Foreign Direct Investment

  • Foreign Direct Investment (FDI) is an investment made by a firm/individual of one country into business interests located in another country.
  • 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. Thus by nature, FDI is a long-term investment.
  • Advantages of FDI include

    Foreign expertise and technology transfe
  • Human capital formation,
  • Contributes to international trade integration
  • Helps create a more competitive business environment and enhances enterprise development
  • Generate employment and thus drive economic growth.
FDI in India
  • FDI was introduced in India in 1991 after the LPG reforms which opened the economy to the world.
  • India passed Foreign Exchange Management Act (FEMA), 1999 to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India.
  • This act seeks to make offenses related to foreign exchange civil offenses.
  • It enables a new foreign exchange management regime consistent with the emerging framework of the World Trade Organization (WTO).
  • FEMA replaced the Foreign Exchange Regulation Act (FERA).
  • FDI is permitted in all sectors including the service sector in India, with certain restrictions in a few sectors where the existing and notified sectoral policy does not permit FDI beyond a ceiling.
  • The prohibited sectors include Betting, Gambling, and Lottery; Chit funds; Nidhi Company; Real Estate, etc.
  • FDI for most cases can be brought through Automatic Route and for the remaining case as elaborated
    below through the

    Government approval.
  • FDI inflows are reported under the capital account of the Balance of payments (BoP).

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