OUR THOUGHTS:- For long and particularly since 1991 reforms, FDIs were held as “gold” in the new emerging economics. However, FDIs do come with their fair share of opportunities and issues.
Our leaders have chased FDIs through various means but the era of FDIs as the beacon of sunshine on emerging market is loosing sheen. The economy needs fundamental restructuring and needs a strong domestic base.
The ebbs and flows of global economy must not render Indians unemployed. For that, we need rethinking, restructuring and a different paradigm altogether.
Read the article below to understand how exit of FDIs and specifically exit of big-firms from India affecting jobs and which requires us to question whether we should see development through the prism of FDI or do wee need an alternative that is more resilient.
The most recent labour statistics, for August 2021, released by the Centre for Monitoring Indian Economy (CMIE) shows that the unemployment rate has increased from around 7% in July to 8.3% for August 2021.
In absolute terms, employment shrunk from 399.7 million in July to 397.8 million, that is, 1.9 million jobs were lost in one month.
Sectoral analysis shows that most of the jobs lost were farm jobs; while non-farm jobs did increase to absorb some of these, the quality of new jobs generated is a matter of concern.
While employment in agriculture fell by 8.7 million, nonfarm jobs increased by 6.8 million, mainly in business and small trade, but the manufacturing sector shed 0.94 million jobs.
Thus, much of the labour shed by agriculture has been absorbed in low-end service activities.
Employment sustainability
During normal times, seasonal labour released from agriculture gets accommodated in the construction sector, even though the ideal situation would be their movement to the factory sector.
But, currently, the construction sector itself is shedding jobs, forcing workers to find employment in the household sector and lowend services.
This nonavailability of sufficient jobs in manufacturing and higher end services could be the dampener for economic recovery in the subsequent quarters of the current fiscal year.
Elementary economic theory suggests that raising the level of investments is the key to output and employment growth. While public investments are important, especially in the current context of sluggish aggregate demand, there is a dire need to complement public investments with even more private investments.
The economy has been waiting for private investments to flow in for quite some time, but their levels have been very low, accentuating the unemployment situation.
Resorting to Foreign Direct Investment (FDI) to augment domestic capital formation is an approach that India has been pursuing by making ‘ease of doing business’ more enticing.
While inward FDI does generate jobs both directly and indirectly through an increase in production activities (which increases demand for labour), the magnitude of employment generated especially in the manufacturing sector, needs closer scrutiny.
Further, the sustainability of increased employment is often threatened as it depends on the business avenues which other competing economies open up leading to corporate restructuring at the global level and firm exits from erstwhile locations.
An exit and disruptions
Tepid employment growth in the manufacturing sector is not a recent phenomenon in India.
However, some subsectors within the manufacturing sector have generated both direct and indirect employment by attracting FDI and entering into global networks of production. A prominent segment, often projected as a driver of the manufacturing sector’s output and employment growth, is the auto sector.
Estimates show that the automobile sector employs 19.1 million workers, directly and indirectly.
Currently, more than 70% of the auto component companies are small and medium enterprises. It was expected that by 2022, the employment in this sector would reach 38 million with a higher generation of indirect employment.
However, three factors have created roadblocks to the expansion of the sector.
First, due to the novel coronavirus pandemic and subsequent lockdown, aggregate demand in the economy is low, which is being reflected in vehicle sales.
Second, the shortage of semiconductors continues to impact production even when customer sentiments are slowly turning positive.
Third, the recent exit of Ford from the Indian market would release a large number of employees, who would be in search of jobs that are hard to find.
The exit of Ford raises some important issues regarding the unbridled attraction of FDI.
While FDI might help in creating a manufacturing ecosystem in certain locations, the uncertainties of global corporate restructuring and changes in the economic environment in the lead firm’s home economy are factors to reckon with.
More frequent global production rearrangements are becoming a part of the strategy of big firms in this phase of globalisation, as markets tend to be more volatile due to repeated demand fluctuations.
Other examples, We have had the experience of Nokia, which at its peak, in its Sriperumbudur factory (Tamil Nadu) was one of the world’s largest mobile phone plant, with 8,000 permanent employees working three shifts, producing more than 15 million phones a month and exporting products to over 80 countries.
But in 2014, Nokia halted its production operations from this location, disrupting the livelihoods of thousands of workers.
Recently, Citibank announced that it would shut India retail banking business as part of a global decision to exit 13 markets. The U.S.based bank wants to focus on a ‘few wealthy regions’ around the world.
Citibank’s exit from the retail segment is after more than three decades; the bank has 35 branches employing approximately 4,000 people in the consumer banking business.
Closely following this, after 25 years of operations is auto manufacturer Ford deciding to exit India. This will affect about 4,000 direct employees as it stops making cars at its factories in Sanand, Gujarat, and Chennai, Tamil Nadu.
