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



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7.5 Chapter summary


This chapter investigated why elite policy stakeholders feel India has attracted market seeking and service sector FDI. Chapter Four (section 4.3.1) explicated that 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). It was revealed from elite policy stakeholders that some feel the government is actively seeking this type of FDI and has not aggressively pushed investors to export as China has done. Also, the government has provided incentives and subsidies as well as established IT parks which save service sector investors the hassles that normally accompany greenfield investment such as environmental regulations and acquiring land. Respondents explained that service sector investment requires skilled labour and India had a highly skilled segment of its labour force which upon economic liberalisation attracted service sector FDI. The perceptions of respondents concur with data from Chapter Six, the FDI to India is catering to middle class employment and consumer needs.

Nearly all respondents discussed India’s unique development trajectory in transitioning from a predominately agricultural economy to a service sector oriented one and essentially skipping the second step, the industrial led economy. The majority of respondents discussed the need for investment in the manufacturing sector and stressed that increased manufacturing employment would help absorb the semi and unskilled labour in need of transition from an unproductive agriculture sector. Without a vibrant manufacturing sector, this labour is being forced into an unorganised service sector with poor and exploitative working conditions.

Participants emphasised four main social and developmental consequences that have resulted from the current investment trajectory. First, participants discussed the exclusion of the majority of the population with lower levels of skills from productive service sector employment. Second, this type of economic growth is not alleviating poverty or contributing to pro-poor growth. Third, elite policy stakeholders relayed concerns that service sector led growth without a strong manufacturing sector is increasing inequality and, fourth, exaggerating social tensions between socioeconomic classes. Dreze and Sen (1995) maintain that the structural inequalities in India were very extensive prior to economic liberalisation and, thus, when the markets opened, only a segment of the population could take advantage of the expanded market opportunities when they arrived post 1991. Elite policy stakeholders confirmed this theory in their responses describing the main social and developmental consequences that have resulted from India’s investment trajectory.

Several of the major factors listed by elite policy stakeholders as holding back manufacturing FDI are directly tied to lack of social welfare provisions. Skill deficiencies were reported by participants as a major factor that is both thwarting manufacturing investment and excluding the majority from productive employment opportunities in the service sector. Skill development in India, according to participants, results from the individual capacity to invest in human capital development. State provided institutions, in particular, education, is substandard and is failing its citizens in skill development. A second factor reported as thwarting manufacturing was lack of internal demand and, this too, is linked to institutional inequality and lack of redistribution of wealth. A third factor holding back manufacturing, according to some participants is stringent labour laws. As explained, the issue of labour regulations, described by one respondent as a ‘red herring’, is widely debated within India. Labour regulations were reported, in particular by respondents from business associations, as being cumbersome, complicated and inflexible. However, the laws are blatantly ignored and unenforced by employers, in particular, in certain states.

Researchers such as Nagaraj (2004), Bhattacharjea (2006), Sharma (2006) and Murali (2010) conclude that although there has not been a formal reform to the labour laws, there has been de facto reform or ‘reform by stealth’ where the government has essentially turned a blind eye to the enforcement of labour protection and allowed business wide flexibilities. Responses from this sample confirm these findings. Ignoring labour laws may be explained by Clinard and Yeager’s (2006, 1980) as well as Benson and Simpson’s (2015, 2009) theory of rationalisation and neutralisation whereby the culture of organisations are awash with beliefs that support abiding regulations selectively (see section 3.3.5). Furthermore, Paternoster and Simpson (1993) list six conditions that predict the breaking of regulations will be more likely and one respondent’s comments on business views of labour laws and the lack of enforcement appear to concur with Paternoster and Simpson’s predictions (see section 3.3.5.3). It is also important to note that the labour reform debate is focused on liberalising laws rather than increasing and enforcing more effective protection for workers. Thus the needs of business are being prioritised over the needs of labour, a topic which will be explored further in the following chapter.

Finally, the chapter explored perceptions regarding the types of FDI into India and it was revealed that certain types such as greenfield investment were preferred over brownfield FDI. Mergers and acquisitions of domestic Indian firms were criticised as a predatory type of investment that is frequently occurring in India and under-reported in FDI statistics. Acquisitions of domestic pharmaceutical firms were particularly concerning for respondents. Diminished access to affordable medicines as a direct result of the spate of acquisitions is a specific public health concern. Brownfield FDI in the form of round tripping was criticized as being a significant source of India’s reported FDI though it was difficult to determine exactly how much is round-tripping. Round tripping was criticized as bolstering India’s FDI numbers without bringing any benefit to India and its citizens. Private equities from institutional investors are an important source of FDI to India as well. It is criticised, by some, as being much closer to portfolio investment and incapable of bringing the positive spillovers that other types of FDI, arguably, can bring.

As this chapter has explored the types of companies investing (and not investing) in India and the main social and developmental consequences of this FDI according to elite policy stakeholders, the following chapter will proceed to explore stakeholders’ perceptions of the government’s ability to effectively balance the needs of its citizens and business as well as the capacity to construct effective FDI policies that minimise the negative impact of TNCs while maximising the benefits to its citizens and economies.



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