With reference to Foreign Direct Investment in India, which one of the following is considered its major characteristic? It is the investment through capital instruments essentially in a listed company. It is a largely non-debt creating capital flow. It is the investment which involves debt-servicing. It s the investment made by foreign institutional investors in the Government securities.

With reference to Foreign Direct Investment in India

With reference to Foreign Direct Investment in India, which one of the following is considered its major characteristic?

It is the investment through capital instruments essentially in a listed company.
It is a largely non-debt creating capital flow.
It is the investment which involves debt-servicing.
It s the investment made by foreign institutional investors in the Government securities.

Answer: B

Explanation

A debt flow is a type of foreign capital where there is obligation for the residents to repay it. A non-debt flow is the one where there is no direct repayment obligation for the residents.

For example, in the case of FDI, there is not debt payment obligation. On the other hand, in the case of External Commercial Borrowings that is a loan taken by residents from abroad, the loan is to be repaid and this is a debt flow. When the capital inflow is a debt flow like External Commercial Borrowings or NRI deposits, it means debt payment obligation for the country.

Thus, an important criterion in assessing the quality of capital inflows is whether they result in future repayment obligation.

FPI can include debt instruments like bonds as well as equity but FDI is predominantly nondebt flows. On the other hand, ECBs, FCCBs, Rupee Denominated Bonds, NRI deposits and banking capital are debt creating flows.

Exam Year: 2020