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

: The Indian development experience post economic liberalisation: Economic and social welfare performance

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4.3: The Indian development experience post economic liberalisation: Economic and social welfare performance

By examining several externally visible indicators, the economic reforms and successive growth model appear to have been a remarkable success for India (Nachane, 2011). The success has been defined by high rates of growth of aggregate and per capita national income (Ghosh, 2011; Basu and Maertens, 2007). The only other Asian country to surpass India’s growth in the last two decades has been China (Nachane, 2011; Nassif, 2010). Other economic indicators such as investment levels are equally impressive. Investment levels, for example, as a proportion of GDP increased from 10 per cent in the 1950s to 23 per cent in the early 1980s to 35 per cent in 2011 (Nachane, 2011). Due to changes in the way FDI is counted coupled with the opening of the construction sector to foreign investment in the mid-2000s enabled the government to report significant increases in FDI inflow in the mid-2000 (Rao and Dhar, 2011b). FDI inflow was reported as amounting to $1 billion in 1990, between $5-7 billion in the early 2000s and $35 billion in 2009 (Rao and Dhar, 2011b).

India’s economy has grown around 5-6 per cent for over two decades following economic liberalisation (Ghosh, 2011; Sen Gupta, 2010; Nassif, 2010). And for three consecutive years from 2005-2008, India achieved growth rates that surpassed 9 per cent (Ghosh, 2011; Nachane, 2011). The global financial crisis of 2008 adversely impacted India’s economic growth in the latter half of 2008, however, the economy began to show signs of recovery and grew by 7 per cent in the first half of 2009 (Sen Gupta, 2010; Nassif, 2010; Mehrotra, 2010).

India’s growth rate has struggled in recent years and was 5.5 per cent in 2012 (Fennell et al, 2013) and 4.7 per cent for 2013-14 (Reserve Bank of India, 2014). Although the Indian growth rate is still respectable by relevant international standards, the rating agencies based in the US, the Standard and Poor as well as Moody’s have been critical of the lack of deeper reforms in the Indian economy to address the slowdown in growth (Fennell et al, 2013). Furthermore, macroeconomic uncertainties and concerns over multi-brand retail investment policy in India have become a concern for foreign investors in 2013 and 2014 (UNCTAD, 2014).

Although India has achieved high economic growth rates, many are not benefitting and remain severely impoverished (Nachane, 2011; Kohli, 2012; Dreze and Sen, 2013). The next subsection will critically analyse India’s economic growth model following economic liberalisation before proceeding to explore FDI flows to India. The last subsection will investigate issues concerning inequality and poverty in India today.

4.3.1: Indian growth model following economic liberalisation

The Indian government’s original strategy when it liberalised the economy in 1991 was to shift the focus away from domestic markets and become an export oriented manufacturing producer for global markets (Rao and Dhar, 2011b). However, this has not come to fruition and India’s overall economic growth has depended upon domestic demand, market seeking and service sector investment (Rajan et al, 2008; Pradhan and Abraham, 2005; Ghosh, 2011; Rao and Dhar, 2011b; World Bank, 2015). Both domestic investment and FDI have targeted the service sector whereas investment to the manufacturing sector has fallen short of India’s development needs. While India’s economic growth is driven by its service sector in terms of output, the majority of the population remain dependent upon agriculture for a living (Nachane, 2011; Chowdhury, 2011). The structural transformation of India’s employment has not transpired (Krueger, 2007; Rodrik, 2011; Ghosh, 2010; Mazumdar and Sarkar, 2008) and neither has migration from rural to urban areas (World Bank, 2014). The majority of the Indian population, 68 per cent, continue to reside in the rural areas (World Bank, 2014). The latest data from the National Sample Survey organisation for 2009-10 revealed that 67 per cent of the rural population and 7.5 of the urban population are dependent upon agriculture for a livelihood, while the sector only accounts for 14 per cent of the GDP (NSSO, 2010; Chowdhury, 2011). Thus, the majority of the population are dependent upon a livelihood that is neither productive nor profitable.

Historically, economic development and structural change entailed a linear transition from agriculture to manufacturing to a service sector-dominant economy (Lewis, 1955; Kuznets, 1966; Cameron, 1993). However, India’s increased investment has not been in manufacturing but in services, which now account for 64 percent of GDP (Mazumdar, 2011). India has essentially bypassed, or “leapfrogged,” the industrial-dominant phase of structural change and transitioned from agriculture to a service sector-led economy (Papola, 2006; Krueger, 2007; Mazumdar and Sarkar, 2008). This unique transition and employment pattern has greatly affected the incidence of poverty in India (Papola, 2005; Krueger, 2007; Mazumdar and Sarkar, 2008; Ghosh, 2011). Furthermore, this growth pattern has a direct impact on the FDI flowing to India. Perceptions of the main social and developmental consequences that have resulted from this growth pattern will be explored in the upcoming empirical chapters (see section 6.3).

