INTERNATIONAL ECONOMICS

ASSIGNMENT 1 AND 2

TOPIC- FDI AND FPI (FII) IN INDIA

DIVYA JAISWAL
ROLL NO. – 1904
ENROLLMENT NO. -A71318219001
B.A (H) ECONOMICS, SEM-4

INDEX
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SR NO. TITLE PAGE NO.

1 INTRODUCTION 3,4

FACTORS AFFECTING
 INTERNATIONAL CAPITAL 5,6
MOVEMENTS
FOREIGN DIRECT
2 7
INVESTMENT (FDI)

 Types of Foreign Investments 7

Routes of Foreign
 7,8
Investments in India

 FDI Prohibition 9

FOREIGN PORTFOLIO
3 10
INVESTMENTS (FPI)

Foreign Institutional
 10
Investment (FII)

Qualified Foreign Investment

 10
(QFI)

 Categories of FPI 11

DIFFERENCE BETWEEN
4 12
FDI AND FPI
ADVANTAGES AND
5 DISADVANTAGES OF 13, 14, 15
FOREIGN INVESTMENTS
CURRENT STATISTICS OF
6 16,17
FDI AND FPI IN INDIA

7 CONCLUSION 18

8 BIBLIOGRAPHY 19

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INTRODUCTION
International capital movements refer to the outflow and inflow of capital from one
country to another. These take place through government, private and international
organizations.
Types of international capital movements are as follows-
1. Direct and portfolio-
Flow of direct capital means that the concerns of the investing country exercise de
facto or de jure control over the assets created in the capital importing country by
means of that investment. The formation in the capital importing country of a
subsidiary of a company of the investing country; formation of concern in which a
company of the investing country has a majority holding; formation in capital
importing country of a company financed exclusively by the present concern situated
in the investing country; setting up a corporation in the investing country for the
specific purpose of assembling the parent product, its distribution, sales and exports;
or the creation of fixed assets by investing in infrastructures like power, refineries,
railways etc. in the capital importing country. Such companies or concerns are
known as Trans National Corporations (TNCs) or Multi-National Corporations
(MNCs).
The movement of indirect capital known as portfolio or rentier investment consists
mainly of the holdings of transferable securities (issued or guaranteed by the
government of the capital importing country), shares or debentures by the nationals
of some other country. Such holdings do not amount to a right to control the
company. The shareholders are entitled to the dividend only. In recent years multi-
lateral indirect capital investments has been evolved. The nationals of a country
purchase the bonds of the World Bank floated for financing a particular project in
some LDC.
2. Private and Government Capital-
Private capital movements refer to lending and borrowing from abroad by private
individuals and institutions. It is generally guaranteed by the government or central
bank of the borrowing country. Profit motive is the driving force of private capital
movements.
Government capital movements imply lending and borrowing between governments.
Such capital movements are under the direct control of governments. In fact,
governments are important international lenders as they make stability loans, loans
to finance exports and imports and particular projects.
3. Home and Foreign Capital-
Home capital is concerned with investments made abroad by residents of a country.
Foreign capital implies investments made by foreigners in the country. Thus home

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capital refers to the outflow of capital, while foreign capital is concerned with inflow of
capital.
4. Foreign Aids-
It refers to public foreign capital on hard and soft terms, in cash or kind, and inter –
governmental grants. Foreign aid is tied and untied aid. It may be tied by source,
projects and commodities. Untied aid is a ‘general purpose aid’ and is also known as
program aid or non- project aid.
5. Short term and Long Term Capital-
Short term capital movements are for a period of less than 1 year maturity while long
term capital movements are of more than one year maturity.

