What’s in today’s article?

• Why in News?
• What is Foreign Portfolio Investment (FPI)?
• What is Foreign Direct Investment (FDI)?
• How is FPI Different from FDI?
• Guidelines on Investment Limits for FPIs

Why in News?

• The Reserve Bank of India (RBI) recently issued guidelines for Foreign Portfolio Investors (FPIs) intending to reclassify their investments in Indian companies as Foreign Direct Investment (FDI) if their holdings exceed specified thresholds.
• The RBI mandates FPIs to secure government approvals and consent from the investee companies to ensure alignment with FDI norms.

What is Foreign Portfolio Investment (FPI)?

• FPI is when investors from a foreign country invest in a country's financial markets or assets for a short term.
• It does not give investors direct ownership of a company's assets and includes securities and financial assets held by investors in another country.
  • Securities include stocks of companies in nations other than the investor's nation.
  • Financial assets include bonds or other debtissued by these companies or foreign governments, mutual funds or exchange-traded funds (ETFs) that invest in assets abroad or overseas.
• FPI is relatively liquid depending on market volatility and is part of a country’s capital account and shown on its balance of payments (BOP).
  • BOP calculates the amount of money flowing from one country to other countries over a financial year.
• In India, FPIs are an important source of investment capital that helps the country's financial markets grow.

What is Foreign Direct Investment (FDI)?

• FDI is an investment in the form of controlling ownership in a business in one country by an entity based in another country.
• FDIs are commonly made in open economies that have skilled workforce and growth prospects.
• It usually involves participation in management, joint-venture, transfer of technology and expertise, and not only brings money with them but also skills, technology and knowledge.
• Broadly, FDI includes mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations and intra company loans.
• Stock of FDI is the net (outward FDI minus inward FDI) cumulative FDI for any given period.

How is FPI Different from FDI?

• A FDI is distinguished from a FPI by a notion of direct control (or ownership in a business).
• In 2014, the Government of India constituted the Arvind Mayaram Committee and approved its recommendation for further rationalising FPI and FDI definitions.
• Recommendations of the committee:
  • An integrated definition of FPI: Investor classes currently regulated as Foreign Institutional Investment (FIIs) and Qualified Foreign Investors (QFIs) are included.
  • What constitutes FDI and FPI? Direct investment excludes investment that results in an investor controlling less than 10% of the shares of the company (less than 10% is FPI).

Guidelines on Investment Limits for FPIs:

• Regulatory framework and investment caps:
  • As per the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, an FPI’s investment in an Indian company must remain below 10% of the total paid-up equity capital on a fully diluted basis.
  • If an FPI breaches this limit, they must either divest or reclassify the excess holdings as FDI within five trading days after the trade settlement.
• Approval requirements for reclassification:
  • To reclassify FPI holdings as FDI, the concerned investor must obtain necessary approvals from the government.
  • This includes compliance with guidelines, particularly for investments from countries sharing land borders with India.
  • The acquisition must follow the prescribed norms under the FDI regulations, including entry routes, sectoral caps, and investment limits.
• Role of the investee company:
  • FPIs are also required to secure consent from the investee company to ensure adherence to sectoral caps and FDI prohibitions.
  • This compliance enables the investee company to verify that the reclassified investment aligns with sectoral restrictions and approvals under the existing FDI rules.
• Sectoral restrictions on reclassification:
  • In cases where the reclassification to FDI is prohibited in specific sectors, the RBI guidelines restrict the FPI from pursuing reclassification.
  • FPIs must clearly state their intent to reclassify and provide necessary approvals to their Custodian.
• Significance of the guidelines:
  • The RBI’s directive aims to streamline FPI investments breaching specified limits and ensure compliance with FDI norms.
  • These guidelines seek to maintain regulatory consistency in foreign investments, upholding India’s sectoral and governmental regulations.

Q.1. What is the significance of FDI for the Indian economy?

FDI stimulates economic growth by bringing in capital, technology, and expertise from foreign countries. FDI can create job opportunities in the host country, reducing unemployment rates.

Q.2. What are the problems with foreign portfolio investment?

FPIs can be highly unpredictable and prone to sudden outflows, leading to market instability. It can lead to increased speculation in financial markets, disrupting the economic environment. Over-reliance on foreign investments may lead to economic vulnerability.

News: RBI issues new framework for reclassification of FPI to FDI

What’s in today’s article?

