Foreign Direct Investment (FDI) Policy in India

Statement 1 is correct: The Trade-Related Investment Measures (TRIMS) agreement under the World Trade Organization (WTO) prohibits quantitative restrictions on imports by foreign investors. This means that countries cannot impose conditions like mandatory local sourcing or trade-balancing requirements that distort free trade. Statement 2 is incorrect: TRIMS only applies to trade in goods, not services. The regulation of trade in services falls under the General Agreement on Trade in Services (GATS), not TRIMS. Statement 3 is correct: TRIMS is not directly concerned with the regulation of foreign investments. Instead, it focuses on investment measures that affect trade in goods, ensuring that they do not create barriers to international trade. Hence, option C is the correct answer.

1. Foreign Loans – These are borrowings from abroad by the government or private sector. They are capital inflows and part of the Capital Account. 2. Foreign Direct Investment (FDI) – Investment by foreign entities in domestic companies, creating a long-term interest in the economy, is part of the Capital Account. 3. Private Remittances – These are funds sent by individuals (like migrant workers) to their home country. They are part of the Current Account, not the Capital Account. 4. Portfolio Investment – Investments in stocks, bonds, and other financial assets by foreigners in the domestic market are capital inflows, part of the Capital Account.

Statement 1 is incorrect. Typically, the RBI uses open market operations to sell government securities to drain money from the system and control inflation. Buying government securities would inject money into the system, potentially fueling inflation further. Statement 2 is correct. Selling dollars in the market - If the rupee is rapidly depreciating, the RBI might intervene in the foreign exchange market by selling dollars from its reserves. This increased supply of dollars in the market can help stabilize the exchange rate and slow down the depreciation of the rupee. Statement 3 is correct. Lower interest rates in the US/EU make India a more attractive destination for foreign investment, leading to a large inflow of dollars. This causes the rupee to strengthen (appreciate). To prevent the rupee from appreciating too rapidly and hurting exporters, the RBI buys the excess dollars from the market.

Foreign Direct Investment (FDI) typically involves a long-term interest and control in a company. However, the definition includes specific instruments and thresholds. Statement 1 and 3 are correct: Foreign Currency Convertible Bonds (FCCBs) and Global Depository Receipts (GDRs) are instruments used by Indian companies to raise capital abroad. Since these are essentially precursors to equity (convertible to shares) or represent underlying shares, they are treated as part of the FDI policy framework and statistics under the "Foreign Investment" category. Statement 2 is correct: Foreign Institutional Investment (FII)—now largely subsumed under Foreign Portfolio Investment (FPI)—is generally considered short-term. However, with certain conditions, it becomes FDI. According to international standards and the Arvind Mayaram Committee recommendations adopted by India, if an FPI holds a stake of 10% or more in a company, it is reclassified and treated as FDI. Statement 4 is incorrect: Non-Resident External (NRE) deposits are simply bank accounts held by NRIs in India. These are classified as External Debt (if repatriable) or Banking Capital, not foreign investment in a productive enterprise.

Statement 1 is correct: This is the primary objective of the Gold Monetization Scheme (GMS). The scheme encourages individuals and institutions to deposit their idle physical gold (jewellery, coins, bars) with banks. This gold is then melted, assayed, and added to the country's gold reserves, which can be lent to jewellers, thereby bringing it into the formal economy. Statement 2 is incorrect: These schemes are focused on managing domestic gold supply and demand. They are not designed to attract Foreign Direct Investment (FDI). Policies related to FDI in the jewellery sector are separate from these schemes. Statement 3 is correct: This is a core objective of both schemes.
* The Sovereign Gold Bond (SGB) Scheme provides a financial alternative to buying physical gold. By shifting demand from physical gold to paper gold, it helps reduce the demand for gold imports.
* The Gold Monetization Scheme (GMS) increases the domestic supply of recycled gold available to jewellers, thus reducing their reliance on imported gold. Both schemes aim to curb gold imports, which are a major component of India's import bill and contribute significantly to the Current Account Deficit (CAD).