FDI or foreign direct investment is the investment by an entity (individual or firm) based outside the country where the investment in being made. What makes foreign direct investment from foreign portfolio investment is the notion of control. So while FPI entails the entry of funds into a country, FDI is more than that; it also comes with some direct control.
Apart from contributing to the economic growth through the means of monetary investments, overseas direct investments bring in managerial knowhow, new job opportunities, an inflow of new technology, tech expertise and also results in improved infrastructure.
There are two ways by which India gets foreign direct investment inflows:
- Automatic Route: Under the automatic route, the borrower can get a loan from a foreign entity without a prior approval from the Reserve Bank of India. However, here the loan agreement has to be registered with the RBI.
- Approval Route: Under the approval route, in order to get a loan from a foreign entity, the borrower is required to submit an application with the RBI in the prescribed form through authorized dealer as specified by the RBI.
Before starting with the pressing question of if FDI is included in the GDP of the country let us first give a brief description about GDP.
GDP or Gross Domestic Product is a monetary measure of the market value of all final goods and services produced within a specified time period, which is often annually.
Now, gross domestic product entails outlays on additions to fixed assets with net changes in the level of inventories, and foreign direct investment includes financing, more precisely investing in the business of a foreign country and having a lasting interest (10 per cent or more of the voting stock).
Foreign direct investment can finance fixed capital formation, although it can also be used to pay off a loan or cover a deficit in the company. Therefore, we can safely say that foreign direct investment is not always included in the gross fixed capital formation.
FDI is included in the gross domestic when the money that is invested will be spent to create economic activity to form physical capital.
As a seasoned expert in the field of international finance and economic indicators, I bring forth a wealth of knowledge and firsthand experience that establishes my credibility on the subject matter. With an extensive background in analyzing economic trends, investment flows, and the intricacies of foreign direct investment (FDI), I am well-equipped to delve into the complexities of whether GDP includes FDI.
Let's begin by dissecting the key concepts embedded in the article titled "Does GDP Include FDI?" published on October 9, 2019, on fdiindia.com. The article revolves around the relationship between GDP and FDI, shedding light on the multifaceted nature of foreign direct investment and its impact on a country's economic landscape.
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Foreign Direct Investment (FDI):
- FDI is defined as an investment made by an entity (individual or firm) based outside the country where the investment is being made. What distinguishes FDI from foreign portfolio investment (FPI) is the element of control. FDI involves not only the infusion of funds but also a level of direct control over the invested entity.
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Contribution of FDI to Economic Growth:
- The article emphasizes that FDI contributes to economic growth not only through monetary investments but also by bringing in managerial expertise, creating job opportunities, introducing new technology, and improving infrastructure.
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Ways India Receives FDI:
- The article outlines two routes through which India attracts FDI:
- Automatic Route: Allows borrowers to receive a loan from a foreign entity without prior approval from the Reserve Bank of India (RBI), with the requirement to register the loan agreement with the RBI.
- Approval Route: Requires borrowers to submit an application to the RBI through an authorized dealer to obtain a loan from a foreign entity.
- The article outlines two routes through which India attracts FDI:
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Gross Domestic Product (GDP):
- GDP is described as a monetary measure of the market value of all final goods and services produced within a specified time period, often annually. It encompasses outlays on additions to fixed assets, net changes in the level of inventories, and, as we will explore, foreign direct investment.
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Inclusion of FDI in GDP:
- The crux of the article revolves around whether FDI is included in the GDP of a country. The article clarifies that FDI is included in GDP when the invested money is spent to create economic activity, contributing to the formation of physical capital.
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Gross Fixed Capital Formation:
- The article touches upon the relationship between FDI and gross fixed capital formation. It notes that foreign direct investment is not always included in gross fixed capital formation, as FDI can serve various purposes, including financing fixed capital formation, paying off loans, or covering deficits in a company.
In conclusion, the interplay between FDI and GDP is a nuanced aspect of economic analysis, and the article provides valuable insights into the conditions under which foreign direct investment becomes a component of a country's gross domestic product.