• About Foreign Contribution Regulation Act
• Major Provisions Under the FCRA, 2010
• For What Purpose a Registered NGO can Receive Foreign Contributions?
• Who Cannot Receive Foreign Funding?
• Foreign Contribution Regulation Amendment Act, 2020
• News Summary

Why in the News?

• The Central Government announced that any NGO involved in anti-developmental activities and forced religious conversions will face cancellation of their registration under Foreign Contribution (Regulation) Act (FCRA), 2010.

About Foreign Contribution Regulation Act

• The FCRA was first enacted in 1976 in order to maintain strict control over voluntary organisations and political associations that received foreign fundings.
• In 2010, the Act was repealed and a new Act with strict provisions was enacted.
• Objective: To regulate foreign donations and ensure that such contributions do not adversely affect internal security of India.
• Nodal Ministry: Ministry of Home Affairs
• It is applicable to all associations, groups and NGOs which intend to receive foreign donations.

Major Provisions Under the FCRA, 2010

• It is mandatory for all such NGOs to register themselves under the FCRA.
• The registration is initially valid for five years and it can be renewed subsequently if they comply with all norms.
• For such NGOs, filing of annual returns, on the lines of Income Tax, is compulsory.
• In 2015, the MHA notified new rules, which required NGOs to give an undertaking that the acceptance of foreign funds:
  • Does not affect the sovereignty and integrity of India
  • Does not impact the friendly relations with any foreign state
  • Does not disrupt communal harmony
• All such NGOs would have to operate accounts in either nationalised or private banks which have core banking facilities to allow security agencies access on a real time basis.

For What Purpose a Registered NGO can Receive Foreign Contributions?

• A registered NGO can receive foreign contributions for the following five purposes:
  • Social
  • Educational
  • Religious
  • Economic
  • Cultural

Who Cannot Receive Foreign Funding?

• Following individuals/organizations cannot receive foreign funding:
  • A candidate contesting elections
  • Media persons
  • Judges
  • Government employees
  • Political parties

Foreign Contribution Regulation Amendment Act, 2020

• The Amendment adds Public Servants to the list of people who cannot accept foreign contributions.
• It prohibits the transfer of foreign contribution to any other person.
  • The term ‘person’ under the Act includes an individual, an association, or a registered company.
• It makes it mandatory to provide Aadhar number for any person seeking prior permission, registration or renewal of registration.
• It provides that the government may conduct an inquiry before renewing the certificate.
• It adds a provision allowing the central government to permit a person to surrender their registration certificate.
• It makes it mandatory for all NGOs receiving foreign aid to open an account in State Bank of India’s New Delhi branch.

News Summary

• The Indian government announced that NGOs involved in anti-development activities, forced religious conversions, or actions affecting social or religious harmony may have their Foreign Contribution (Regulation) Act (FCRA) registration cancelled.
• The notice states that NGOs using foreign funds for personal gain, undesirable activities, or with links to terrorist or radical groups will also face cancellation.
• Additionally, NGOs not using foreign funds according to their stated objectives may lose their FCRA registration.

Q1. What is a Political Pressure Group?

Political pressure groups are organisations set up in order to influence government policy-making, legislation, and public opinion.

Q2. Are NGOs exempted from GST?

'Charitable Activities' A special exemption is provided in GST for NGOs registered under sec. 12AA. They need not pay any GST on 'charitable activities'. Similarly, they need not pay GST even if they charge fees for training or coaching in arts, culture or sports.

News: NGOs to lose FCRA licence over conversions, anti-development acts: MHA

What’s in today’s article?

• Why in News?
• Manipur Violence – Reasons
• The Flash Point – ST status for Meiteis
• Hmar Tribe

Why in News?

In Manipur’s Jiribam district, ten suspected militants, allegedly from the Hmar community under the Kuki-Zo umbrella, were killed in a shootout with security forces.

The incident began when armed groups launched attacks early in the day, targeting Meitei settlements and later a CRPF post and a local police station, injuring a CRPF constable who is now hospitalized.

The conflict reportedly intensified after a recent killing of a Hmar woman, with the Hmar Village Volunteers claiming those killed were "village volunteers" retaliating for her death. Prohibitory orders were imposed in Jiribam to prevent further violence. The incident prompted shutdowns in Kuki-Zo-majority districts of Churachandpur and Kangpokpi.

