Topic 04 of 5 · Chapter 06 · Indian Economy
FDI vs FPI — Foreign Investment in India
FDI vs FPI differences, automatic vs approval route, FDI limits in various sectors, and India’s FDI policy.
📋 In This Article
1. Foreign Direct Investment (FDI)
FDI is investment by a foreign entity in a business in India with the intention of establishing a lasting interest and exercising significant control (usually 10% or more equity).
💡 FDI Example
Apple Inc. (USA) sets up a manufacturing plant in India → This is FDI
Amazon (USA) invests in its Indian subsidiary → This is FDI
Toyota (Japan) builds a car factory in India → This is FDI
Amazon (USA) invests in its Indian subsidiary → This is FDI
Toyota (Japan) builds a car factory in India → This is FDI
FDI brings not just money but also technology, management expertise, and global market access.
⭐ India’s FDI Performance: India received $83 billion FDI in 2021-22 — a record high. Top FDI sources: Mauritius, Singapore, USA, Netherlands, Japan. Top FDI sectors: Services, Computer software, Telecom, Construction, Automobiles.
2. Foreign Portfolio Investment (FPI)
FPI (formerly called FII — Foreign Institutional Investment) is investment by foreign investors in Indian stocks, bonds, and other securities. FPI investors hold less than 10% equity in any company.
💡 FPI = “Hot Money”: FPI is called “hot money” because it can flow in and out of the country quickly. When FPIs sell Indian stocks and take money out, it can cause the rupee to depreciate and stock markets to fall. This is why FPI flows are closely monitored.
3. FDI vs FPI Comparison
| Feature | FDI | FPI |
|---|---|---|
| Nature | Long-term investment | Short-term investment |
| Control | Investor has management control (≥10% equity) | No management control (<10% equity) |
| Stability | Stable — doesn’t leave quickly | Volatile — “hot money” |
| What it brings | Capital + technology + jobs + management expertise | Capital only |
| Examples | Apple factory, Amazon India, Toyota plant | Foreign investors buying Reliance shares |
| Regulated by | DPIIT (Department for Promotion of Industry) | SEBI |
4. FDI Routes — Automatic vs Approval
- Automatic Route: FDI allowed without prior government approval. Investor just needs to inform RBI after investment. Most sectors fall under automatic route.
- Government Approval Route: Prior approval from government required. Sectors: Defence (above 74%), Media, Telecom (above 49%), etc.
- Prohibited Sectors: FDI not allowed in Lottery, Gambling, Chit funds, Nidhi companies, Real estate (except townships), Tobacco manufacturing.
✅ 100% FDI Allowed: Many sectors now allow 100% FDI under automatic route — including IT, manufacturing, e-commerce (marketplace model), single-brand retail, construction, and many others.
5. Key Points for Exam
🔑 Must-Remember Facts
- FDI = investment with management control (≥10% equity)
- FPI = investment without management control (<10% equity)
- FDI = stable, long-term; FPI = volatile, “hot money”
- FDI regulated by: DPIIT
- FPI regulated by: SEBI
- FDI routes: Automatic (no approval needed) and Government (approval needed)
- India’s record FDI: $83 billion (2021-22)
- Top FDI source: Mauritius (due to tax treaty)
- FDI prohibited in: Lottery, Gambling, Tobacco manufacturing
- 100% FDI allowed in: IT, manufacturing, single-brand retail