BS EDIT: Why India needs durable foreign investment

By Business StandardPublished On Nov 13, 2024

Why foreign capital is crucial for growth

Foreign Direct Investment (FDI) is seen as the most reliable source, bringing not just capital but also technology and best management practices

Role of FDI vs FPI content

FDI: Long-term investment by multinational corporations in Indian businesses

FPI: Short-term investment driven by interest-rate differentials, often subject to quick reversal

RBI’s new guidelines

The Reserve Bank of India (RBI) has introduced new guidelines for reclassifying FPI as FDI when an investor’s holding exceeds 10 per cent in an Indian company

FPI reclassification content

It may artificially inflate FDI numbers. FPIs, despite longer-term holdings, remain financial investors rather than strategic partners

There is a risk of sudden outflows, affecting market stability

The need for policy reforms in FDI

Instead of reclassification, India could consider legislative changes to Fema

This would allow FPIs to increase their holdings under specific conditions, ensuring investment stability without distorting FDI data

Creating environment for higher FDI

To attract sustainable foreign investment, India must: Improve its business environment, and address concerns around repatriation and disinvestment