Introduction
After the independence of India in 1947, the Indian Economy was
a closed economy. The Indian Government took some policies to boost the
economy. Initially, the Indian Government did not allow the foreign economy to enter
into the domestic market to facilitate the indigenous enterprises to grow. However, this idea did not work. Then the government realized that without foreign
investment, export and import between the international and domestic firm
Indian economy would not be able to develop. So after 1991, when the Indian economy
was immersed into crisis, the Government opened the economy for the foreign
investors and Economic Liberalisation was introduced.
Foreign Direct Investment (FDI)
Definition:
Foreign Direct Investment or FDI is the investment made by a
foreign country in India. International companies directly invest in India's
private business and companies to boost up the economic crisis and also get
benefited. As the Indian market is labour intensive and the labour is cheap, so
the foreign companies set up their business in India and derive much
revenue. It increases the GDP growth
rate of the host country as well as the productive capacity of that country. It
also generates a massive amount of employment in the domestic country as it
directly establishes its business in other countries. FDI invest in a long
term basis in the host country.
Current scenario of FDI:
As per the present situation of the FDI in India, FDI
compressed about 7% during the period of April to December in 2018-19. The FDI
in India reduced to 33.49 billion in 2018-19 from 15.95 billion in 2017-18.
Deduction of FDI had a significant impact on the balance of payment in India
and the value of the rupee. In these nine months of fiscal, the maximum FDI was
received by the critical sectors like service, computer hardware and software,
telecommunications, trading, chemicals, and the automobile industry. The
largest foreign investor in 2018-19 was Singapore, followed by Mauritius,
Netherland, Japan, the US and the UK.
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FDI Inflows in India (Source: Businesstoday.in) |
Now India is freer to welcome the foreign investment than it
ever did before. India allows FDI in each public and private sectors in India.
According to the current scenario of India, the economic condition is not
stable as the consumption and saving both are declining. So it can be said that
Indian economy is running through a most challenging situation. Many large
industries are bound to shut down their business. Accordingly, the current
Government has taken some remedial steps to bring the financial crisis back
into health. The Government encourages foreign investors to invest in India.
The Government has permitted 100 per cent of FDI in coal mining for open sell.
Foreign Portfolio Investment (FPI):
Definition:
FPI is the indirect foreign investment through the securities
and assets like stocks, bonds, cash equivalents held by foreign investors in
overseas countries. It is volatile in nature, unlike the FDI. It allows foreign
investors to deposit money in the country's bank and make purchases in the
assets.
Current scenario of FPI:
India’s FPI raised by 11.469 USD bn in March 2019. However,
after the announcement of the budget in 2019 by the Finance Minister Nirmala
Sitaraman, Rs 7712 crores from India’s equities was withdrawn by the foreign
portfolio investors. The other factors that keep preventing foreign investors
from investing in the Indian economy are a lower rate of GDP growth, sub-par
monsoon, lowering of India’s growth forecast etc. So evidently India’s current
scenario of FPI is not favourable.
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FPI in Equity and Debt Segments (Source: Marketrealist.com) |
Government approach:
Slowing down of FPI
has an adverse impact on the balance of payment, especially on capital account
balance which reduces the GDP. The government withdrew higher surcharge on FPIs
and domestic investors. For startup companies, it also removed Angel Tax
Provisions. It's going to reduce the GST returns and simplify the form. The
finance minister withdrew the surcharge that was enhanced in the long term as
well as short term capital gains, brought a transparent mechanism to have an
end to the tax harassment of business. It was also to make the liquidity flow
easier and to make the loan cheaper so that the customer gets interested in
taking loans from the bank.
Foreign Institutional Investor (FII):
Definition:
FII is a registered foreign investment fund or investment
institution which makes an investment in another country. It may be some insurance company, pension fund,
mutual fund etc. These are commonly seen in India that are registered with the
Securities and Exchange Board of India for participating in the Indian market.
India allows the FII to invest in its primary and secondary capital market,
determined by the Portfolio Investment Scheme. This scheme enables the FII to
purchase shares and debentures of Indian companies. This scheme also includes
some system. The amount of investment can only be 24% of the paid-up capital of
the Indian companies which received the investment. But in the case of public
sector banks, this ceiling has been reduced to 20% of the paid-up capital of
the investment. The RBI observes the daily consent with theses ceilings for all
the foreign institutional investors.
FII in India (Source: Allresearchjournal.com) |
Current Scenario:
FII pulled out a large number of funds from the Indian market.
It withdrew 70746 crores that are highest in Indian history. It is because of a
sharp depreciation of Indian rupee in the current year, present rate hike, as
well as expected future rate, is also at hike by the Federal Reserve. Previously
FII withdrew its fund three times from the Indian market in 2008, 2016, and
2018. Gradually FFI is driving out from the Indian market.
Government Approach:
The Reserve Bank of India increased the limit for investment
for IIF in the long term categories Government debt from 5 billion to 15
billion and in the corporate non-infrastructure debt category by 5
billion.
Conclusion
From the above analysis, it is clear that FDI makes a direct investment in other countries whereas the FPI and FII are the indirect
investors who invest in Indian companies and banks in the form of equity securities
and debts. FDI set up their companies in India and drive uplift economic growth
as well as employment growth.
Readings
Ghosh, B. (2017).
In search for FPI trail in blue-chip Indian bourse during a phase of
rehabilitation-An investigative study. Asian Journal of Management.
Gondgawe, M. S.
P., BVIMSR, C., Shinde, G., & Gawde, M. M. S. B. (2019). A Study of Foreign
Direct Investment and Indian Banking Sector. Our Team, 156.
Khan, M. I., &
Banerji, A. (2015). Relationship between Fdi and Fii/fpi: A Case Study of
India. Journal of International Business Research, 14(2),
91.
Priya Solomon, M., & Aggarwal, T. (2017).
Trends and Patterns of FDI and FII in India-Implications for the Future. Global
Journal of Management And Business Research.
Singh, M., & Kaur, H. (2016). FII Inflows:
A Theoretical Background. Asian Journal of Research in Marketing, 5(4),
1-20.
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