Explanation
A debt flow is a type of foreign capital where there is obligation for the residents to repay it. A non-debt flow is the one where there is no direct repayment obligation for the residents.
For example, in the case of FDI and FPI, there is not debt payment obligation. On the other hand, in the case of External Commercial Borrowings that is a loan taken by residents from abroad, the loan is to be repaid and this is a debt flow. When the capital inflow is a debt flow like External Commercial Borrowings or NRI deposits, it means debt payment obligation for the country.
Thus, an important criterion in assessing the quality of capital inflows is whether they result in future repayment obligation.
FDI, FPI and Depository Receipts are non-debt flows. These inflows don’t create any repayment burden. On the other hand, ECBs, FCCBs, Rupee Denominated Bonds, NRI deposits and banking capital are debt creating flows. Governments’ overall strategy is to reduce the debt creating and volatile inflows. Among the non-debt flows, FPI is very volatile and involves several other risk elements. Hence the government promotes FDI.