The Indian government has recognised that service sector led growth without a vibrant manufacturing sector may not be a sustainable development model and has prioritised the enhancement of manufacturing investment. The government implemented the National Manufacturing Policy (NMP) in 2011, to attract and incentivise both foreign and domestic manufacturing investment (DIPP, 2011). To entice investment to the sector, the government curtailed labour protections within the NMP. The need for manufacturing, the NMP and the implications of curtailing labour laws are explored in the empirical chapters (see section 6.6.2).

It is often argued that it is not merely economic growth that matters but rather the type of growth that is important (Dreze and Sen, 1995, 2013; Bhagwati, 1993; Ghosh, 2011; Rodrik, 2011). India’s economic growth has been based not only on its service sector but its domestic markets as well (Ghosh, 2011; Mazumdar, 2011; Nachane, 2011). Ghosh (2011) and Mazumdar (2011) as well as Dreze and Sen (1995, 2013) argue that India was unable to become an exporting achievement because the government did not discipline Indian business to adopt a mercantilist strategy for export nor did it implement effective social welfare policies such as assistance with food, housing, public transportation, health services, and education which provides a large share of the wage output and subsidises labour costs for exporting firms. East Asia and China implemented such reforms and this enabled employers to lower wages as some of the basic needs are taken care of by the state (Dreze and Sen, 1995, 2013; Ghosh, 2004). In India cheap labour has come at the cost of simple low absolute wages rather than social welfare provision and underwriting of labour costs and this has greatly undermined the ability for India to become an exporter in the global markets (Dreze and Sen, 1995, 2013; Ghosh, 2004; Chandrasekhar and Ghosh, 2006). This is coupled with the fact that India has not efficiently invested in infrastructure (Ghosh, 2004). These two factors—low wages and infrastructure—are vital for comparative advantage in global export markets (Ghosh, 2004).

The liberalisation and the structural reforms taken in 1991, outlined above, greatly decreased state support of the public sector which played a large role in providing formal sector employment and private sector growth has not generated the employment needs to compensate for the jobs lost from the declining public sector (Mazumdar, 2011). Formal sector employment has decreased significantly and the employment created in the formal sectors has tended to be of an ‘informal’ nature or irregular and without working benefits or protections (Mitra, 2008; Ghosh, 2011; Mazumdar, 2011). Ghosh (2004) argues that the inability to generate adequate employment opportunities for India’s citizens is one of the biggest disappointments of the growth strategy following economic liberalisation.

Thus far this chapter has concentrated on the domestic social and economic policies that have played an important role in creating the contemporary development scenario within India today. It has also highlighted some of the specific issues confronting India’s growth strategy and development trajectory as well as the persistent problems within Indian labour markets. Chapter Two relayed the arguments that stress the importance of FDI and economic growth, provision of employment, and poverty reduction (see section 2.4). Of course, with economic liberalisation FDI became an important factor of growth for India and the government implemented FDI into its overall development endeavours (Rao and Dhar, 2011b). The next subsection will examine FDI to India.

4.3.2: FDI to India

The majority of India’s FDI is market seeking meaning it is attracted to India’s large and lucrative domestic markets (Shah and Patnaik, 2013). A reported benefit to India delivered by market seeking FDI has been better quality goods (Emde, 1999; Bhaumik et al., 2003). With market seeking FDI to India, domestic consumption has expanded compared to the closed economy years when domestic producers were largely the main ones supplying consumer goods (Emde, 1999). While market seeking FDI can be good for consumers with the purchasing power to afford such products, it is arguably not the best FDI for the economy (Pradhan and Abraham, 2005). While both export oriented FDI and market seeking FDI can bring a bundle of assets that can spillover into the host country, export oriented is considered to be a ‘better quality’ of FDI and is argued to generate stronger links with the host economy because it is motivated by the production advantages of the host country (Pradhan and Abraham, 2005, p.1). The capacity for knowledge spillovers, especially in knowledge-based industries, is argued to be much higher for export oriented FDI (Pradhan and Abraham, 2005). Export oriented FDI often works more closely with domestic firms as opposed to market seeking FDI which is often in competition with local firms for a share of the domestic market (Pradhan and Abraham, 2005). As discussed in Chapter Two (see section 2.4.2) a potential risk involving FDI is crowding out of domestic industries and market seeking FDI is often associated with crowding domestic industries of the market. As market seeking FDI is in direct competition with domestic firms for market share they can simply acquire or take over domestic firms and quickly capture a large share of the domestic market (Singh, 2002).

