Foreign Exchange, FDI & External Debt (Part – II)

In 2006, the Government eased policy for FDI in retail sector for the first time, allowing up to 51 percent FDI through the single-brand retail route. In 2012, the Government allowed up to 51 percent FDI in multi-brand retail. The Government also approved 100 percent FDI in single-brand retail, with the requirement of 30 percent local sourcing, preferably from  MSMEs and cottage industries etc.

The FDI Policy allows 100% FDI under the automatic route for the marketplace model of e-commerce activities. How ever, FDI is not permitted for the inventory-based model of e-commerce activities. E-commerce entities providing marketplace cannot exercise control or ownership over the inventory, i.e. the goods professed to be sold. Such control or ownership over the inventory renders the e-commerce business into an inventory-based model. The Ministry of Consumer Affairs has also specified that an e-commerce market- place entity shall not sell any goods owned or controlled by it on such e-commerce marketplace platform. Inventory of a vendor will be deemed to be controlled by e-commerce marketplace entity if more than 25% of purchases of such vendor are from the marketplace entity or its group companies. Thus, the degree to which foreign-owned e-commerce entities can own big sellers on their platform is limited. Hence, statement 1 is incorrect while statement 2 is correct.

On 4th October, 2012, the Government of India had proposed to change the limits of FDI in Insurance Sector from 26% to 49%. In Union Budget 2021-22, the Finance Minister announced an increase in the FDI limit for Insurance Sector from 49% to 74% which came into effect on May 19, 2021.

On 4th October, 2012, the Government of India had proposed to change the limits of FDI in Insurance Sector from 26% to 49%. In Union Budget 2021-22, the Finance Minister announced an increase in the FDI limit for Insurance Sector from 49% to 74% which came into effect on May 19, 2021.

Except for the prohibited sector, foreign investors are allowed to invest in small-scale industrial (SSI) units operating in various sectors. Foreign equity holding in a small scale industrial unit was limited to 24% in 1995-96. If FDI in an SSI unit exceeds 24% of the paid up capital, the company had to lose its SSI status. Presently, most sector/ activities including Micro, Small and Medium Enterprises (MSMEs) except certain strategically important sectors/activities are open for 100% FDI under the automatic route, subject to sectoral laws, regulation/rules, security conditions and state/local laws/regulations.

A country is said to be in debt trap when it has to take new loans to pay the interests due on the loans taken in the past. It is a situation in which outstanding loans are difficult or impossible to repay, generally because high interest payments prevent repayment of the principal.

As per the question period, option (b) was the correct answer. As per the Status Report on India's External Debt 2022-23, at end-March 2023, India's external debt was placed at US $ 624.7 billion, recording an increase of about US $ 5.6 billion (0.9 percent) over its level at end-March 2022. At end- December 2023 (P), India's external debt was placed at US $ 648.2 billion.

Statement 1 is incorrect as most of India's external debt is owed by non-governmental entities. At end-December 2023 (P), India's external debt was placed at US $ 648.2 billion, in which government external debt (Sovereign debt) was US $ 142.2 billion while non-government external debt stood at US $ 506.0 billion.

Statement 2 is also incorrect because not all of India's external debt is denominated in US dollars. Actually, US dollar denominated debt continued to be the largest component of India's external debt, with a share of 54.2 percent at end-December, 2023 (P), followed by the Indian Rupee (30.7 percent), Yen (5.9 percent), SDR (5.6 percent), and the Euro (2.9 percent).

Commercial borrowings continued to be the major component of India's external debt in 2017 and its share was about 38 percent in total external debt. At end-December 2023 (P), India's external debt was placed at US $ 648.2 billion and loans (commercial borrowings) remained the largest component of external debt, with a share of 33.2 percent.

As per the question period, option (c) was the correct answer. Variations in different components of India's external debt in end-March 2023 over end-March 2022 are as follows:

               Outstanding External Debt (in US$ billion)