Chapter Seven: Attracting the ‘right kind of investment’ and the social and developmental consequences of the FDI to India
As explored in Chapters Two and Three (2.3.2 and 3.5) different types of investment bring different types of advantages and disadvantages. For example, FDI may be market seeking, resource seeking or efficiency seeking. While FDI that targets new markets may reduce market space for domestic firms, it may also force indigenous firms to become more efficient or productive in the wake of the competition. Similarly, efficiency seeking firms may be attracted to abundant and unskilled labour but it may also be associated with a ‘race to the bottom’ in terms of working conditions and wages. Furthermore, as explored in Chapter Two (2.3) the ways in which investors enter foreign markets brings context specific risks and advantages. Here we can expect different social and economic consequences from an influx of M&A as opposed to greenfield investments, for example.
The previous chapter revealed the types of investment the government was attempting to attract. However, it is not a foregone conclusion that such strategies will be effective given governments’ lack of control over private business decisions. Governments’ can entice investment; they cannot force the hand of business. Given these debates, this chapter will answer the second research question:
Why do elite policy stakeholders feel India has attracted the type of investment it has and what do they believe are the main social and developmental consequences that have resulted from the FDI India is attracting?
To examine these questions, the views of respondents will be analysed and presented throughout this chapter.
7.2: Types of FDI investing in India and the resulting social consequences
In terms of the interview data, every respondent in my sample confirmed that India was primarily attracting market seeking and service sector FDI (see section 4.4.1). As explored in Chapter Four (see section 4.3.2) while market seeking FDI or local market FDI (LMFDI) can be good for consumers with the purchasing power to afford such products, it is arguably not the best FDI for the economy compared to export oriented FDI (EFDI) (Pradhan and Abraham, 2005; Friedrich Ebert Stiftung, 2014 ). However, despite EFDI being the preferred type of investment and India’s original focus following liberalisation, the government has, to an extent, encouraged market seeking FDI as was obvious from the highlighted selling points on Indian investment bureaux.
FO is a senior economist specialising in FDI and trade policies of developing countries with an applied economics and development research institute. She has previously held positions with the Asian Development Bank and worked for one of India’s main business associations. She expressed that she did not feel market seeking FDI was problematic and that the government was clear in its objective of inviting such investment:
Yes, most FDI is market seeking. Export would be better for the economy but I don’t see any problem. I think the government is pretty clear in its objective which it wants FDI which is market seeking...I think unlike China where most of the FDI comes from the export sector and there is an export obligation on the part of the foreign investor, there is no such thing in India. Because the government encourages market seeking FDI. Because in China, 40% of your production you have to export. But that is not the case in India.
As FO highlights here, it appears that India is attracting market seeking investment, in part, because that is the type of investment the government is targeting. Perhaps if India had employed stipulations for foreign investors as China did to obligate them to export a percentage of their production, India may have penetrated global export markets better.
PS is a Professor of international and development economics with a multidisciplinary centre for advanced research and training in the fields of social and economic development. As part of his position he often teaches and advises government policymakers and Indian Economic Service Officers in the areas of macroeconomics and international economics. In the following passage, PS explains that India’s skilled labour, IT parks and subsidies helped attract FDI to the service sector:
Now coming to the service sector, why is FDI coming to the service sector? The first thing is the endowments or the resources are available for the service sector is quite good. When we opened in 1991, we had abundant manpower with skill or skilled manpower available at a reasonable cost if you compare with developed countries. So they wanted to tap that so they came and they did it. And the second thing in regards to why they came into the service sector, specifically, is that they do not have to deal with the hassles of getting started like environment regulations or the hassles of acquiring land. For IT/ITES there are information parks set up and there are a lot of incentives and subsidies given for the IT Park.
A unique aspect of the ‘Indian growth story’ is the absence of manufacturing led growth. Particularly since the 1980s, it was the growth of services more than that of manufacturing which contributed towards faster GDP growth in India (Mazumdar, 2011; Krueger, 2007; Kohli, 2012). One major criticism, reported by every respondent is that service sector FDI is not the most appropriate for India’s needs, in particular employment needs. Rather, manufacturing investment was stressed as being desperately needed. It was explained that the majority of the Indian population relies on agriculture for a living, yet the sector has become very unproductive causing a surplus of labour in the sector that needs to transition into another sector for productive employment. Elite policy stakeholders observed that the manufacturing sector would enable the absorption of the unskilled and semi-skilled labour that predominates in the agriculture sector whereas the service sector requires higher levels of skill. The lack of manufacturing investment and employment, it was argued, is stunting India’s structural transformation which means that many people are constrained in an unproductive livelihood with few opportunities for enhancement.