As discussed above, the service sector is driving economic growth in India. Furthermore, the majority of the FDI to India is targeting the service sector. A table illustrating the dominance of FDI to the service sector is presented below. Service sector FDI is listed as comprising financial, banking, insurance, non-financial/business, outsourcing, R&D, technology, and testing and analysis services (DIPP, 2015) . Top sectors for FDI to India from April 2000 to January 2015 include finance, telecommunications, computer software and hardware, housing and real estate and construction activities (DIPP, 2015). The service sector is comprised of both ‘high end’ formal segments and ‘low end’ informal segments of the labour market (Ghosh, 2011; Rao and Dhar, 2011b). In the high end, India is an attractive destination for computer software, IT/ITeS and back-office processes, customer and interaction and technical support (UNCTAD, 2007; Rajan et al, 2008, p. 7). However the lower end of the service sector spectrum, such as the construction sector, also attracts much FDI (DIPP, 2012; Rao and Dhar, 2011). Figure 5 depicts FDI inflows from 1990 to 2013 and Figure 6 illustrates the sectoral composition of FDI.

Figure 5: Inward FDI to India, annual, 1990-2013

Source: UNCTAD Stat: [accessed May 6, 2015]

Figure 6: Sectors Attracting Highest FDI Equity Inflow (US $ in Million)




( April -



(April- March)


(April 14- February, 2015)



(April 2000 -

February 2015)

Percentage of total Inflows









































































Source: DIPP (2015) Factsheet on Foreign Direct Investment April 2000- February 2015.

The housing, real estate and construction segments are a large percentage of FDI for India where, incidentally, investment is more speculative and erratic (Rao and Dhar, 2010b). Furthermore, employment in the construction sector is informal and exploitative (Ghosh, 2011). Rao and Dhar (2011b) emphasise that the housing, real estate and construction sector is dominated by private equities, venture capital, hedge funds and round tripping types of investment. As discussed in Chapter Two (see section 2.3.1) these types of FDI are argued to be a lower quality and less likely to bring development oriented assets that India needs such as decent employment opportunity (Rao and Dhar, 2011b).

Among investor countries, Mauritius has been the biggest investor in India from 2000-2015, contributing 36 per cent of the total FDI (DIPP, 2015). Interestingly, Mauritius is a tax haven and has an agreement with India on double tax avoidance. As the findings of this thesis will highlight, investment from Mauritius is heavily criticised by participants as round tripping FDI. As explained in Chapter Two (see section 2.3) round tripping occurs when domestic corporates channel their investment through a routing economy and bring it back as FDI. This helps the corporations avoid capital gains tax. Singapore is the second largest contributor of FDI to India and accounts for 13 of the total inflow from 2000-2015 (DIPP, 2015). Singapore is another tax haven for Indian capitalists. Thus the top two investing countries of FDI to India are tax heavens for India. Upcoming empirical chapters will explore participants’ perceptions of the wider implications of round-tripping FDI to India (see section 6.5). The U.K. is the third largest investor for these years, followed by the Japan, the Netherlands, and U.S.A. (DIPP, 2015).

The flow of FDI is almost exclusively to large urban cities in India. The distribution of FDI within India from the years 2000-2015 sees the city of Mumbai as attracting the most foreign investment. It accounted for 30 per cent of the total inflow (DIPP, 2015). New Delhi follows Mumbai and accounts for 20 per cent of the country’s total FDI from 2000-2015 (DIPP, 2015). Chennai, Bangalore, Ahmedabad, and Hyderabad follow New Delhi in FDI flows for these years (DIPP, 2015). For statistical purposes, the Department of Industrial Policy and Promotion divide the country into 16 regional offices. The top six regional offices listed above account for 71 per cent of the total FDI of India (DIPP, 2015).