Violence in Manipur

• About
  • Violence between Manipur’s Kuki tribe and the majority Meitei community continued to rage in several parts of Manipur for many days.
• The Imphal valley, which comprises about 10% of Manipur’s landmass, is dominated by the non-tribal Meitei who account for more than 64% of the population of the State. This area yields 40 of the State’s 60 MLAs.
• The hills comprising 90% of the geographical area are inhabited by more than 35% recognised tribes. This area sends only 20 MLAs to the Assembly.
  • Manipur has been restive since February 2023 when the state government launched an eviction drive seen as targeting a specific tribal group.
• The drive led to protests but not on the scale of the one seen recently.
• Reasons behind the violence in Manipur
  • High Court’s order as a tigger point
    • The recent protests were triggered by the Manipur HC’s direction to the State to pursue a 10-year-old recommendation to grant Scheduled Tribe (ST) status to the non-tribal Meitei community.
    • The Court’s order has brought the historical tensions between the valley-dwelling Meitei community and the state’s hill tribes to a boil.
  • Violence started
    • A ‘tribal solidarity march’ was organised by the All-Tribal Students’ Union of Manipur (ATSUM) against the order of the High Court.
    • Violent clashes broke out at various places in Manipur during the course of this march.

The Flash Point – ST status for Meiteis

• Meitei community want ST status
  • There has been an organised push in support of this demand for at least since 2012, led by the Scheduled Tribes Demand Committee of Manipur (STDCM).
  • Recognised as tribe before merger with India
    • In their plea before the High Court, it was argued that the Meitei community was recognised as a tribe before the merger of the princely state of Manipur with the Union of India in 1949.
    • It lost its identity as a tribe after the merger.
  • Need to preserve tradition and culture
    • The demand for ST status arose from the need to preserve the community, and save the ancestral land, tradition, culture and language of the Meiteis.
    • As per the arguments forwarded by the community in the court:
    • The community has been victimised without any constitutional safeguards to date.
    • The Meitein/Meetei have been gradually marginalised in their ancestral land.
    • Their population which was 59% of the total population of Manipur in 1951 has now been reduced to 44% as per 2011 Census data.
• Why Tribal groups of Manipur are opposing ST status for Meiteis?
  • The tribal groups say the Meiteis have a demographic and political advantage besides being more advanced than them academically and in other aspects.
• The Meiteis are a dominant group controlling the state and its apparatuses.
• Hence, the claim that Meiteis need ST status to protect their culture and identity is self-defeating.
  • They feel the ST status to the Meiteis would lead to loss of job opportunities and allow them to acquire land in the hills and push the tribals out.
  • The Manipuri language of the Meiteis is included in the Eighth Schedule of the Constitution.
  • Sections of the Meitei community — which is predominantly Hindu — are already classified under Scheduled Castes (SC) or Other Backward Classes (OBC).

Hmar tribe

• About
  • The Hmar tribe is an indigenous ethnic group primarily residing in the northeastern states of India, such as Mizoram, Manipur, Assam, and parts of Tripura.
  • They are believed to be part of the larger Mizo-Kuki-Chin ethnic group, tracing their origins to the Chin Hills of Myanmar.
  • They are recognised as Scheduled Tribe under the Constitution of India.
• Origin
  • The Hmar claim to be descended from the Singlung region in central or southwest China.
• Ethnicity and Language
  • The Hmars belong to the group of the Sino-Tibeto-Burman family of the Mongolian race.
  • Their language, Hmar, also belongs to the Tibeto-Burman family.
  • It shares linguistic similarities with Mizo and other related dialects of the Kuki-Chin group.
• Society
  • The society is traditionally clan-based, with extended families organized into clans and sub-clans.
  • The Hmars society is patriarchal society, and follow the so-called ultimogeniture system of succession and inheritance.
• Ultimogeniture is an inheritance system where the youngest child inherits the estate. 
  • But sometimes the eldest and the youngest sons enjoy equal shares in inheritance.
• Economic Activities
  • The Hmars engage primarily in agriculture, practicing both traditional shifting cultivation (jhum) and settled farming.
  • Key crops include rice, maize, vegetables, and sometimes cotton.

Q.1. What triggered the recent violence in Manipur?

The violence in Manipur was triggered by a Manipur High Court order to grant ST status to the Meitei community, leading to protests and violent clashes between tribal groups and the Meiteis.

Q.2. Who are the Hmar tribe and where are they located?

The Hmar tribe is an indigenous ethnic group primarily found in northeastern India, including Mizoram, Manipur, and Assam. They are part of the Mizo-Kuki-Chin ethnic group and are recognized as a Scheduled Tribe.

