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The Prime Minister, Mr. Modi, in his speech at the Times Now Summit, presented again the picture of a $5 Trillion economy.  While optimists & rationalists continue to debate whether this is possible, none can deny the importance of a strong financial framework to meet any GDP target. Again, none can deny that the goal cannot be met  without the help of foreign investments.

But what type of investment should India seek? What will help us in the long run? 

Our latest article ties to answer the question by deciphering the two ‘FI’s – Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI)

What are FDI & FPI?

Foreign investments into India are categorised under two heads, 

  • Foreign Direct Investment, which includes (a) investment into the capital of an unlisted company, irrespective of % owned, and (b) ownership of 10% or more capital of listed companies,
  • Foreign Portfolio Investment, into listed companies, where the ownership is less than 10%

Securities of unlisted companies are harder to sell as the secondary market for such companies is not robust. Thus, it is harder for foreign investors (or any investor for that matter) to exit / sell the stake owned when the investment is ‘FDI’

As an extension, FDI money remains within India for longer periods of time. FPI, on the other hand, moves in & out freely (of course, subject to the restrictions & rollbacks that SEBI announces from time to time)

FDI money is beneficial to any country as it is locked into domestic assets & will help generate employment. FP-Investors on the other hand prefer to exit once they’ve made their returns; their outlook being shorter in nature. FP-Investors also tend to exit quickly if their perception of risk – due to political or economic reasons – increases. Thus, FPI is not a reliable or long term source of investment for any nation. Over-reliance on FPIs to meet short term deficits would be dangerous for any economy.

FDI flows under the lens

Government data, upto Sept’19 on FDI shows that India received Rs. 1,82,000 Cr. in the first half of fiscal year 2019-20. 

  • Singapore, as is the case since 2018-19, tops the list with an investment of Rs. 55,986 Cr. (30%).
  • Mauritius is a close second with Rs. 44,348 Cr. (24%). As expected, the services & ITeS sector receives highest amount of investment (~ 32%). Telecom, trading & automobile are next in the hierarchy.
  • Delhi (#1), Mumbai (#2) and Bangalore (#3) receive nearly 60% of all FDI inflows!

What is very relevant to the title of this article is the growth rate in FDI over the years. Growth for the last 3 years, starting 2016-17 has been sluggish. While 2015-16 & 2014-15 witnessed 20%+ growth, the number has tapered down to 2% in 2018-19. This does not augur well.

Another matter of concern is that the growth of inflow into equity – which stays longer in India than other instruments – has turned negative for the first time in 5 years. 

What about FPIs?

FPIs on the other hand, given their nature, have operated on predictable lines. They’ve exited Indian whenever certainty has deteriorated. The availability of data is far better & information on net investments is available on day basis. However, to improve comparison, data till Sept’19 has been considered for this study.

The first half of the fiscal year witnessed a net inflow of Rs. 38,916 Cr. Portfolio investors had in 2018-19 pulled out Rs. 38,931 Cr. It is interesting to note that gross FPI inflow, on an average for the last 18 months till Sept’19 has been ~6 times of the monthly FDI inflow. While this number should be factored for rotation of money, it is still indicative of the fact that foreign investors prefer ‘hot cash’ to FDIs.


Given that FPIs aren’t a reliable source of long term investment, their exit adds strain to the economy; compounding the impact of factors that first lead to the exit of foreign money! This creates a vicious cycle & unless the tourniquet is applied quickly, the economy could very well collapse. The 1997 Asian financial crisis is a case in point.

Further, exit of FPIs adds strain on the home country’s currency exchange rate. Depreciation of  domestic currency is natural when dollars become scarce due to the exit. India is no stranger to this problem – Sept’18 & Oct’18, two months that witnessed massive FPI outflows also witnessed steep fall in INR’s exchange rate. Its impact is felt till today.

What does India need?

India clearly needs more FDI money. The preference should be to attract investments that will stay in India for the longer term. Though unreliable, India should of also attract FPI money. The guidelines around FPI for long have followed the standard process of ‘introduction’, ‘protest’ and ‘withdrawal’ – greater clarity & improved transparency will help attract these short term funds. While we know that FPI money will primarily serve the interest of the foreign investor, greater trust in them will help relax norms.

FDI needs special attention. We need to make India an attractive investment destination where foreigner are willing to play the longer game. FDI benefits both the foreign investor and the country that receives investment money. To attract FDI, structural reforms are necessary; the solution needs to be more deeply rooted. Clarity in taxation, corporate governance norms, and removing impediments in the creation & maintenance of domestic businesses will help. This has a trickle down effect – domestic investors too reap the benefits.

We hope that we will continue to take giant strides in this respect.

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