The Economic and Social Impacts to India and Its Citizens from Inward Foreign Direct Investment

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3.8: Chapter summary

As discussed in Chapter Two, a large part of the development agenda within the globalized context for developing countries is concerned with making the host economy attractive to FDI. Governments try to attract and induce investment and they do this by adopting policies that are attractive to investors. Chapter Two concentrated on the economic policies that countries implement to attract investment. However, as argued here, the social welfare of the host economy is important to attracting FDI and social policies are often equally important to the needs of foreign investors. Thus, FDI has implications for the social policies of host economies.

This chapter examined the social impact of FDI on developing host countries by exploring the connection between business, social policy and the state’s development strategies. Social welfare is critical not only for its citizens but also for the needs of business (Farnsworth, 2010, 2012; Hecock and Jepsen, 2013). While business has power to shape and influence host country policies, there are internal and external factors that serve to boost or limit business influence on social policy construction (Fuchs, 2005; Farnsworth, 2010; Bell and Hindmoor, 2013). TNCs can also directly impact host social environments with the risk of deleterious corporate behaviour. This chapter explored the concepts of risk, costs, harm and corporate crime.

It was observed in this chapter that state welfare provisions include both social and corporate welfare components and while the needs of both citizens and businesses necessitate an equitable provision of both, there are political and ideological factors that can skew distributional outputs (Glasberg and Skidmore, 1997; Farnsworth, 2012). Neoliberal ideology vastly undermines the need for social welfare for developing countries (Mkandawire, 2004; Marques and Utting, 2010 Utting et al, 2012). Even though development prescriptions have recognised a place for social policy in the years following the Washington Consensus, it was argued that the needs of business to create economic growth continue to be prioritised (Farnsworth, 2010; Marques and Utting, 2010; Utting et al, 2012; Kohli, 2012) and the role of social welfare continues to be viewed more as a category of residual safety nets rather than a critical ingredient for growth (Mkandawire, 2004). Naturally, this will most likely influence the impact that TNCs have on developing countries.

That said, the developing state can use its power to create investment strategies that regulate and steer the activities of business in order to better ensure positive spillovers and mitigate for potential costs (Chang, 2003; 2014). East Asia often effectively combined selective and interventionist policies to direct and control TNC involvement to ensure better growth opportunities (Lall, 1997; Chang, 2003; Kwon, 2012). While not all countries will have the capabilities or comparative advantages to be as demanding of business as East Asia, adopting taken-for-granted business preferences and constructing lightly regulated markets with minimal social welfare policies may produce environments that are bad for business and for its citizens (Chang, 2003; Farnsworth, 2010).

Now that I have explored FDI and the potential impact to social welfare in developing countries in a general context, I will now proceed to explore the impact of FDI in development in India.

Chapter Four: Social and economic development in India

4.1: Introduction

India is viewed as a globalisation success story, and for some, it has taken its place amongst the showcase of developing countries that demonstrate the benefits of economic liberalisation and the progress that can come from alignment with global markets (Ghosh, 2011; Mazumdar, 2011; Kohli, 2012). With its sustained economic growth, increase in per capita income (Ghosh, 2011) as well as influx of foreign capital (Rao and Dhar, 2011b); India does have much to boast about. However, India continues to have high and persistent poverty rates, low human development indicators, alarming levels of food poverty (Banerjee, 2008; Dreze and Sen, 2013) which demonstrate a much more bleak picture of globalisation; one that indicates that economic liberalisation may not be the ‘cure all’ it is often purported to be (Chandrasekhar and Ghosh, 2006).

When India committed to structural reforms and officially liberalised its markets in 1991, it did so against a backdrop of widespread inequality and lack of social policies to address and restructure the social divisions (Dreze and Sen, 1995, 2013; Kohli, 2012). With that said, however, there was a greater decrease in inequality and poverty in the pre-reform period in comparison to post reform (Motiram and Vakulabharanam, 2011). There are several characteristics of the poverty and inequality in India that remain stubborn to change. First, there are considerable differences in the incidences of poverty and inequality across and between different castes, classes, religions, and between men and women (Nachane, 2011). Second, there is a large divergence in poverty rates between rural areas and urban areas (Naschold, 2012, Krishan, 2014). Rural areas—where the majority of the population or 68 per cent reside (World Bank, 2014) are much more destitute (Nachane, 2011; Naschold, 2012). Third, there is substantial ‘inter-regional inequality’ or inequality between individual states (Nachane, 2011; Van Klaveren, 2010; Ghosh, 2011). A fourth characteristic to India’s poverty and inequality has been its lack of structural transformation of its workforce (Krueger, 2007; Mazumdar and Sarkar, 2008; Rodrik, 2011; Binswanger-Mkhize, 2013; Ghosh, 2011). The majority of the population are dependent upon and engaged in agricultural sector activities while employment generation and the share in GDP has fallen dramatically (Krueger, 2007; Binswanger-Mkhize, 2013). The service sector’s share of India’s GDP has increased remarkably and contributes to over half of the national income (World Bank, 2015; Krishan, 2014). However, the impressive output of the service sector has not generated the formal employment opportunities needed for India’s large workforce (Ghosh, 2011; Mazumdar, 2011). Meanwhile the stagnant output and employment generation of the industrial sector has further constrained the structural transformation leaving many bottled up in an unproductive agriculture sector or informal sections of the service sector (Papola, 2005; Bhattacharjea, 2006; Nachane, 2011; Rodrik, 2011; Binswanger-Mkhize, 2013; Ghosh, 2011).

India liberalised its markets slowly at first but by the mid-2000s most sectors were completely open to FDI and the government was actively incorporating FDI into its development initiatives to bring needed and missing resources such as capital, technology, managerial skills and widespread employment for India’s abundant labour force (Rao and Dhar, 2011; Shah and Patnaik, 2013; Mitra, 2008; Pradhan and Abraham, 2005). While FDI to India was slow to accumulate shortly after liberalisation, it greatly increased after 2005 (Rao and Dhar, 2011b; Pradhan and Abraham, 2005; UNCTAD, 2009). FDI inflow statistics reveal an increase in the stock of FDI from $17.5 billion in 2000 to $164 billion in 2009 (UNCTAD, 2009; Rao and Dhar, 2011b). Not surprisingly with the exceeding riches flowing to India, FDI became a coveted tool in the Indian government’s development planning armour (Shah and Patnaik, 2013).

This chapter is divided into two parts. The first section will explore development in India prior to economic liberalisation in 1991 which covers the colonial period and the years of import substitution industrialisation (ISI). This section will analyse both economic and social welfare implementation and performance during this time. The second section investigates the Indian development experience after economic liberalisation. This section will look at both economic and social welfare performance by analysing the Indian growth model, FDI to India and inequality and poverty in India. Following this, the global financial crisis, the impact to development, developing countries and the specific impact to India will be explored.

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