Foreign Direct Investment

Also called: FDI, Foreign investment · Topic: Balance of Payments and Exchange Rates · NCERT: Class 10, Ch 4 "Globalisation and the Indian Economy"; Class 11, Ch 3 "Liberalisation, Privatisation and Globalisation: An Appraisal"; Class 12, Ch 6 "Open Economy Macroeconomics"

Meaning

Foreign Direct Investment (FDI) is money that a foreigner puts into a business in India with a lasting interest. This means the investor wants long-term control of, or a say in, how the business is run. In India, holding 10% or more of a listed company's equity (its shares) counts as FDI.

FDI brings factories, technology and jobs. It is also hard to pull out quickly, so it is the most stable kind of foreign money for paying for a current account deficit (CAD: when a country spends more abroad on goods, services, income and transfers than it earns).

Formula: Net FDI = Gross FDI inflows − repatriation/disinvestment by foreigners − overseas direct investment (ODI) by Indians

Explanation

Where FDI sits in the Balance of Payments

• The balance of payments (BoP) has two main parts:
• the current account records goods, services, income and transfers;

• the capital account records trade in assets such as shares, bonds and loans. It shows who owns what and who owes whom.

• Old (NCERT) layout: FDI is shown under "Foreign investment" in the capital account.

• BPM6 layout: BPM6 is the IMF's Balance of Payments and International Investment Position Manual, 6th edition (2009).
• It moves FDI into the financial account, along with FPI, loans, other investment and reserve assets.
• The narrow BPM6 capital account keeps only capital transfers and non-produced, non-financial assets, such as land for embassies, patents and spectrum licences.

• The old "capital account" was renamed the "capital and financial account" [2].

• Sign rule: follow the foreign exchange.

• A foreigner buys a stake in an Indian firm → dollars come in → credit (+).

• An Indian firm buys a foreign company (ODI) → dollars go out → debit (−).

• BoP identity: Current account balance + Capital account balance + Errors and omissions = Change in foreign exchange reserves.

Worked example: FDI inside the capital account

NCERT Table 6.1 (US$ million, illustrative data): | Item | Value | |---|---| | External assistance (net) | 0.15 | | ECBs (net) | 2 | | Short-term debt | 10 | | Banking capital (net) | 15 | | Foreign investment (net): FDI 13 + portfolio 6 | 19 | | Other flows (net) | −5 | | Capital account balance | 41.15 |

• Check the sum: 0.15 + 2 + 10 + 15 + 19 − 5 = 41.15.
• Foreign investment (19) is the largest item.
• Within it, FDI (13) is bigger than portfolio money (6). This is a healthier mix, because FDI is more stable.

Real data (2021-22):

• India's CAD was US$ 38.7 bn, and reserves rose by US$ 47.5 bn [3].
• So capital account + errors ≈ 47.5 − (−38.7) = US$ 86.2 bn net inflow.
• Net FDI of US$ 38.6 bn was a large part of this, even though net FPI was −US$ 16.8 bn [3].
• In that year, FDI stayed in while portfolio money left.

Types and routes of FDI

• Greenfield investment: a foreign firm builds a new plant from scratch. It adds new capacity and jobs.
• Brownfield investment: a foreign firm buys or expands an existing company or plant. Example: Cargill buying Parakh Foods.
• Automatic route: no prior government approval is needed. The investor only reports to the RBI afterwards.
• Government route: the ministry concerned must give prior approval.
• Press Note 3 (2020): all FDI from countries that share a land border with India must use the government route, in all sectors. China is the main target.

What makes net FDI rise or fall

• Gross inflows rise when a country offers ease of doing business, stable tax rules and incentives such as PLI (Production Linked Incentive) schemes.
• Repatriation rises when foreign investors sell their stakes and take the money home.

• When the stock market is strong → foreign investors sell through secondary sales and IPOs → net FDI falls even as gross FDI rises [6].

• ODI rises when Indian firms buy or build businesses abroad. This also lowers net FDI.

In India

• Who manages it:
• DPIIT (Department for Promotion of Industry and Internal Trade) coordinates FDI policy.
• The RBI receives reports on FDI and publishes BoP data.

• The FIPB (Foreign Investment Promotion Board) was abolished in 2017. Its work passed to the administrative ministries.

