is their economic justification in maintaining the distinction between investment through fdi & from fii?

Answer 1

There is. Foreign direct investment or fdi, such as building a manufacturing plant, is a long term commitment. FII, such as investing in portfolios of stocks and bonds, on the other hand can be a very unstable source of capital. When there is a slight wiff of trouble, fii capital can flee in a heartbeat, while fdi is more permanent.

Aside from the risk of capital flight, FDI directly increases employment and GDP because the country's capital stock increases. fii may do the same, but it might also do nothing more than transfer ownership of existing productive assets without increasing those assets.

Answer 2

The economic justification is every country require Investments to maintain annual growth in employment as well as for the economy to grow to achieve this. So they let private savings to do the job for them. But nowadays of globalization and open economy theories countries can get savings of foreigners to be transfered to other countries for investments there which appear as FDI and FII. This generates growth and employment for the local economy using the savings of foreigners and the locacl savings can be diverted for other purposes like consumption or even for investments again. Credit formation in the economy will grow and this can bring down the interest rates or cost of capital. Then excess conusmption also take place due to foreign savings flowing into other countries and this can create inflationary pressures. Ultimately the Central Banks intervene to create the rightful policy formulations to run the economy without undue side effects.