2021 GS Paper I, all questions

UPSC Prelims 2021 · GS Paper I

Question 7: Economy and Social Development

Consider the following :

  1. 1.Foreign currency convertible bonds
  2. 2.Foreign institutional investment with certain conditions
  3. 3.Global depository receipts
  4. 4.Non-resident external deposits

Which of the above can be included in Foreign Direct Investments?

a1, 2 and 3
b3 only
c2 and 4
d1 and 4

AnswerUPSC’s answer is (a).

FDI means investment that brings lasting ownership in an Indian company. Under India's FDI policy, foreign currency convertible bonds (which can turn into equity) and global depository receipts (equity listed abroad) count as FDI. Foreign institutional investment is portfolio investment but is treated as FDI when holdings cross the 10 percent limit on a company's paid-up capital. NRE deposits are bank deposits of non-residents, a banking liability and not equity investment, so they are not FDI.

  • 1. FCCBs are convertible into equity and are counted under FDI.
  • 2. Foreign institutional holdings above the 10 percent limit are treated as FDI.
  • 3. GDRs are equity-linked instruments counted as FDI.
  • 4. NRE deposits are bank deposits, not investment in a company's equity.

How you could have got this

  1. If you were sure statement 1 is correct, (b) and (c) go: each of them leaves 1 out.

    What you needed to know: FCCBs are convertible into equity and are counted under FDI.

  2. Then, if you were sure statement 2 is correct, (d) goes: it leaves 2 out.

    What you needed to know: Foreign institutional holdings above the 10 percent limit are treated as FDI.

Only (a) is left. You didn’t need statements 3 or 4.

Which options go is worked out from UPSC’s key and the options, not by a model.

Why each option is right or wrong
  • (a) Right: FCCBs, FII investment above the limit and GDRs can be counted as FDI.
  • (b) Wrong: GDRs count, but so do FCCBs and conditional FII investment.
  • (c) Wrong: NRE deposits are not FDI.
  • (d) Wrong: NRE deposits are not FDI, and it drops GDRs.

Worth knowing: Foreign Institutional Investors were replaced by Foreign Portfolio Investors in 2014; the rule that holdings above 10 percent count as FDI now applies to FPIs.

Answer: UPSC’s key. Explanation: written by UPSC Grade, not by UPSC.

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Source: UPSC, Civil Services (Preliminary) Examination 2021, General Studies Paper I, Series A. The paper on upsc.gov.in.