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FACTORS AFFECTING INTERNATIONAL CAPITAL MOVEMENTS-
Factors affecting international capital movements are as follows-
1. Rate of Interest-
The most important factor which affects international capital movements is the
difference among current interest rates in various countries. Capital flows from that
country in which the interest rates are low to those where interest rates are high
because capital yields high returns there.
2. Speculation-
Speculation related to expected variations in foreign exchange rates or interest rates
affect short term capital movements. When the speculator feels that the domestic
interest rates will increase in future, they will invest in short term foreign securities to
earn profit from the possibility of fall in bond prices leading to the outflow of capital. If
the possibility is of fall in domestic interest rates in future, the foreign speculators will
invest in securities at a low price at present, leading to the inflow of capital in the
country.
If there is the likelihood of devaluation of country’s currency in future, the domestic
speculators will try to change the currency into foreign securities, leading to outflow
of capital. If foreign exchange rate is expected to rise, there will be a inflow of capital
in the country.
3. Expectations of Project-
A foreign investor always has the profit motive in his mind. Where the possibility of
earning profit is more, capital flows into that country. A foreign entrepreneur keeps
expected profit in view while investing in various projects in a country.
4. Bank Rate-
A stable bank rate of a central bank of a country also influences capital movements
because market interest rates depends on it. If the bank rate is low, there will be
outflow of capital. And if bank rate is high, there will be inflow of capital in the
country.
5. Production Costs-
Capital movements depends on the production costs in other countries, in countries
where labor, raw material etc. are cheap and easily available, more private foreign
capital flows into them.
6. Economic Conditions-

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Economic conditions in the country, especially size of the market, availability of
infrastructure facilities like means of transport and communication, power and other
resources, efficient labor etc. encourage the inflow of capital there.
7. Political Stability-
Political stability, security of life and property, friendly relations with other countries
etc. encourage the inflow of capital in the country.
8. Taxation Policy-
To encourage the inflow of foreign capital, the taxation policy should avoid double
taxation, should not burden entrepreneurs heavily, give tax relief etc. to new
industries and foreign collaborations.
9. Foreign Capital Policy-
If the government provides facilities of transferring profit, dividend royalty, interest
etc. to foreign investors, there will be inflow of capital in the country. Similarly, soft
foreign exchange contracts and fiscal, monetary and other policies which encourage
foreign capital are helpful in the inflow of capital.
10. Marginal Efficiency of Capital-
Foreign investors generally compare the marginal efficiency of capital with the
interest rate in different countries and prefer to invest in that country, where the rate
of return is likely to be high.

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FOREIGN DIRECT INVESTMENT (FDI)-
Foreign Direct Investment (FDI) is when a company takes controlling ownership in a
business entity in another country. With FDI, foreign companies are directly involved
with day-to-day operations in the other country. This means they aren’t just bringing
money with them, but also knowledge, skills and technology.
 
Generally, FDI takes place when an investor establishes foreign business operations
or acquires foreign business assets, including establishing ownership or controlling
interest in a foreign company.
 
Types of Foreign Direct Investment-

Foreign direct investments are commonly categorized as being horizontal, vertical or

conglomerate.
A horizontal direct investment refers to the investor establishing the same type of
business operation in a foreign country as it operates in its home country, for
example, a cell phone provider based in the United States opening stores in China. 
A vertical investment is one in which different but related business activities from the
investor's main business are established or acquired in a foreign country, such as
when a manufacturing company acquires an interest in a foreign company that
supplies parts or raw materials required for the manufacturing company to make its
products.

A conglomerate type of foreign direct investment is one where a company or

individual makes a foreign investment in a business that is unrelated to its existing
business in its home country. Since this type of investment involves entering an
industry in which the investor has no previous experience, it often takes the form of a
joint venture with a foreign company already operating in the industry.

Routes through which India gets FDI

 
Automatic route- 
The non-resident or Indian company does not require prior nod of the RBI or
government of India for FDI.

Sectors which come under the ' 100% Automatic Route' category are-

Agriculture & Animal Husbandry, Air-Transport Services (non-scheduled and other

services under civil aviation sector, Asset Reconstruction Companies, Automobiles,
Biotechnology (Greenfield), Broadcast Content Services, Chemicals, Coal & Lignite,
Construction Development, Duty Free Shops, E-commerce Activities, Electronic

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Systems, Food Processing, Gems & Jewellery, Healthcare, Industrial Parks, IT &
BPM, Manufacturing, Mining & Exploration of metals & non-metal ore etc.

 Sectors which come under up to 100% Automatic Route' category are -

 Infrastructure Company in the Securities Market: 49%

 Insurance- up to 49%

 Medical Devices- up to 100%

 Pension- 49%

 Petroleum Refining (By PSUs)- 49%

 Power Exchanges- 49%

 Government route- 
The government's approval is mandatory. The company will have to file an
application through Foreign Investment Facilitation Portal, which facilitates single-
window clearance. The application is then forwarded to the respective ministry,
which will approve/reject the application in consultation with the Department for
Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce. DPIIT will
issue the Standard Operating Procedure (SOP) for processing of applications under
the existing FDI policy.

