We have seemingly promoted FDI investments at the expense of employment generation and agricultural livelihoods over the last few decades.
India’s economy faces a unique paradox. Macroeconomic policy trends in the last few decades have sought foreign direct investment as a panacea for economic growth and employment generation, specially in developing countries. High FDI inflows usually serve as affirmation for a nation’s economic policies, while indicating the robustness of its economic health. FDI inflows are surging (hitting Rs 1.44 lakh crores over the last three years) after remaining stagnant over a few years, growing at 28.2 per cent for the past three years — a consequence of an increasing relaxation of FDI norms and improvement in the ease of doing business in India.
Yet, India’s rate of employment has declined, with over 30 per cent of India’s youth currently unemployed. India’s employment elasticity (a measure of percentage change in employment with every percentage change in gross domestic product growth) has fallen by 50 per cent from 0.3 in 1991 to 0.15 currently, highlighting the limitation of FDI investments. While the rhetoric of start-up investments should augur a rush of jobs, the recent bout of layoffs has instead led to over 10,000 people losing their jobs in the last year. Over the next few years, increasing consolidation in the telecom and automotive sectors, along with a structural change in employment generating segments like IT services are likely to see significant restructuring, buffeted by trends like automation and changing visa norms. The cruel paradox of a rise in labour productivity reducing the number of people employed has affected sectors as varied as mining — it took 25 workers to mine Rs 1 crore worth of minerals in 1994-95, it now takes just eight workers.
Logically, a rise in FDI should increase direct and ancillary jobs — however, in India, geographical and sectoral skew have played their part. Incoming FDI has historically been skewed towards urbanised states like Maharashtra, Gujarat, Delhi, Karnataka, Tamil Nadu and Andhra Pradesh (all of which received over Rs 13.4 lakh crores between 2014 and 2017; about 75 per cent of India’s total FDI inflow). And this trend is increasing, with these states receiving 82 per cent of India’s total FDI inflow in FY17. Meanwhile, the demographic bellwether states like Uttar Pradesh, Rajasthan and Madhya Pradesh received just one per cent of India’s FDI inflows between 2014 and 2017. As this FDI flow aggregates, urbanised, rich states will get richer, making it more difficult for other states to attract capital. Meanwhile, sectoral biases, in particular to services and the IT sector (accounting for 25 per cent of cumulative FDI inflows between 2014 and 2017) have limited employment potential, with construction, typically a large employment generator, is seeing its share of FDI decline, attracting just Rs 703 crores worth of investments in FY17, compared to Rs 4,652 crores in FY15. Other sectors like textiles and leather, where India ought to have a natural advantage, have seen only 0.8 per cent of total FDI inflows since 2000. Despite its august tradition of metalwork, FDI investments in metallurgical and chemical industries (the key to China’s initial economic success) have remained low (three-four per cent of cumulative FDI). Finally, the entry of such FDI could also have been for avoiding taxes (Singapore and Mauritius account for 50 per cent of all incoming FDI since 2000). India seemingly beats other emerging markets like Brazil and South Africa in attracting capital, but fails to attract it in the sectors that would create significant employment. We have ended up with jobless growth.
We have seemingly promoted FDI investments at the expense of employment generation and agricultural livelihoods over the last few decades. Meanwhile, our MSME’s face stagnant growth, despite offering a labour intensity that is often four times as high as a large corporate — their growth potential has been limited given poor credit history, limited demand for their products and investment challenges. India needs a single comprehensive MSME law, covering the gamut of land acquisition, labour management, factory buildup and hiring. Financial policy could be cognisant of the receivables delay that MSMEs face while tax policy could be amended to offer tax holiday for 10 years to micro enterprises, besides implementing lower tax slabs for small and medium enterprises.
In order to counter the regional inequity in FDI inflows, lowering entry requirements for backward states can be considered to secure high-value investments in labour-intensive sectors, which shall also be critical to counter rising urban migration. It is critical to achieve geographical dispersion of FDI inflow, with more inflow in poorer states to achieve equitable growth. Policy solutions similar to those adopted in China to attract investments into its hinterland can be studied and implemented. Policy solution increasing attractiveness of backward states cannot be followed in isolation — it has to be backed with strengthening of manufacturing capability and growing industrial base of weaker states, and should be incorporated under the Make in India policy. In order to counter the growing slowdown in service sector employment generation despite record FDI, an integrated service policy, in line with the National Manufacturing Policy (NMP) of Make in India can be pursued. The policy should also actively seek to reorient the service mix from low-end manual services to high-end IP-based services, enabling us to counter such employment slowdowns in future.
In addition, poorly conceived trade pacts have resulted in inverted duties, with higher import rates applicable on raw materials while lower duties are realised on finished products, doing irreparable harm to our manufacturing sector, discouraging value addition and job creation. Consider — apparels, which can be imported into India without incurring duties but their raw material — manmade fibres, attracts one for 10 per cent; electronic products like laptops and mobile phones are easy to import while their parts attract higher duties. Such trade pacts have failed to open markets for India’s exports, restricted as they are by non-tariff barriers and need urgent correction. We need to remember that FDI by its nature to chase economic returns becomes short-term and volatile in nature, thus making public investments furthermore important which considers socio-economic returns.
India must remain open to FDI, but that openness to trade and global capital flows should not preclude an industrial policy focus on increasing employment, prioritised over raising the capital intensity of production. We need to appropriately design trade policy and promote public investment, while providing key supporting infrastructure to MSMEs. The low-hanging fruit of FDI will automatically come.