Model Question and Answers for APSC | Distinguish between FDI and FII. Discuss their relative merit and demerit as sources of external investment for a country’s economic growth. (APSC Mains 2020 GS- III)

Model Question and Answers for APSC | Distinguish between FDI and FII. Discuss their relative merit and demerit as sources of external investment for a country’s economic growth. (APSC Mains 2020 GS- III)

Ans : A Foreign Direct Investment (FDI) is an investment made by a firm or individual in one country into business interests located in another country. FDI lets an investor purchase a direct business interest in a foreign country.
Foreign Institutional Investment (FII) consists of securities and other financial assets passively held by foreign investors. It does not provide the investor with direct ownership of financial assets and is relatively liquid depending on the volatility of the market.
Merits of Foreign Direct Investment in India
1. Promotion of investment in key areas
2. Induction of New technologies
3. Increase in Capital inflow
4. Increase in Exports
5. Promotion of Employment opportunities
6. Promotion of financial services
7. Exchange rate stability
8. Development of backward areas

Demerit:
1. May discourage domestic industries
2. Dependence on FDI makes country vulnerable to geopolitical risks and affects its strategic autonomy Foreign institutional investment (FII)
Merits:
1. Increased inflow of investments will conservatively allow to build forex reserves so that India has a buffer to maintain resilience in case of any future contagion from excessive liquidity and rising fiscal deficits.
2. Foreign institutional investors play a very important role in any economy. These are the big companies such as investment banks, mutual funds etc, who invest a considerable amount of money in the Indian markets.
3. With the buying of securities by these big players, markets trend to move upward and vice-versa. They exert strong influence on the total inflows coming into the economy.
Demerit:
1. FIIs directly impact the stock/securities market of the country, its exchange rate and inflation.
2. Sometimes, FIIs invest in the securities for a short period of time. This is helpful for liquidity in the market, but they also cause instability in flow of money.