Chalapati Rao and Biswajit Dhar (2011b) closely analysed the FDI flows from 2005-2008. These years are significant because statistical reports show a very large increase in FDI flows compared to the figures of 2004. Rao and Dhar (2011b) provide several explanations for the increase. First, the government enacted a number of policy initiatives in an attempt to attract FDI. In March 2005, the government revised the FDI policy to allow FDI up to 100 per cent equity under the automatic route in townships, housing, built-up infrastructure and construction-development projects. In 2005, the government also enacted the Special Economic Zones Act which stimulated foreign investment. Also there was a change in the reporting practice of FDI in 2002 which introduced new matters such as reinvested earnings of previous established businesses to count as FDI. This significantly increased inflow calculations (Rao and Dhar, 2011b).

FDI flows to India during 2010-2011 decreased by 28.4 per cent from the previous year, 2009-2010 (UNCTAD, 2011). This major decrease caused much concern for policy makers and became “a subject matter of public comments” (Rao and Dhar, 2011b, p.58). The sectors responsible for the slowdown have been identified as construction, real estate, business and financial services. As noted, these are the sectors that have the most fickle types of financial flows such as hedge funds, private equity, and venture funds (Rao and Dhar, 2011b). However, FDI rebounded in 2013 and increased 17 per cent to reach inflows of $28 billion (UNCTAD, 2014). One puzzling aspect to the FDI increase is that FDI in the retail sector did not increase despite the heavily anticipated opening of the multi-brand retail sector in 2012 (UNCTAD, 2014). The multi-brand retail sector and its liberalisation will be discussed in further detail in the empirical chapters.

The following subsection will briefly examine the persistent inequality and poverty in India today.

4.3.3: Inequality and poverty in India

India has a history of deeply engrained structural inequalities and desperate levels of poverty (Kohli, 2004, 2012). It is argued by researchers and policy makers alike that India’s economic growth and development must become more inclusive if it is to be sustainable (Dreze and Sen, 2013; Kohli, 2012). Nachane (2011) observes that while the term ‘inclusive growth’ has become a buzz word for policy makers in India, it has been largely rhetorical and for inclusive growth to occur there needs to be evidence of both poverty reduction as well as substantial decrease in inequality in India. First, there are considerable differences in the incidences of poverty and inequality across and between different castes, classes, religions, and genders. Second, there is also inter-regional inequality or inequality between the different states as well as between rural and urban areas. I will briefly explore these aspects of poverty and inequality. The extent of poverty in India

Official estimates concerning the extent of poverty (head count ratio below official poverty line) have been the subject of intense debate (Ghosh, 2011). In 2012 the Planning Commission of India stated 29.9% of the population or 301 million citizens live below the poverty line which is a sharp decrease from the 37% figure they calculated in 2004-2005 (Biswas, 2012). This figure was very controversial as the Planning Commission set the poverty line at 28.65 rupees or $.56 or 35p per person per day (Biswas, 2012). The Asian Development Bank (2008) estimated of the number of poor in India in 2005 was well over double the official Indian estimate, at between 622 to 740 million. The higher estimate is due to the fact that the Asian Development Bank used a higher Asian poverty line of $1.35 PPP per day per person (Ghosh, 2011, p.17). The Asian Development Bank recently reported (2014) that while other Asian countries have managed to half the number of extreme poor (defined as having average income or consumption less than $1.25 per day in 2005 purchase power parity terms), India continues to struggle whereby the extreme poverty rate is over 20 per cent (Asian Development Bank, 2014). Caste linked inequalities and poverty in India

One of the most widely recognised contributing factors to both inequality and poverty is the caste system in India (Dreze and Sen, 1995, 2013). The Indian caste system is a very complex and rigid system of stratification and hierarchical social ordering that is particularly associated with the Hindu religion although other religions are incorporated into the caste hierarchy and the system is recognised and practiced in other religions in India (Ghosh, 2011). Scheduled Castes and Scheduled Tribes (SCs/STs), also known as Dalits or ‘untouchables’ are the most marginalized caste and face immense discrimination from other castes Indian society.

The government recognised the need to try and combat caste inequality and enacted a reservation or quota system that reserves a percentage of places for government employment, higher education and seats within Parliament and Assemblies (Shah, 2004). The reservation system has allowed for some social mobility for some castes (Shah, 2004) but not for SCs/STs (Ghosh, 2011; Shah, 2004). Lack of social welfare or decent public education has hindered the ability of the lowest castes to develop the social capital to be able to reserve such positions in the first place (Ghosh, 2011).

