For Prelims: Foreign Exchange Management Act (FEMA), Capital Account Convertibility, Foreign Direct Investment (FDI), Net FDI FY2021, Net FDI FY2025, Key Law, Key Section, Draft Rules Released By
For Mains: Capital account convertibility, FEMA vs FERA, CFIUS (US) / Investment Security Unit (UK) as screening models, national treatment for foreign investors
Source:
Indian Express
5 facts for one-day exams
SSC, railway, police and teaching exams ask direct questions like these.
- Net FDI in India fell from $40 billion (FY2021) to near zero (FY2025).
- The RBI released draft Foreign Investment Rules (FI Rules) in 2026.
- Under Section 6 of FEMA, capital account transactions are prohibited unless specifically permitted.
- FEMA was enacted in 1999, replacing the Foreign Exchange Regulation Act (FERA).
- The US uses CFIUS and the UK uses the Investment Security Unit for capital screening.
Why in the news?
India's net FDI has fallen from $40 billion in FY2021 to near zero in FY2025. The news argues that operational tweaks like the draft Foreign Investment Rules are insufficient; a first-principles overhaul of FEMA is needed to signal that capital is welcome and reduce transaction friction.
Summary
- Net FDI inflow into India dropped from $40 billion (FY2021) to effectively zero in FY2025.
- The RBI released draft Foreign Investment Rules (FI Rules) with operational improvements but they do not address the core restriction under FEMA.
- Under Section 6 of FEMA, capital account transactions are prohibited unless specifically permitted, making India an outlier alongside China among major economies.
Highlights
FDI Collapse
India's net foreign direct investment plunged from $40 billion in FY2021 to near zero in FY2025, signalling a severe decline in foreign capital inflows.
Call for Overhaul
The news argues that the RBI's draft Foreign Investment Rules offer only cosmetic changes; a first-principles overhaul of FEMA is needed to restore investor confidence.
Background
India's net FDI has collapsed from $40 billion in FY2021 to effectively zero in FY2025. This decline has prompted the RBI to release draft Foreign Investment Rules (FI Rules) aimed at creating a 'contemporary, user-friendly investment framework'. However, the news argues these are operational revisions that fail to address the core problem: India's suspicious approach toward foreign capital embedded in the Foreign Exchange Management Act (FEMA).
Key Analysis and Impact
Under Section 6 of FEMA, capital account transactions remain prohibited unless specifically permitted by the RBI or government. This makes India an outlier among significant economies, alongside China. No OECD country maintains general capital and exchange controls. Even in fully open sectors, India regulates individual transactions—prescribing instruments, legal forms, and prices through certified valuations. This ex-ante control creates friction, forcing parties to transact at mandated prices rather than negotiating commercially. These difficulties were masked earlier by global interest in India and low interest rates, but now require a deeper overhaul.
Way Forward
The news proposes three principles: (1) Restrictions on capital flows should be temporary, based on publicly stated objectives, and used only for managing macroeconomic risk or national security (with screening mechanisms like CFIUS in the US or the Investment Security Unit in the UK). (2) Rulemaking should involve public consultation, cost-benefit analysis, and review as argued by the FSLRC. (3) Controls should be tested for neutrality as to the investment vehicle and the investor, and each restriction must be tied to an identified market failure. Without a first-principles overhaul of FEMA, tactical adjustments like the draft FI Rules are unlikely to alter the status quo.
Background GK
Textbook concepts you need to understand this news
- Foreign Exchange Management Act (FEMA)
- An Indian law enacted in 1999 to consolidate and amend the law relating to foreign exchange and to facilitate external trade and payments. It regulates capital account transactions and replaced the earlier FERA (Foreign Exchange Regulation Act).
- Capital Account Convertibility
- The freedom to convert local financial assets into foreign financial assets and vice versa. Full convertibility allows free movement of capital across borders; India has partial capital account convertibility.
- Foreign Direct Investment (FDI)
- An investment made by a firm or individual in one country into business interests located in another country, typically involving a lasting interest and control.
Facts to remember
Tap a card to see the answer. Try to recall it first.
