Question

"The Indian economy has witnessed a sharp turnaround during 2023 – 24 with Foreign Direct Investments (FDI) inflows of US $ 70.9 Bn and net Foreign Portfolio Investments (FPI) inflows of US 32.4 Bn." Distinguish between the above-mentioned economic variables.

Hint:

FDI is long-term and involves physical assets, while FPI is short-term and involves financial instruments.

Answer 1

Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) are both types of foreign investment, but they differ in terms of nature and impact on the economy:
1. Foreign Direct Investment (FDI):
FDI refers to investments made by foreign entities or individuals in a country’s physical assets or production capabilities. These investments typically involve acquiring a significant stake (usually more than 10%) in a company or setting up new operations, such as factories, infrastructure, or joint ventures. FDI is long-term in nature and helps in creating jobs, boosting technology transfer, and enhancing the overall industrial growth of the economy. It is generally considered a more stable form of investment.
2. Foreign Portfolio Investment (FPI):
FPI refers to investments made by foreign investors in a country’s financial assets, such as stocks, bonds, and other securities. Unlike FDI, FPIs are typically short-term investments, as foreign investors may buy and sell securities based on market conditions. FPI is more volatile than FDI, as investors can quickly withdraw their investments in response to changes in market sentiment. However, it still helps improve liquidity and contributes to the overall capital market development of the country.
In summary, FDI involves long-term investment in physical assets, while FPI refers to short-term investments in financial assets like stocks and bonds.