Sectors which come under the 'up to 100% Government Route' category are-

 Banking & Public sector: 20%

 Broadcasting Content Services: 49%

 Core Investment Company: 100%

 Food Products Retail Trading: 100%

 Mining & Minerals separations of titanium bearing minerals and ores: 100%

 Multi-Brand Retail Trading: 51%

 Print Media (publications/ printing of scientific and technical magazines/

specialty journals/ periodicals and facsimile edition of foreign newspapers):
100%

 Print Media (publishing of newspaper, periodicals and Indian editions of

foreign magazines dealing with news & current affairs): 26%

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  Satellite (Establishment and operations): 100%

FDI Prohibition-

There are a few industries where FDI is strictly prohibited under any route. These
industries are-

 Atomic Energy Generation

 Any Gambling or Betting businesses

 Lotteries (online, private, government, etc.)

 Investment in Chit Funds

 Nidhi Company

 Agricultural or Plantation Activities (although there are many exceptions like

horticulture, fisheries, tea plantations, Pissciculture, animal husbandry, etc.)

 Housing and Real Estate (except townships, commercial projects, etc.)

 Trading in TDR’s

 Cigars, Cigarettes, or any related tobacco industry

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FOREIGN PORTFOLIO INVESTMENTS (FPI) –
Foreign Portfolio Investment (FPI) consists of securities and other financial
assets held by investors in another country. It does not provide the investor
with direct ownership of a company's assets and is relatively liquid depending
on the volatility of the market. 
Portfolio investment involves the making and holding of a hands-off—or
passive—investment of securities, done with the expectation of earning a
return. In foreign portfolio investment, these securities can include stocks,
American Depositary Receipts (ADRs), or Global Depositary Receipts (GDRs)
of companies headquartered outside the investor's nation. Holding also
includes bonds or other debt issued by these companies or foreign
governments, mutual funds, or Exchange Traded Funds (ETFs) that invest in
assets abroad or overseas.

In India, foreign portfolio investment is regulated by the Securities and

Exchange Board of India (SEBI). FPI in India refers to investment groups or
FIIs (Foreign Institutional Investors) and QFIs (Qualified Foreign Investors). 

Foreign Institutional Investment (FII)

FII is when foreign institutional investors invest in the shares of an Indian company,
or in bonds offered by an Indian company. So, if a foreign investor buys shares in
Reliance, it is an FII.
Only institutional investors like Investment companies, Insurance funds, etc. are
allowed to invest in the Indian stock market directly. Hence the term foreign
institutional investor. These investors have to get a license from SEBI.
However, if foreign individuals want to invest in India’s markets, they have to get
themselves registered as a sub-account of an FII. The FII will buy shares/ bonds
from the Indian markets on their behalf.
India allows only wealthy foreign individuals or high net worth individuals (HNIs) who
have a minimum net worth of $50 million to be registered as a sub-account of a
foreign institutional investor (FII).

Qualified Foreign Investment (QFI)

As we know, foreign individuals cannot invest directly in India’s markets without sub-
accounts with an FII. As an alternative, QFI was introduced in the year 2002. A
Qualified Foreign Investor can invest in India without sub-account. However, they
have to open a Demat account and Trade account with a depository participant in
India.

 The Qualified foreign investor (QFI) can be an individual, group, or

association.

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  The QFI should be a resident in a foreign country that is compliant with the
standards of the Financial Action Task Force (FATF).
 In addition, the QFI must be a signatory to the International Organization of
Securities Commission’s Multilateral Memorandum of Understanding.
(MMOU).

Categories of FPI

FPIs have been categorized into three major categories:

 Category I (Low Risk) which would include Government and entities like

Foreign Central banks, Sovereign wealth Funds, Multilateral Organizations, etc
 Category II (Moderate Risk) which would include Regulated entities such as
banks, Pension Funds, Insurance Companies, Mutual Funds, Investment Trusts,
Asset Management Companies, University related endowments (already
registered with SEBI)
 Category III (High Risk) which would include all other FPIs not eligible to be
included in the above two categories

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DIFFERENCE BETWEEN FDI AND FPI
Following are the differences between FDI and FPI-
BASIS FDI FPI

