Context:
Recently, the Union Cabinet has approved 100% Foreign Direct Investment (FDI) in the space sector, under the revised FDI policy.
Changes in FDI norms:
- Aim – To attract investors to invest in Indian space companies.
- New divisions – Satellite sub-sector has been divided into 3 different types, with defined limits for foreign investment in each type.
- Production of parts, systems, or sub-components for satellites – FDI of up to 100% under the Automatic route
- Satellite production and management – Up to 74% FDI under the automatic route
- Launch vehicles and their components – Up to 49% FDI under the automatic route will be allowed
- Significance –
- Will increase private sector involvement and facilitate the adoption of modern technology in the sector.
- Expected to link Indian firms with global supply chains, allowing them to set up manufacturing plants locally.
Foreign Direct Investment (FDI):
- It is an investment made by a firm or individual in one country into business interests located in another country.
- Components –
- Equity capital: Purchase of shares of an enterprise in a country other than its own.
- Reinvested earnings: Share of earnings not distributed as dividends or not remitted to the direct investor.
- Intra-company loans: Short or long term borrowing and lending of funds between direct and affiliate enterprises.
- Routes of FDI – Automatic Route & Government Route (Approval Route)
| Automatic Route | Approval Route |
| Foreign investor or the Indian company does not require any prior approval from the Government of India | Foreign investor or the Indian company should obtain prior approval of the Government of India. |
| Foreign investor needs to inform the RBI only within thirty days of bringing their investmentinto the country, and within thirty days of issuing any shares. | Proposals are considered by the respective Administrative Ministry/Department for proposals up to 5000 crores.For above this limit, the Cabinet Committee on Economic Affairs (CCEA) is the approving authority. |
| Aimed for those sectors that are less restricted. | Aimed for critical sectors like defence, telecommunication, satellite etc. |
- FDI in India –
- 100% FDI is allowed in non-critical sectors through the automatic route
- Prior security clearance from MHA is required sectors such as defence, media, telecommunication, satellites, private security agencies, civil aviation and mining, besides any investment from Pakistan and Bangladesh.
- FDI prohibition in 9 sectors: Lottery, Gambling, Chit funds, Nidhi Companies, Real estate, some areas of agriculture, Multi-brand retail trading, Sectors not open to private sectors, Manufacturing of tobacco etc.
- Trends:
- Declining Growth rate of FDI
- Increasing FDI outflows
- Tax havens like Mauritius and Cayman Islands continue top FDI sources
- 62% of total FDI inflow in 5 sectors: Computer Hardware & Software, Service sector, Automobile, Trading, Construction
- 78% of total inbound FDI limited to 3 States: Karnataka, Maharashtra, Delhi
- Major FDI sources of India: Singapore (37%), Mauritius (12.1%), UAE (11%), USA (10%)
Source: PIB
Previous Year Question
Both Foreign Direct Investment (FDI) and Foreign Institutional Investor (FII) are related to investment in a country. Which of the following statements best represents an important difference between the two?
[UPSC Civil Service Exam – 2011 Prelims]
(a) FII helps bring better management skills and technology, while FDI only brings in capital.
(b) FII helps in increasing capital availability in general, while FDI only targets specific sectors.
(c) FDI flows only into the secondary market, while FII targets the primary market.
(d) FII is considered to be more stable than FDI
Answer: (b)
