Economic Survey 2026: FDI/FII Flows Dip, Rupee Stability Questioned
Economic Survey 2026 indicates a decline in FDI/FII flows, impacting rupee stability.
Key Facts
GDP growth estimate (2026): 6.72%
UPSC Exam Angles
GS Paper 3: Indian Economy - Investment models
Impact of global events on Indian economy
Potential for statement-based questions on FDI/FII
Visual Insights
More Information
Background
The history of FDI and FII in India is closely linked to the country's economic liberalization in 1991. Before that, India had a restrictive investment regime. The balance of payments crisis in 1991 forced the government to open up the economy.
Initially, FIIs were the primary drivers of foreign capital inflows. Over time, FDI became more prominent, especially in sectors like manufacturing, IT, and services. Key milestones include the establishment of SEBI to regulate FIIs, and various policy reforms to simplify FDI procedures and increase sectoral caps.
The nature of these flows has evolved from being heavily reliant on portfolio investments to a more balanced mix with strategic long-term investments.
Latest Developments
In recent years, global economic uncertainties, trade tensions, and geopolitical risks have significantly impacted FDI and FII flows to emerging markets, including India. The COVID-19 pandemic initially caused a sharp decline in these flows, followed by a recovery driven by pent-up demand and government stimulus measures. However, rising interest rates in developed economies, particularly the US, have made them more attractive destinations for capital, leading to outflows from emerging markets.
Looking ahead, the focus is on attracting sustainable and long-term FDI by improving the investment climate, infrastructure, and regulatory framework. The government aims to diversify FDI sources and promote investments in new sectors like renewable energy and digital economy.
Frequently Asked Questions
1. What is the key takeaway from the Economic Survey 2026 regarding foreign investment?
The Economic Survey 2026 highlights a concerning decline in Foreign Direct Investment (FDI) and Foreign Institutional Investor (FII) flows into India, which could impact the stability of the Indian rupee.
2. According to the Economic Survey 2026, what is the estimated GDP growth rate for 2026?
The Economic Survey 2026 estimates India's GDP growth to be 6.72% in 2026.
Exam Tip
Remember this figure for prelims questions on economic forecasts.
3. How can declining FDI/FII flows impact the Indian Rupee?
Reduced capital inflows, as indicated by the Economic Survey 2026, can put downward pressure on the Indian rupee, potentially leading to instability in the foreign exchange market.
4. What global factors are contributing to the decline in FDI/FII flows, as suggested by the Economic Survey 2026?
The Economic Survey 2026 suggests that global economic uncertainty and geopolitical factors are contributing to the decline in FDI and FII flows.
5. How did the economic liberalization of 1991 influence FDI and FII in India?
The economic liberalization in 1991 opened up the Indian economy, moving from a restrictive investment regime. Initially, FIIs were the primary drivers, but FDI later became more prominent, especially in manufacturing and IT.
6. What recent developments have impacted FDI and FII flows to India?
Global economic uncertainties, trade tensions, and geopolitical risks have significantly impacted FDI and FII flows to emerging markets, including India. Rising interest rates in developed economies also play a role.
7. What measures can the government take to stabilize the rupee in light of declining FDI/FII flows?
While the Economic Survey 2026 highlights the issue, it doesn't specify measures. Generally, the government and RBI can intervene in the foreign exchange market, attract more foreign investment through policy reforms, and manage the current account deficit.
8. How might the decline in FDI/FII flows, as indicated in the Economic Survey 2026, affect the average Indian citizen?
A weaker rupee, resulting from lower FDI/FII, can lead to imported inflation, making goods and services more expensive for the average Indian citizen. It can also impact job creation and economic growth in the long run.
9. What are the key facts about the Economic Survey 2026's assessment of FDI/FII for the UPSC Prelims?
For UPSC Prelims, remember that the Economic Survey 2026 indicates a decline in FDI/FII flows. Also, note the estimated GDP growth rate of 6.72% for 2026, as this could be a potential MCQ.
Exam Tip
Focus on understanding the relationship between FDI/FII, rupee value, and economic growth.
10. Why is the decline in FDI/FII flows highlighted in the Economic Survey 2026 considered a high-importance issue?
The decline is considered high-importance because FDI and FII are crucial for India's economic growth, providing capital for investment, infrastructure development, and job creation. A significant drop can hinder these processes and affect overall economic stability.
Practice Questions (MCQs)
1. Consider the following statements regarding Foreign Direct Investment (FDI) and Foreign Institutional Investor (FII) flows into India: 1. FDI is generally considered more stable than FII as it represents long-term investment in productive assets. 2. FII flows are primarily driven by macroeconomic factors and investor sentiment, making them more volatile. 3. Both FDI and FII are recorded in the current account of India's Balance of Payments (BoP). Which of the statements given above is/are correct?
- A.1 and 2 only
- B.2 and 3 only
- C.1 and 3 only
- D.1, 2 and 3
Show Answer
Answer: A
Statement 1 is CORRECT: FDI is indeed more stable as it involves long-term investment in physical assets and businesses. Statement 2 is CORRECT: FII flows are highly sensitive to market sentiment and macroeconomic conditions. Statement 3 is INCORRECT: FDI and FII are recorded in the CAPITAL account, not the current account, of the Balance of Payments. The current account records trade in goods and services.
2. With reference to the Indian economy, what could be the impact of declining FDI and FII flows as highlighted in the Economic Survey 2026? 1. Increased pressure on the Indian Rupee leading to potential depreciation. 2. Reduced liquidity in the stock market, potentially affecting market valuations. 3. Decreased overall investment in the economy, impacting GDP growth. Which of the statements given above is/are correct?
- A.1 only
- B.2 and 3 only
- C.1 and 3 only
- D.1, 2 and 3
Show Answer
Answer: D
Statement 1 is CORRECT: Reduced capital inflows can indeed put downward pressure on the rupee. Statement 2 is CORRECT: Lower FII flows reduce liquidity, potentially impacting stock valuations. Statement 3 is CORRECT: Declining FDI and FII can lead to decreased overall investment, affecting GDP growth.
3. Which of the following factors typically influence Foreign Institutional Investor (FII) flows into emerging markets like India? 1. Interest rate differentials between developed and emerging economies. 2. Global risk appetite and investor sentiment. 3. Domestic political stability and policy environment. 4. Exchange rate volatility. Select the correct answer using the code given below:
- A.1 and 2 only
- B.2 and 3 only
- C.1, 2 and 3 only
- D.1, 2, 3 and 4
Show Answer
Answer: D
All the factors listed influence FII flows. Interest rate differentials make emerging markets attractive when their rates are higher. Global risk appetite drives investment decisions. Political stability and favorable policies attract investors. Lower exchange rate volatility provides more certainty.