MEANING Foreign Direct Investment Foreign portfolio investment

(FDI) is when a company (FPI) consists of securities
takes controlling ownership and other financial assets
in a business entity in held by investors in another
another country. country.
DIRECT It provides the investor It does not provide the
OWNERSHIP with direct ownership of a investor with direct ownership
company’s assets. of a company's assets.
ASSET Investment in tangible Investment in intangible
INVESTED assets like plant and assets like bonds, shares
IN machinery. mutual funds etc.
ROLE OF With FDI, foreign Investors are not involved in
INVESTOR companies are directly any operations of the
involved with day-to-day company i.e. they play a
operations in the other passive role.
country i.e. investors play
an active role.
GAINS The host country gains The host country gains
knowledge, technology capital inflows.
and skills along with funds.
ENTRY AND Difficult in case of FDI. Relatively easier in case of
EXIT FPI.

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ADVANTAGES AND DISADVANTAGES OF FOREIGN
INVESTMENTS
Advantages
The following are the advantages of foreign investments-
1. Use of Modern Techniques-
It not only provides finance but also managerial, administrative and technical
personnel, new technology, research and innovations in products and techniques of
production which are in short supply in LDCs and tend to increase the pace of
development.
2. Encouragement to Local Enterprise-
Foreign enterprise encourages local enterprise in 2 ways, directly by fostering local
enterprise with men, money and material and by imparting training and experience to
its personnel and indirectly by creating demand for ancillary or subsidiary services
(like transport and training agents) which are uneconomical for private foreign
enterprise to provide.
3. Diversification-
When foreign investors invest in extraction of raw materials, running plantation,
infrastructures, manufacturing and consumer goods, it leads to widespread
diversification in LDCs.
4. Increasing employment-
All round diversification by foreign investors increases employment and income and
helps to raise living standards in LDCs.
5. Wide Markets-
When foreign investors setup different types of industries in LDCs, they also bring in
a variety of marketing techniques. Consequently, markets for goods expand within
and outside the country.
6. Filling the Gaps-
By bringing capital and foreign exchange, foreign investments help in filling the
savings and foreign exchange gap in order to achieve the goal of national economic
development in LDCs.
7. Reinvestment of Profits-
A part of profits from Foreign Direct Investments is generally ploughed back into the
expansion, modernisation, and development of related industries.
8. Greater Social Returns-

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Foreign Investments adds more value to output in the recipient country than the
return on capital from foreign investments.
9. Revenue to the Government-
Foreign investments also brings revenue to the government of a LDC, when it taxes
profits of foreign firms or gets royalties from concession agreements.
10. Increase in Productivity-
Foreign investments help in raising productivity and hence, also raise the real wages
of local labour. Investments in export- oriented industries lead to much higher social
benefits as they have larger backward and forward linkage effects.
11. Less Burden on BOP-
The remittance of profits from direct investments brings less pressure on the BOP
when it is in the long run, the country produces also for foreign markets which has a
favourable effect on BOP.
12. Encouragement for Investment in LDCs-
Foreign investments flowing into a developing country also encourages its
entrepreneurs to invest in other LDCs.

Disadvantages
The following are the disadvantages of foreign investments-
1. High costs-
The recipient country may be required to provide basic facilities like land, power and
other public utilities, concessions in form of tax holiday, development rebate, rebate
on undisturbed profits, additional depreciation allowance, subsidised inputs etc. Such
facilities and concessions involve high cost on LDCs’ resources that could be utilised
elsewhere by the government.
2. Foreign Exchange Crisis-
To attract foreign investments LDCs have to provide sufficient facilities for
transferring profits, dividends, interest and principles. These payments lead to a net
capital outflow creating BOP difficulties. The indirect cost of debt servicing and
balance of payments adjustments create serious foreign exchange crisis.
3. Local Enterprise Discouraged-
Foreign investments adversely affect income distribution when it competes with
home investments. Capital and other resources flow to foreign enterprises in
preference to domestic enterprises, thereby discouraging local enterprises.
4. Executive Posts to Foreigners-