CD is a senior Research Fellow at an applied economics research institute. Her research interests concern the impact of globalisation on development. She has conducted several research projects concerning FDI and inequality in Eastern Europe and America. She explains that FDI to India is targeting the service sector and that one impact of this investment is it is excluding many with lower levels of skill from this growth:
For me it is very simple, FDI is coming into IT/ITES...now who employs the IT/ITES? What kind of skills goes into IT/ITES...it is only people with skills, sometimes high skills...with a minimum of graduate degree. So these people already have skills and are getting jobs. Good, nothing wrong with that. But in India, if you look at the average education level, it is still school age and in India over 50% of the workforce is still agricultural and the labour productivity in agriculture is very, very low. There is large surplus of labour in agriculture. Now what is going to happen to that excess in agriculture? Services cannot absorb them. So where are you going to absorb those with minimal skills? And manufacturing is the place where, particularly, other cases around the world have shown that it can absorb that kind of skill level. This is why so many countries go from agriculture to manufacturing to services. Step by step. And we seemed to have skipped the step and gone to services.
Most of the respondents explained that a further developmental consequence of service sector led growth was it was not resulting in a reduction of poverty principally because, as explained above, the majority of those with fewer skills are unable to participate in high end service sector led growth. AM is a Professor of economics with a research institute that concentrates on economic and social development. His expertise includes urban development, labour and welfare and the informal sector. He discussed the lack of ‘pro poor growth’ as a result of a lack of productive employment options for those with little skill:
The main point is that we have not been experiencing the pro poor growth. And pro poor growth is one of our major objectives...that is, economic growth that would also result in reduction of poverty. And how can it happen? It can happen only when it is able to generate productive employment opportunities for the unskilled and semi-skilled variety of workforce. And that is something which is still missing.
Although some researchers argue that service sector led growth is sustainable and not unique to present day developing economies (Dasgupta and Singh, 2005), all of the respondents from this sample expressed concern that service sector led growth without increased manufacturing investment and employment is unsustainable. The service sector is layered in terms of the skill level and it is able to absorb a portion of India’s semi and unskilled labour, but respondents indicated absorption is occurring in the lower productive levels of the service sector where employment is informal and working conditions are poor.
AMK is a Professor with one of India’s premier economic policy think tanks. Her research has directly contributed to India’s negotiating strategies in the WTO and her research interests include world trade, FDI, and the service sector. She explained that the service sector is being forced to absorb the agricultural surplus labour and suggests this is not helpful for the worker or the service sector led growth model:
Right now I would say that the service sector is forced to absorb...like if you look into construction service and retail...they are large employers...they are one of the largest employers after the agriculture and they employ whoever is left after agriculture because they have nowhere else to go...they go to the service sector. But that is not really a growth model. If you want your service sector to be a growth model, you are talking about creation of skilled and high quality job rather than unskilled jobs. The government is also trying to come out with a Construction Act to make the sector more organized but right now it is very informal.
AMK’s quote highlights that the government is trying to make the construction sector more formal which would have positive implications for labourers. Respondents often discussed the exploitative nature of the sector and explained that women and children are often employed in construction as they are the cheapest type of labour.
Several respondents expressed concern that because FDI is only increasing opportunity for a minority of the population; ultimately, it has helped to aggravate economic and social inequalities. PJ is a Professor of economics at a major university in India. He has been a Visiting Professor in major universities in several countries including Germany and China and he has served as a Senior Research Economist at the International Labour Organization. His areas of specialization include labour economics, development economics, the agriculture sector as well as rural development. PJ suggests there has been a rise in inequality in the economy and FDI is a contributing factor:
Yes, absolutely. All indicators tell us there is a rise in inequality. And the impact of FDI also show up in that sense in that some sections have benefitted very, very substantially from it and some are losing.
RO, a representative of, and senior economist within an international organisation concerned with monitoring the global economy, remarks that prior to the 21st century, economic growth was more equally distributed amongst the population. However, during the last decade, economic growth has been skewed to the urban and middle class:
Yes, analysis done by one of my colleagues years ago seemed to suggest essentially that the growth dividend was not as equitably distributed in the 21st century as it was in 1990. During that time, in a sense, all were lifted up quite equally. In the past decade there has been more concentration of the benefits going to urban India and middle-class India. But I think the government has realized that it has to do something in terms of rural areas. It is also very politically expedite for them to do so. Certainly something needs to be done to make rural India feel that it is benefitting from this.
At the end of this quote, RO refers to the political expediency of making economic growth more inclusive and this was a point often expressed by participants. It was explained that the exclusion of economic participation by the majority of the population with lower level of skills was not only increasing inequality but it was increasing social tensions between socioeconomic classes.
CD specialises in FDI and inequality and she discussed the increased social tension that was occurring in India:
So the chain is getting affected...going from agriculture to services...so what is going to happen? Inequality is going to increase. We all know income inequality increases inequality...and this has major ramifications. You will have people protesting because they feel only some people are getting richer and richer.
