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



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6.4: Chapter summary


This chapter explored how India is selling itself to investors and examined possible implications for social welfare that may arise from investment strategies by analysing investment bureaux and two investment policies.

Looking at India’s investment bureaux, it does appear that India is marketing itself for service sector and market seeking investment however misaligned it is to the original goals of exporting manufacturing. The major selling points from such bureaux are India’s abundant, young, and often highly skilled and English speaking workforce. Another quality stressed to investors is India’s large middle class with increasing purchasing power. In this respect, India’s current investment strategy appears largely based on consumer and employment demands of the middle and upper classes.

However, the government is also using functional investment strategies to attract investment based on abundant and cheap labour in an attempt to shift its growth strategy to one with increased manufacturing sector involvement. An obvious implication for social welfare is that by enticing investment with cheap labour endangers depressing national wages and locking them at low levels. Furthermore investment strategies targeting manufacturing are enticing investment with relaxed labour laws and financial incentives. This brings an implication for poor working conditions for labourers. Thus, the government’s overall investment strategy appears polarised in trying to attract high end service sector FDI with “market and talent” to suit its middle class and manufacturing FDI with liberalised labour laws to suit its lower class employment needs. The dualism in this strategy may impact the social welfare of the labour force by causing further fragmentation and polarisation between the skilled and less skilled or between the middle/ upper classes and lower classes.

From here, the chapter continued to examine the first research question by analysing two specific FDI related policies: FDI in Multi-Brand Retail Trading and the National Manufacturing Policy. These policies are very important for the Indian government’s investment strategies and each has the capability to bring wide-ranging and serious consequences for the social welfare of Indian citizens. The policies are very different in their level of afforded social protections.

The nature and the extent of the impact that FDI in MBRT will have is widely debated. Interestingly, within this sample, viewpoints were clearly demarcated between those working for organisations with human rights focus as opposed to those in liberal market oriented organisations. All respondents except one who worked with liberal market organisations were in support of FDI in multi-brand retail. For the supporters, the retail bill afforded an opportunity to help fix large bottlenecks in India’s supply chain and this was most needed to modernize the retail sector. Supporters of MBRT argue that the policy has the ability to connect small producers to global markets. Furthermore, it is argued that social welfare of citizens may improve due to the reduction in food wastage, lower prices for food and increased choice in the retail sector.

On the other hand, street vending is a means of survival for many working poor and small farmers are currently in a state of economic distress (see section 4.3.1). The MBRT brings a large concern for job displacement and loss of livelihood for disadvantaged small retailers and farmers. Elite policy stakeholders, in particular those from human rights organisations, tended to express more variation in opinion with most declaring that FDI in MBRT would, in all likelihood, result in both harms and benefits with the weight of each to determine the balance to India and its citizens. All respondents, regardless of workplace orientation, expected there would be some level of job displacement for small retailers and middlemen in the supply chain. It was highlighted by many that because India does not have widespread social welfare schemes, the impact of livelihood loss may prove particularly detrimental. As highlighted by one participant, the retail bill epitomised the sacrifice of the lower classes for the consumer needs of the middle and upper classes.

The Indian government implemented several conditions to the retail bill to try and ensure greater spillovers such as mandatory investment in back-end infrastructure and sourcing requirements. Using Farnsworth’s (2012) welfare continuum with social welfare and corporate welfare located at the extreme ends (see section 3.6), it could be argued that this policy is positioned more in the middle of the continuum as both the needs of citizens and business are addressed. However, the view from business associations within India is that the conditions are too strict to bring investors on board. It appears there is evidence of this criticism as UNCTAD’s (2014) most recent World Investment Report explains that while India’s FDI inflow increased 17 per cent over the year, no new investment has been recorded in MBRT. In fact, divestiture (selling of an asset) as occurred with TNCs such as Walmart pulling out of India. The implication here is that business will express their discontent by withdrawing from domestic markets.

Given these debates, an important question arises: What influenced the Indian government’s policymaking? In line with Murali’s (2010) and Varshney’s (1998) conclusions, business influence on policy construction may have been limited due to its mass political appeal and the discontent that the issue caused across the country. Thus, because the issue was of mass concern to the population, business had influence to the degree that the bill was passed but this influence was limited and several conditions enforced to better ensure social protection. UNCTAD (2014, p.56) appears to concur as well as pinpoint policy uncertainties for investors:

TNCs’ passive and even negative reactions to the second round of retail liberalization in India were due partly to the strict operational requirements and continued policy uncertainties. As the two rounds of policy changes encountered significant political resistance, compromises have been made at both national and local levels to safeguard local interests by regulating issues related to the location of operations, the mode of entry and the share of local sourcing required.

The NMP, on the other hand, was applauded by industry and business groups and this is not surprising in that their biggest criticisms of doing business in India have been addressed in this policy. The policy is promising world class infrastructure, simplified and relaxed environmental and labour laws, an exit policy to layoff unneeded labour easily, and skills training units within self-regulated industrial townships on land acquired and purchased by the State government. Aside from business groups, other stakeholder groups are also welcoming the initiatives as many are concerned that service sector led growth, without a strong manufacturing sector, is not sustainable for India at this time in its development stage.

As with MBRT, the implications for social welfare with this policy are divided. On the one hand, the policy may enable increased employment opportunities for those with lower levels of skill (an important issue that will be explored in the next chapter); thus, it may enable more of the population to share in India’s economic growth. There is also the possibility for those entering the sector to gain valuable and needed skills.

On the other hand, an obvious implication for social welfare that may arise is increased exploitative working conditions for labourers. Furthermore, with large tracts of land needed for the NIMZs, there is concern for increased land displacement. Also, as individual states are required to purchase the land and pay resettlement costs, the policy may further increase interregional inequality between richer and poorer states.

As discussed, the NMP is the first policy to curtail labour protections in India. Despite continuous appeal from business associations that the national labour laws are hindering investment opportunity and employment expansion, changes to national labour laws have not occurred (Murali, 2010). Given the above debates presented in Chapter Three concerning business influence on policy-making (see section 3.2), a key question emerges: What factors enabled business to influence labour reform with the NMP? One possible interpretation is that the increased and specific need to expedite manufacturing investment increased industry’s power to have their demands incorporated into the NMP. Another interpretation using Murali (2010) ‘mass’ versus ‘elite’ politics is that because labour reform was only within one policy, the NMP, it did not become a political concern for the masses which could have challenged the policy outcome.

It was argued here that the NMP may bring implications for state-corporate crime. Elite policy stakeholders discussed the government’s failure to enforce labour laws through corrupt labour inspection practices. It was argued that the state may have evolved from a position of state-facilitated corporate crime by failing to enforce labour laws to a state-initiated corporate crime whereby it constructed a policy which may increase harm and physical costs to workers. It was argued that using Kauzlarich et al’s (2003) complicity theory, harms as a result of the policy would fall under implicit acts of commission (see section 3.3.5.4). As explored in Chapter Three (section 3.3.5.4), Bruce and Becker (2007) extend Kramer et al.’s (2002) theory to demonstrate that the role of the state can evolve from instigator to facilitator. However, the findings here argue that the state can also evolve from that of facilitator to instigator.

As this chapter has explored India’s investment strategies and possible consequences for social welfare, the following chapter will explore the type of FDI flowing to India and elite policy stakeholders’ perceptions of the main social and economic consequences that have resulted from this investment.


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