Given below are 10 MCQs on FDI and Investments in India along with detailed answers and explanations. There is a good amount of probability that questions like these or similar to these might be asked in forthcoming UPSC and other State Civil Services Exam.
1. Which of the following sectors in India does NOT allow Foreign Direct Investment (FDI) under any circumstances?
a) Multi-brand retail
b) Atomic energy
c) Banking sector
d) Insurance sector
Answer: (b) Atomic energy
Explanation: In India, FDI is prohibited in certain strategic sectors. One such sector is atomic energy, where private or foreign investment is not allowed under any route. The Atomic Energy Act, 1962 restricts participation in atomic energy-related projects to the Government of India. In contrast, sectors like multi-brand retail, banking, and insurance allow FDI under certain limits and conditions.
2. What is the current FDI limit in the Insurance sector under the automatic route?
a) 26%
b) 49%
c) 74%
d) 100%
Answer: (d) 100%
Explanation: The FDI limit in the insurance sector was increased from 49% to 74% in 2021 under the automatic route, as per the amendments to the Insurance Act, 1938. However, the government retains regulatory powers to ensure the protection of policyholders’ interests.
The Union Budget 2025 increased the sectoral cap of insurance sector to 100% from 74%.
In the recent past, reforms in the FDI Policy have been undertaken in sectors such as Defence, Insurance, Petroleum & Natural Gas, Telecom and Space.
- FDI in the Defence sector is allowed up to 74% through Automatic Route (from earlier 49%) for companies seeking new industrial licenses.
- Further, 100% FDI in the Telecom Sector is allowed under the Automatic Route.
- FDI sectoral cap in the insurance sector has been revised from 49% to 74% under the automatic route.
- The Union Budget 2025 also announced the further increase of FDI sectoral cap for the insurance sector from 74% to 100%. This enhanced limit will be available for those companies, which invest the entire premium in India.
3. Under which of the following routes can foreign investors invest in India without prior approval from the government?
a) Automatic Route
b) Government Route
c) Restricted Route
d) Strategic Route
Answer: (a) Automatic Route
Explanation: Under the Automatic Route, foreign investors do not require prior government approval and can invest directly in sectors permitted under this category. The Government Route, in contrast, requires approval from relevant ministries and authorities. Sectors like defense, media, and multi-brand retail require government approval, while IT, manufacturing, and construction generally fall under the automatic route.
More than 90% of the FDI inflow is received under the automatic route.
4. Which of the following institutions is responsible for regulating FDI in India?
a) Reserve Bank of India (RBI)
b) Securities and Exchange Board of India (SEBI)
c) Department for Promotion of Industry and Internal Trade (DPIIT)
d) NITI Aayog
Answer: (c) Department for Promotion of Industry and Internal Trade (DPIIT)
Explanation: The DPIIT, under the Ministry of Commerce and Industry, is the nodal agency for FDI policy formulation in India. However, the RBI monitors the inflow and compliance aspects of FDI under FEMA regulations. SEBI mainly regulates stock market-related foreign portfolio investments (FPIs).
5. Which of the following countries is the largest source of FDI in India in recent years?
a) China
b) United States
c) Mauritius
d) United Kingdom
Answer: (c) Mauritius
Explanation: Mauritius has been one of the largest sources of FDI in India due to its favorable tax treaties with India. Many foreign companies route their investments through Mauritius to take advantage of lower tax rates. Other major sources include Singapore, the USA, and Japan.
6. The term “Brownfield Investment” in the context of FDI refers to:
a) Investment in the agriculture sector
b) Investment in new infrastructure and projects
c) Investment in an existing business or facility
d) Investment in sustainable and green projects
Answer: (c) Investment in an existing business or facility
Explanation: Brownfield investment refers to foreign investment in an already existing company, facility, or asset. This is different from Greenfield investment, where a company builds new infrastructure from scratch.
7. Which of the following sectors in India has received the highest FDI inflows in the past decade?
a) Real Estate
b) Pharmaceuticals
c) Services Sector
d) Textile Industry
Answer: (c) Services Sector
Explanation: The services sector, which includes finance, IT, insurance, and business process outsourcing (BPO), has consistently attracted the highest FDI inflows in India. The ease of doing business and the availability of skilled labor make this sector highly attractive for foreign investors.
8. Which of the following statements about Foreign Portfolio Investment (FPI) is correct?
a) FPI investors have controlling stakes in companies
b) FPI refers to short-term investments in stocks and bonds
c) FPI is the same as FDI
d) FPI requires government approval in all cases
Answer: (b) FPI refers to short-term investments in stocks and bonds
Explanation: FPI refers to foreign investments in stocks, bonds, or other financial assets and is considered short-term in nature. In contrast, FDI involves a long-term commitment and often includes ownership or control over business operations. FPIs are regulated by SEBI under Indian laws.
9. Which of the following recent government initiatives aims to boost FDI in the manufacturing sector in India?
a) Atmanirbhar Bharat Abhiyan
b) Make in India
c) Ayushman Bharat
d) PM-KISAN Scheme
Answer: (b) Make in India
Explanation: The Make in India initiative was launched in 2014 to encourage domestic and foreign companies to set up manufacturing units in India. It promotes ease of doing business and provides incentives for FDI in sectors such as electronics, automobiles, and defense.
10. Which of the following FDI policies is TRUE for the defense sector in India?
a) 100% FDI is allowed under the automatic route
b) FDI above 49% requires government approval
c) FDI in the defense sector is completely prohibited
d) Only state-owned companies can receive FDI in the defense sector
Answer: (b) FDI above 49% requires government approval
Explanation: In the defense sector, up to 49% FDI is allowed under the automatic route, while investments beyond 49% require government approval. The purpose of this restriction is to ensure national security while allowing technological collaboration with foreign firms.
These 10 MCQs cover a broad range of topics related to FDI and investments in India in line with the UPSC Civil Services Examination pattern.
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