📘 Q.6 IAS Prelims 2021 — Economics (Foreign Direct Investment)
🧷 Authentic Classroom Explanation | IAS Monk
📌 The Question:
Which of the following can be included in Foreign Direct Investments (FDI)?
- Foreign Currency Convertible Bonds
- Foreign Institutional Investment with certain conditions
- Global Depository Receipts
- Non-resident external deposits
Select the correct answer using the code given below:
(a) 1, 2 and 3
(b) 3 only
(c) 2 and 4
(d) 1 and 4
📌 Answer: (a)
🧠 Classroom Explanation
🔹 Core Concept: What counts as Foreign Direct Investment?
In the Balance of Payments (BoP), the Capital Account records transactions that change ownership of assets.
Within it:
- Foreign Direct Investment (FDI) and certain equity-like instruments represent non-debt capital flows.
- Debt-creating flows are classified separately and do not qualify as FDI.
🔍 Instrument-wise Analysis
✅ 1. Foreign Currency Convertible Bonds (FCCBs) — Included
- FCCBs are bonds issued by Indian companies in foreign currency, convertible into equity shares.
- Since they have a potential equity conversion, they are treated as part of foreign investment / FDI-type flows.
✔️ Correct.
✅ 2. Foreign Institutional Investment (with certain conditions) — Included
- FIIs are usually portfolio investments.
- However, when subject to specified thresholds and conditions (for example, limits on ownership and control), such investments may be treated within the broader foreign investment framework.
✔️ Correct (as per UPSC framing).
✅ 3. Global Depository Receipts (GDRs) — Included
- GDRs represent equity shares of Indian companies, issued abroad.
- They are non-debt capital flows and hence part of foreign investment.
✔️ Correct.
❌ 4. Non-Resident External (NRE) Deposits — Not Included
- NRE deposits are bank deposits by NRIs.
- They are debt-creating capital flows, not equity.
- Hence, they do not qualify as FDI.
❌ Incorrect.
✅ Final Answer Logic
Instruments 1, 2 and 3 are equity or equity-linked foreign investment flows.
➡️ Correct answer: (a) 1, 2 and 3
🔍 Curiosity Raiser
Why does India carefully distinguish between equity flows and debt-creating capital in its external sector management?
🧘 IAS Monk Whisper
Equity brings commitment,
Debt brings obligation.
An economy must know the difference to stay sovereign.