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Does GDP Include FDI?

Does GDP Include FDI?

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:

  1. 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.
  2. 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.

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