How exams will ask this
- Data: Net FDI fell from $40 billion (FY2021) to near zero (FY2025)
- Nodal Body: Reserve Bank of India (RBI) - released draft Foreign Investment Rules
- Legal Point: Section 6, Foreign Exchange Management Act (FEMA), 1999
Don't make this mistake!
The draft FI Rules are operational revisions, not a structural overhaul. Students might confuse the draft rules with a full reform of FEMA, but the news clearly states they are insufficient without deeper changes to the primary statute.
Write these in mains answers
- Capital account convertibility, FEMA vs FERA, CFIUS (US) / Investment Security Unit (UK) as screening models, national treatment for foreign investors
Stuck? Get it in one tap
Foreign Direct Investment (FDI) is money that foreign companies invest in India. India's net FDI has dropped sharply from $40 billion in FY2021 to almost nothing in FY2025. The Reserve Bank of India released draft rules to improve the process, but the news argues the main law, FEMA, treats foreign capital with suspicion. Under Section 6 of FEMA, capital account transactions are prohibited unless specifically permitted by the RBI or the government. To truly attract foreign capital, India needs a fundamental overhaul of FEMA, not just small adjustments.
- Net FDI in India fell from $40 billion (FY2021) to near zero (FY2025).
- The RBI released draft Foreign Investment Rules (FI Rules) in 2026.
- Under Section 6 of FEMA, capital account transactions are prohibited unless specifically permitted.
- FEMA was enacted in 1999, replacing the Foreign Exchange Regulation Act (FERA).
- The US uses CFIUS and the UK uses the Investment Security Unit for capital screening.
- Economy: Foreign Direct Investment (FDI) and Capital Account Convertibility
- Polity: Foreign Exchange Management Act (FEMA)
Related concepts: Foreign Exchange Management Act (FEMA), Capital Account Convertibility, Foreign Direct Investment (FDI)
Practice questions
Pick an answer, then read the explanation.
- Q1Easy
Which Indian law governs capital account transactions and is the primary statute regulating foreign exchange?
Explanation: FEMA, enacted in 1999, replaced FERA and governs all foreign exchange transactions, including capital account transactions. Under Section 6 of FEMA, capital account transactions are prohibited unless specifically permitted by the RBI or government. FERA was the earlier restrictive law, while PMLA and Companies Act deal with money laundering and corporate regulation respectively.
- Q2Hard
Consider the following statements regarding India's foreign investment framework:
- 1.Net FDI in India fell from $40 billion in FY2021 to effectively zero in FY2025.
- 2.Under Section 6 of FEMA, capital account transactions are permitted unless specifically prohibited by the RBI.
- 3.The draft Foreign Investment Rules released by the RBI represent a first-principles overhaul of FEMA.
Which of the statements given above is/are correct?
Explanation: Statement 1 is correct: net FDI fell from $40 billion (FY2021) to near zero (FY2025). Statement 2 is incorrect: under Section 6 of FEMA, capital account transactions are prohibited unless specifically permitted (the default is restriction, not permission). Statement 3 is incorrect: the draft FI Rules are described as operational revisions, not a first-principles overhaul of FEMA.
- Q3Medium
India's net foreign direct investment (FDI) in FY2025 was approximately:
Explanation: Net FDI in India has gone down from $40 billion in FY2021 to effectively zero in FY2025.
- Q4Medium
What is the primary argument made in the news regarding India's approach to foreign capital?
Explanation: The news argues that the draft FI Rules are 'operational revisions that are in themselves insufficient' and that the binding constraint is India's suspicious approach towards foreign capital under FEMA. A deeper overhaul of the primary statute is required. The other options contradict the news's analysis.
Frequently asked questions
1. What is the current status of net FDI in India?
Net FDI in India has fallen from $40 billion in FY2021 to effectively zero in FY2025.
2. Which law primarily governs foreign exchange and capital account transactions in India?
The Foreign Exchange Management Act (FEMA), 1999, governs foreign exchange transactions. Under Section 6, capital account transactions are prohibited unless specifically permitted by the RBI or government.
3. What did the RBI release to address the foreign investment framework?
The RBI released draft Foreign Investment Rules (FI Rules) as an operational revision, but the news argues they are insufficient without a deeper overhaul of FEMA.
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- Original6 November 2026 · Read story