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Many foreign concerns in LDCs, reserve al; senior executive posts for their nationals
and pay them very high salaries with many perks which are a huge drain on the
resources of the recipient county. The train local nationals for lower and middle level
posts having little independent decision making power.
5. Social Tensions-
The lavish spending habits of foreign nationals have an undesirable demonstrative
effect on the nationals of LDCs and creates social tensions.
6. High Capital Intensive Technology-
Foreign investments bring highly capital- intensive technologies, which do not fit in
the factor proportions of LDCs.
7. Loss of Domestic Autonomy-
Foreign Investment also involves costs in the form of loss of domestic autonomy,
when foreign firms interfere in the policy making decisions of the government of an
LDC which favours the foreign enterprises.
8. Loop-sided Development-
Foreign investors set up industries in big cities and towns where infrastructural
facilities are easily available. Thus, regional disparities increase.
9. Create Monopolies-
Foreign investments also lead to emergence of monopolies in certain fields of
production thereby driving out local enterprise. Monopolies exploit the domestic
consumers by overprizing the products.
10. Lead to Crisis-
Foreign investors invest when they expect high profits and withdraw their capital
when they expect low profits, leading to financial crisis in host country.

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CURRENT STATISTICS OF FDI AND FII IN INDIA-

Foreign Direct Investment in India

Financial Year Total FDI Inflow (in US$

billion)

Note: You may note that the above figures correspond to the total FDI inflow. The net FDI inflow is
lower.

“Foreign Direct Investment into India rose by 13% in 2020, boosted by interest in the
digital sector, and while fund flows "declined most strongly" in major economies”-
Business Standard.
Top Countries (2000-2019)

1. Mauritius (31%)
2. Singapore (20%)
3. Japan (7.2%)
4. Netherlands (6.7%)
5. USA (6.2%)

Latest trends (2019-20): Singapore> Mauritius > Netherlands > Cayman Islands >
USA

Top Sectors (2000-2019)

1. Services (17.6%)
2. Computer Software and Hardware (9.5%)
3. Telecommunications (8.1%)
4. Trading (5.8%)
5. Construction Development (5.5%)

Latest trends (2019-20): Manufacturing> Communication Services > Retail &

Wholesale Trade > Financial Services > Computer Services

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FPI/ FII Investment in India

INR crores
Financial Year
Equity Debt Debt-VRR Hybrid Total

2014-2015 111332.59 166127.09 0.00 0.00 277459.68

2015-2016 -14171.57 -4003.76 0.00 0.00 -18175.33

2016-2017 55702.67 -7291.64 0.00 0.00 48411.03

2017-2018 25634.19 119035.74 0.00 10.29 144680.22

2018-2019 -87.73 -42355.97 0.00 3514.24 -38929.46

2019-2020 6152.26 -48710.23 7331.17 7697.63 -27529.17

2020-2021 274031.96 -50443.62 33264.56 10247.09 267099.99

“India was the only country among emerging markets to receive equity inflows from
FPIs in 2020, as the country attracted USD 30 billion in the first nine months of the
year, according to the Economic Survey.”- Business Standard.
Top countries (according to data of December 2020)-
1. USA (33.97%)
2. Mauritius (11.1%)
3. Singapore (8.79%)
4. Luxembourg (8.57%)
5. United Kingdom (5.28%)

Top sectors (according to data of December 2020)-

1. Financial services sector ($191.3 billion)
2. Software ($76.1 billion)
3. Oil & gas ($50 billion)
4. Automobiles & auto components ($26.9 billion)
5. Pharmaceuticals & biotechnology ($22.8 billion)

CONCLUSION
FDI and FPI are two methods through which foreign capital can be brought into
the economy. The foreign capital inflow is affected by various factors such as rate

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of interest, economic situation, taxation policy etc. Such an investment has both
positive and negative aspects on the economy and on the BOP. It can help the
economy to prosper by bringing new technology, knowledge and funds, but also
put pressure on the host country. At present the current Covid- 19 situation has
made India an investment hub, which is a great opportunity for the country to
develop.

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BIBLIOGRAPHY
1. M.L. Jhinghan, International Economics 6th edition
2. http://economyria.com/types-foreign-investment-fdi-fii-fpi-qfi/
3. https://www.investopedia.com/terms/f/fdi.asp
4. https://economictimes.indiatimes.com/markets/stocks/news/fpis-pump-in-33-8b-
this-fiscal-take-total-holding-to-record-592b-check-10-sectors-they-are-most-
bullish-on/articleshow/81094211.cms#:~:text=The%20maximum%20holding
%20is%20in,products%20(%2420.2%20billion)%2C%20capital
5. https://www.fpi.nsdl.co.in/web/Reports/ReportsListing.aspx
6. https://www.business-standard.com/article/economy-policy/india-only-emerging-
market-to-get-equity-fpi-inflows-in-2020-eco-survey-121012901478_1.html

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