Context: Falling Net Foreign Direct Investment
India’s Net Foreign Direct Investment has declined despite healthy Gross Foreign Direct Investment inflows because foreign investors are taking out larger amounts through dividends, profits, royalties and investor exits.
Balance of Payments
Balance of Payments is the record of all economic transactions between residents of India and the rest of the world during a specific period.
Current Account
Records transactions related to current income and expenditure. It does not create assets or liabilities.
Components
- Goods — exports and imports
- Services — Information Technology, tourism, banking, shipping
- Income — interest, dividend, royalty, profits
- Transfers — remittances, gifts, grants
Current Account Deficit
Current Account Deficit occurs when Current Account payments exceed Current Account receipts.
Capital Account
Records transactions that create assets or liabilities between India and the rest of the world.
Components
- Foreign Direct Investment
- Foreign Portfolio Investment / Foreign Institutional Investment
- External Commercial Borrowings
- Foreign loans
- Non-Resident Indian deposits
Important Concepts
Foreign Direct Investment
- Long-term foreign investment involving ownership, management participation or control in a business.
External Commercial Borrowings
- Loans raised by Indian companies from foreign banks, international financial institutions or overseas markets for expansion and capital investment.
Remittances
- Money sent by Indians working abroad to families in India.
- Recorded under Current Account Transfers.
- India is the world’s largest recipient of remittances, about $130 billion annually.
Disinvestment
- Sale of an existing investment or stake by an investor.
- When a foreign investor sells shares and takes money abroad, it results in capital outflows.
Why is Net FDI Falling?
Net FDI = Gross FDI Inflows − FDI Outflows
Major Outflows
Dividend Remittances
- Indian subsidiaries distribute profits to foreign shareholders abroad.
Profit Repatriation
- Foreign companies transfer profits earned in India back to their parent company.
Royalty Payments
- Payments made for use of foreign technology, patents, trademarks and brand names.
Technical Service Fees
- Payments for management, consultancy and technical support provided by foreign parent companies.
Disinvestment / Investor Exit
- Foreign investors sell their stakes in Indian companies and withdraw money.
