With reference to Foreign Direct Investment in India, which one of the following is considered its major characteristic?
Answer & explanation
Answer: (b) It is a largely non-debt creating capital flow.
FDI is largely a non-debt-creating capital flow: the foreign investor buys ownership (equity) in an Indian company, so India owes no loan repayment or interest, unlike a borrowing. The other options describe listed-company portfolio investment, loans, or investment in government bonds.
- ✗ (a) FDI is investment through capital instruments in an unlisted Indian company, or 10 per cent or more of the post-issue paid-up equity of a listed company. It is not limited to listed companies.
- ✓ (b) Foreign investment (FDI and portfolio investment) is a non-debt liability in India's balance of payments, while loans, trade credit and NRI deposits are debt liabilities.
- ✗ (c) Debt-servicing means repaying interest and principal on a loan. FDI brings ownership capital and involves no such obligation; that is the mark of external borrowing.
- ✗ (d) Investment by foreign institutional investors in government securities is portfolio investment, not FDI. FDI carries a 'lasting interest' in an enterprise, unlike portfolio investment.
Remember · FDI = ownership stake (equity), non-debt creating, with a lasting interest. Loans, trade credit and NRI deposits are debt.
📘 Read it in NCERT: Class 12 Introductory Macroeconomics, Ch 6 (practise this chapter)
Sources
- DPIIT, Consolidated FDI Policy Circular of 2020, para 2.1.16 (definition of FDI) ↗ “'FDI' or 'Foreign Direct Investment' means investment through capital instruments by a person resident outside India in an unlisted Indian company; or in ten per cent or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company … FDI, as distinguished from Foreign Portfolio Investment, has the connotation of establishing a 'lasting interest' in an enterprise that is resident in an economy other than that of the investor.”
- Ministry of Finance, Economic Survey 2009-10, Ch 6 (Balance of Payments) ↗ “Foreign investment comprising foreign direct investment (FDI) and portfolio investment represents non-debt liabilities, while loans (external assistance, external commercial borrowings and trade credit) and banking capital including non-resident Indian (NRI) deposits are debt liabilities.”
- NCERT Class 12 · Introductory Macroeconomics, Chapter 6 “These items are Foreign Direct Investments (FDIs), Foreign Institutional Investments (FIIs), external borrowings and assistance.”
Question and answer: UPSC's official GS Paper I (2020, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 30 Sept 2026 (how we verify). ·