• How RBI reports it: RBI publishes quarterly BoP data in two formats [3][4]:

• Statement I: BPM6 format, with FDI in the financial account;

• Statement II: the old "major items" format, which NCERT Table 6.1 follows.

• Outward side: ODI is governed by the FEMA (Overseas Investment) Rules, 2022. Examples are Tata–Corus (2007) and Tata–JLR (2008).

• Latest figures:
• Total FDI inflows were US$ 81.04 bn (provisional) in FY 2024-25, up 14% from US$ 71.28 bn in FY 2023-24 [5].
• Top sectors for FDI equity in FY 2024-25 were services (19%), computer software and hardware (16%) and trading (8%) [5].
• Cumulative FDI inflows crossed US$ 1 trillion between April 2000 and September 2024 [5].
• Gross FDI rose from US$ 47.2 bn (April–November 2023) to US$ 55.6 bn (April–November 2024), a rise of 17.9%, but net FDI fell because repatriation rose [6].

• Net FDI was −US$ 0.3 bn in July–September 2023 [4].

• Long trend (NCERT Class 11): foreign investment (FDI + FII) rose from about US$ 100 mn in 1990-91 to US$ 23 bn in 2022-23.

• Round-tripping checks: round-tripping is when Indian money is sent abroad, often through Mauritius or Singapore, and brought back as "FDI" to save tax. India has acted against it:
• DTAA (Double Taxation Avoidance Agreement) amendments with Mauritius (2016) and Singapore (2017), so capital gains are now taxed in India;
• GAAR (General Anti-Avoidance Rules) from April 2017, which let tax officers deny benefits to deals made mainly to avoid tax;
• SEBI beneficial-ownership disclosure rules (2023), under which FPIs with concentrated holdings must disclose who really owns them.

Don't confuse with

• Foreign Portfolio Investment (FPI): below 10% of equity, with no controlling stake. SEBI regulates it. It is "hot money" (money that can leave in days). FDI is 10% or more and stays for the long term. FII is the old name for FPI. If an FPI's holding crosses 10%, it must either sell down or have the holding reclassified as FDI.
• Overseas Direct Investment (ODI): investment by Indians abroad. It is a debit (outflow) in the BoP. FDI into India is a credit (inflow).
• External Commercial Borrowings (ECBs): loans that Indian residents raise from non-residents. They create debt that must be repaid. FDI is ownership (equity), so there is no fixed repayment.
• Gross FDI vs net FDI: gross counts only money coming in. Net subtracts repatriation and ODI. Gross can rise while net falls, as happened in April–November 2024 [6].

Prelims Hooks

• FDI = 10% or more of a listed company's equity. FPI = below 10%. FII is the old name for FPI.
• In the BPM6 (IMF, 2009) layout, FDI sits in the financial account, not the narrow capital account. The NCERT/old format shows it in the capital account.
• Press Note 3 (2020): FDI from land-border countries must use the government route, in all sectors. FIPB was abolished in 2017.
• Greenfield = new plant built from scratch. Brownfield = buying or expanding an existing firm.
• ODI is governed by the FEMA (Overseas Investment) Rules, 2022. It is a debit in the BoP.
• Trap: "rising gross FDI means rising net FDI" is false. Repatriation and ODI can push net FDI down [6].

Mains Points

• The quality of capital flows matters more than the amount.
• FDI is sticky and brings technology and jobs.
• FPI and short-term debt can leave fast. Examples are 1991, and net FPI of −US$ 16.8 bn against net FDI of +US$ 38.6 bn in 2021-22 [3].

• So Indian policy prefers equity to debt, and long-term to short-term flows.

• Falling net FDI is a mixed signal.

• Good side: foreign investors are exiting at a profit through IPOs, which shows India's market is deep [6].
• Worry: the CAD then depends more on volatile FPI.

• Policy answer: ease of doing business, stable tax rules and PLI-type incentives.

• Openness vs security and tax fairness.

• Press Note 3 (2020) and the round-tripping checks (DTAA changes, GAAR, SEBI disclosure) give up some inflows.
• In return, India protects national security and stops domestic money from posing as foreign investment to avoid tax.

Related concepts

• Capital account
• BPM6
• Capital flows
• Foreign portfolio investment
• Greenfield and brownfield investment
• Automatic route and government route
• Overseas direct investment
• Round-tripping
• External commercial borrowings
• Non-resident deposits

Read more

• Balance of payments II: the capital (financial) account and BPM6