RS is the Director of an NGO devoted to the promotion of inclusive civil society, democracy building and social action in India. She discussed the government’s formation of a ‘business- led’ development model which will be discussed further in the next chapter. However, here it is important to note her observation of increased conflicts that have resulted from the exclusion of many from this development trajectory:
So for the rest, you are being left out in the cold...in terms of resources...in terms of poverty...in terms of exclusion and inequality which is so deeply entrenched. It means all kinds of distortion. And I think it also means...because India is not a passive people or passive society; India has been referred to as the land of a million mutinies where there is this constant assertion...it means a deepening of conflicts.
However, not everyone in this sample felt FDI or skewed service sector investment is to blame for the widening inequalities present in India today. Several respondents felt the lack of social welfare was directly to blame for the large inequality rather than FDI. Respondents reported that the government has not provided appropriate social institutions to create the human capital needed for individuals, of all classes, to prosper from market opportunities. The majority of respondents from this sample expressed opinions that the government has failed to provide institutions such as quality education or health care and as a result large segments of the population are excluded from productive market opportunities.
AMK is a Professor with one of India’s premier economic policy think tanks. Her research has directly contributed to India’s negotiating strategies in the WTO and her research interests include world trade, FDI, and the service sector. AMK concurs that there is a polarization of wealth in India but argues this problem is not directly linked to FDI:
There is a polarization of wealth in the country but it cannot be linked itself to FDI. The polarization of wealth happened because the social infrastructure investments of the government has been limited...people have had to invest on their own...like education, health. So I know that my daughter has to study and I am capable of investing but my chauffeur may not have the power to do that. So much of the human capital development...the wealth of India is created through human capital development.... And much of the human capital development comes from the individual capacity to invest...India is not a country like Australia where your basic needs are met and you are only doing an investment in the high end. So there is a huge difference between the public quality and the private quality of service provision of basic social needs. So that leads to the inequality. Inequality is not created by FDI...inequality is created by the structure in which we are operating. If you go to a country like Australia, the UK, or even the US...you will see the basic infrastructure is provided...you get the basic...if you want the better quality, you pay for it. Here the basic is of substandard nature.
PS is a professor of macroeconomics with a multidisciplinary centre for advanced research and training in the fields of social and economic development. His areas of speciality are development economics and international trade and finance. PS similarly proposes that it is the government’s fault for not implementing social protection programmes and ensuring that more of the population can gain from market opportunities as it is not the role of FDI to create jobs for everyone:
But you don’t expect FDI to create jobs for you...you have to create safety nets and you have to make sure that the people, in general, get the benefits out of the market economy...56% of the total population are in agriculture...they don’t have the vocational training; they don’t have the skills to take part in the industries. You have to create conditions so that there are benefits for the people...for the unprivileged group. You have to give them different types of training or education so that they take part. It is not right to tell ‘stop globalisation, stop FDI and this jobless growth will go.’ That is not the solution at all.
As the two quotes above highlight, the problem may not be service sector led growth per say but the failure to provide education and skills training to the majority of the population. It was explicated that the public education system in India is very poor and this plays a large role in the exclusion of the majority from service sector jobs. AS is a Senior Fellow for an applied economics research organisation; her areas of expertise are the informal economy, gender equity, and globalisation and development. She discussed the inequality in the education system:
India has gone from agrarian to services...but the entire problem of a country like India is that we have a huge population and an inability of getting them skilled or educated. So why did that not happen? So you are asking a very fundamental question, why did we not have a system that could generate equity? I think it is because we started with huge inequality. We had caste problems, we had gender problems, we had this various sections problems...all these traditional problems; we had those problems. And then we had this quite rich and quite middle class. And I think the system that came up with reforms did not give space for them to grow and develop themselves.
AS goes further to explain that the caste reservation system is not effective without a well-functioning public education system:
And the interventions have started happening...there is a need to provide quota, reservation for these guys to move up. But these interventions were thought out in piecemeal. I think you should put a lot of emphasis in the primary and secondary education...quality education...put a lot of money there rather than try to reserve later on in higher education for example in engineering, medical, etc.
Nearly all of the respondents, at one point in the interview, commented on ‘the half-hearted’ nature of the government’s social development policies, to quote one respondent. The proceeding chapter will explore this further and link India’s social welfare provisions to its overall development plan to achieve high economic growth.
Thus far this chapter has explored why elite policy stakeholders feel India has attracted market seeking and service sector FDI as well as the resulting social consequences. It was made clear that participants feel manufacturing investment is needed to provide jobs for semi and unskilled labour, create inclusive growth and reduce poverty. However, why India has failed to attract manufacturing FDI is an important piece to India’s unique economic growth puzzle. This is the topic for the proceeding section.