There are proposals to extend the reservation system to the private sector but this has not materialised and has received much opposition from Indian business groups (Murali, 2010). However, the debate concerning caste reservation in private business raises interesting questions relevant to this thesis. If a reservation system were enacted, would inward FDI help to decrease inequality? On the other hand, if such a system is not enacted, will inward investment serve to reinforce inequality in India? Perceptions of the impact of FDI on inequality are examined further in empirical chapters. Women’s inequality in India

The Constitution of India includes provisions for non-discrimination on several grounds, including gender (Van Klaveren et al, 2010). Although India has a democratic government and a progressive Constitution with many laws to protect women’s rights, compliance and enforcement of the laws are a serious problem in India (Van Klaveren et al, 2010).

The World Economic Forum (WEF) developed the Global Gender Gap Index in 2006 as a framework for investigating gender-based inequalities within countries in the areas of the economy, politics, education, and health. The report currently assesses 142 countries and measures gender-based gaps in access to resources and opportunities in each country (WEF, 2014). The report uses four areas or categories as benchmarks in determining the overall gender gap: economic participation and opportunity, educational attainment, health and survival, and political empowerment (WEF, 2014). The Gender Gap Index for 2014 ranked India 114th (WEF, 2014), down from 105th in 2012 (WEF, 2012). Economic participation is very low for women in India as India is ranked 134th (WEF, 2014) which is down from 123rd in 2012. In the category of educational attainment, the WEF (2014) ranked India 126th and reported an adult female literacy rate of 51 per cent (adult male literacy rate of 75 per cent). For health and survival, India ranked second to last at an abysmal 141st, however, for political empowerment ranked 9th (WEF, 2014).

The ILO and the Asian Development Bank (2011) produced a joint study addressing gender equality within labour markets in Asia. The study concluded that women in Asia, while faring better than some women in other regions of the world, continue to remain concentrated in low productivity agricultural employment and in vulnerable, low-paid informal sections of the labour force (ILO-ADB, 2011). Women have tended to:

… to make up the “buffer workforce” – both within labour markets and as flexible and expanded workers, concentrated in informal jobs and within the household as “secondary earners” ( ILO-ADB, 2011, p. vii ).

Given this, Asian women have disproportionately borne the brunt of the impacts from the most recent global financial crisis because they were already structurally disempowered, marginalised and the ‘buffer workforce’ prior to the crisis (ILO-ADB, 2011). The impact of the most recent global financial crisis on women and informal sectors in India is explored in more detail in a proceeding section (section 4.4). Interregional inequality in India

Although India has some very large urban cities—megacities—the majority of the population of India does not live in urban areas (Nachane, 2011). As mentioned above, the rate of urbanisation in India has been very slow which is consistent with the stubborn structural transformation of the employment structure (Mazumdar and Sarkar, 2008). The rates of poverty reduction in rural areas have been particularly low and the differentials of poverty between rural and urban areas have been large since economic liberalisation (Ghosh, 2011). As noted above, (see section 4.3.2) FDI is going to the large urban cities and 71 per cent of India’s FDI is concentrated in six major cities. Regional inequality or inequality between different states in India is very prominent and has increased significantly since the economic liberalisation (Nachane, 2011). The inequality is mirrored not only in economic indicators but also in many social indicators, including the Human Development Index (HDI), child (under five) mortality rates, absolute poverty figures, and adult literacy rates. Van Klaveren et al (2010) examined inequality between different states and concluded that skewed distribution for both domestic and foreign investment across the states has increased regional inequality across India. Five states receive approximately 70 per cent of India’s FDI (DIPP, 2012). Thus, it appears there is a correlation between increased investment levels and a decrease in poverty, however, the question of whether focusing on FDI is an effective anti-poverty strategy is less apparent.

A final word concerning inequality and poverty in India involves the level of poverty following economic liberalisation. Poverty and other socioeconomic data such as workforce participation rates in India are calculated by consumer expenditure surveys conducted by the National Sample Survey Organisation (NSSO) and are conducted every five years. Motiram and Vakulabharanam (2011) use data from the NSSO for the past two and a half decades to conduct an in-depth study of poverty and conclude that poverty reduction has occurred since the economic reforms of 1991 but that the rate of reduction was much higher in the 1980s, before the economic reforms. They also conclude that the qualitative characteristics of poverty have not changed significantly, meaning the relative positions of social sections such as caste, class, urban-rural have remained the same. As increased FDI is directly correlated with economic liberalisation, this draws scepticism on how effective FDI has been in decreasing poverty for the majority of the population. The empirical chapters will return to these debates.

The proceeding section will explore the global financial crisis and its impact on development and developing countries and, more specifically, India.

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