News: Manipur Police: Ten militants killed, targeted CRPF camp | Hindustan Times | Report on Hmars

What’s in today’s article?

• Why in News?
• Volkswagen's Crisis Highlights Germany's Industrial Decline
• Economic Crisis in Germany
• Germany’s Fragile Coalition Struggles Amid Economic Crisis and Global Tensions
• Implications

Why in News?

German Chancellor Olaf Scholz stated he’s open to facing a confidence vote before Christmas after his coalition collapsed over economic management issues, with the vote initially planned for January 15.

Germany’s economy grew slightly (0.2%) in Q3 after a contraction, reflecting a broader crisis affecting key industries, including Volkswagen.

For the first time in its 87-year history, Volkswagen, Europe’s largest employer, is considering closing three of its 15 factories in Germany due to financial difficulties.

Volkswagen's Crisis Highlights Germany's Industrial Decline

• Volkswagen, Germany’s largest carmaker and the world’s second-largest, is facing severe troubles that threaten the entire German automotive sector, the nation’s largest industry.
• The company plans to shut down up to three factories and lay off tens of thousands of workers due to declining sales and rising competition, particularly from China.
• This move reflects broader issues within Germany’s industrial landscape, with high energy costs, shrinking markets, and geopolitical tensions putting over 20% of the country’s industrial output at risk by 2030.
• The carmaker’s deepening troubles are set to have a domino effect through the entire German automotive industry.
  • It is the country’s single-largest sector accounting for 5% of GDP and employing almost 800,000 people — over a third of whom work for Volkswagen

Economic Crisis in Germany

• About
  • Germany was the only G7 economy to shrink last year (2023) and is set to be the group’s slowest-growing economy again this year.
  • According to the IMF, its GDP per head shrank 1 per cent between 2019 and 2023.

Reasons behind this crisis

• Volkswagen’s one of the main pillars of German economy, is struggling due to multiple factors including a late shift to electric vehicles.
• Its reliance on internal combustion engines, rather than transitioning to electric vehicles, has left the industry lagging in the current energy landscape.
  • Germany’s deeper economic challenges is also due to the factors such as such as dependence on Russian gas.
• Germany’s terms of trade deteriorated hugely after Russia’s invasion of Ukraine, as the price of natural gas soared. 
  • Experts argue that Germany’s reliance on authoritarian states like Russia and China and its failure to embrace the new digital economy have left the nation behind in global competitiveness.
  • Also, the post-pandemic rebalancing of global demand from manufactured goods towards services was also unfavourable for Germany’s economy. 
• Structural issues
  • The recent crisis highlights deeper structural issues within the German economy.
• Germany was once a symbol of high-tech manufacturing but now seen as uncompetitive with a potentially reduced output outlook.
• High debt and deficit levels, pushed by the government’s need to satisfy a diverse coalition, have also raised concerns in the EU.
• Over-regulation and bureaucratic hurdles further impact Germany’s smaller and mid-sized firms.

Germany’s Fragile Coalition Struggles Amid Economic Crisis and Global Tensions

• Germany's "traffic light" coalition, composed of the Social Democrats, Free Democrats, and the Green Party, has hit a breaking point following Chancellor Scholz’s dismissal of Finance Minister Christian Lindner.
  • Linder belongs to the pro-business Free Democrats.
• The coalition has been divided on economic strategy, with the Free Democrats opposing tax hikes and debt increases, while the Greens and Social Democrats advocate for more state investment in infrastructure, energy transition, and digital growth.
• This internal crisis comes as Germany faces challenges from:
  • ongoing conflicts in Europe and West Asia and rising security and
  • tariff risks with the recent re-election of Donald Trump in the U.S.

Implications

• This economic strain, combined with political instability, could benefit far-right parties like the AFD, deepening divisions within Germany.
• The slowdown in Germany could exacerbate a Eurozone crisis, with potential negative consequences for global markets, including India.

Q.1. What is causing the economic crisis in Germany?

The crisis in Germany is driven by several factors including Volkswagen's struggle to transition to electric vehicles, high energy costs due to reliance on Russian gas, and global competition, alongside structural issues like over-regulation and high debt levels.

Q.2. How is the political instability in Germany affecting the economy?

Germany's fragile coalition, divided over economic strategies, has led to internal conflicts. This political instability, compounded by economic struggles, could exacerbate tensions and benefit far-right parties, potentially deepening divisions within the country and impacting its global competitiveness.

News: Sick man of Europe again? What ails the once-booming German economy | Financial Times