Estimates show that another 35,000 indirect employees would also be lost at various levels, creating a massive disruption in the local economy.
Impact on job generation
The exits of high-profile global firms affect employment generation in two ways.
First, it creates apprehensions among potential investors about choosing that location for greenfield investments or for scaling up existing facilities. Such circumstances generally lead to a ‘wait and watch’ approach, affecting private investments even if an economy claims to have the tag of investor friendliness. A downturn in private investments leads to slower employment growth.
Second, the process of the ‘destruction’ of jobs through exits creates mismatches in the labour market. That is, there is a sudden release of high skilled workers which could block possible new entrants who have already invested in their skills; this leads to a levelling down of wages which occurs when highend services firms exit. When large assembly firms exit there would be a big influx of lowskilled workers to other sectors as the same sector might not be able to absorb the workforce released.
This churn in the labour market aggravates an existing unemployment problem. A waning of permanency.
The euphoria on the inflow of FDI and associated benefits needs to be tempered with the reality of the emergence of modern transnational corporations (TNC) with ‘agility, rapidity and mobility’.
When these TNCs emerge as key players in an industry, a proliferation of mergers and consolidations across national and international borders might be frequent. These are efforts to open up new opportunities in new markets. Such waves of expansions and contractions are aimed at acquiring new markets and new trade opportunities.
This process of an internationalisation of production is driven by the big firms by investing in and out of developing economies.
Growing scepticism towards more open trade policies and the rise of protectionism have increased the risk and unpredictability of policy environments, leading to deeper reflection on both existing and new investments by global firms.
Thus, the ‘next to near’ permanency of large foreign firms operating for decades is slowly waning. It is here that domestic capital formation and private investments should step in. We are still waiting for it to happen.
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Petrol in India is cheaper than in countries like Hong Kong, Germany and the UK but costlier than in China, Brazil, Japan, the US, Russia, Pakistan and Sri Lanka, a Bank of Baroda Economics Research report showed.
Rising fuel prices in India have led to considerable debate on which government, state or central, should be lowering their taxes to keep prices under control.
The rise in fuel prices is mainly due to the global price of crude oil (raw material for making petrol and diesel) going up. Further, a stronger dollar has added to the cost of crude oil.
Amongst comparable countries (per capita wise), prices in India are higher than those in Vietnam, Kenya, Ukraine, Bangladesh, Nepal, Pakistan, Sri Lanka, and Venezuela. Countries that are major oil producers have much lower prices.
In the report, the Philippines has a comparable petrol price but has a per capita income higher than India by over 50 per cent.
Countries which have a lower per capita income like Kenya, Bangladesh, Nepal, Pakistan, and Venezuela have much lower prices of petrol and hence are impacted less than India.
“Therefore there is still a strong case for the government to consider lowering the taxes on fuel to protect the interest of the people,” the report argued.
India is the world’s third-biggest oil consuming and importing nation. It imports 85 per cent of its oil needs and so prices retail fuel at import parity rates.
With the global surge in energy prices, the cost of producing petrol, diesel and other petroleum products also went up for oil companies in India.
They raised petrol and diesel prices by Rs 10 a litre in just over a fortnight beginning March 22 but hit a pause button soon after as the move faced criticism and the opposition parties asked the government to cut taxes instead.
India imports most of its oil from a group of countries called the ‘OPEC +’ (i.e, Iran, Iraq, Saudi Arabia, Venezuela, Kuwait, United Arab Emirates, Russia, etc), which produces 40% of the world’s crude oil.
As they have the power to dictate fuel supply and prices, their decision of limiting the global supply reduces supply in India, thus raising prices
The government charges about 167% tax (excise) on petrol and 129% on diesel as compared to US (20%), UK (62%), Italy and Germany (65%).
The abominable excise duty is 2/3rd of the cost, and the base price, dealer commission and freight form the rest.
Here is an approximate break-up (in Rs):
a)Base Price | 39 |
b)Freight | 0.34 |
c) Price Charged to Dealers = (a+b) | 39.34 |
d) Excise Duty | 40.17 |
e) Dealer Commission | 4.68 |
f) VAT | 25.35 |
g) Retail Selling Price | 109.54 |
Looked closely, much of the cost of petrol and diesel is due to higher tax rate by govt, specifically excise duty.
So the question is why government is not reducing the prices ?
India, being a developing country, it does require gigantic amount of funding for its infrastructure projects as well as welfare schemes.
However, we as a society is yet to be tax-compliant. Many people evade the direct tax and that’s the reason why govt’s hands are tied. Govt. needs the money to fund various programs and at the same time it is not generating enough revenue from direct taxes.
That’s the reason why, govt is bumping up its revenue through higher indirect taxes such as GST or excise duty as in the case of petrol and diesel.
Direct taxes are progressive as it taxes according to an individuals’ income however indirect tax such as excise duty or GST are regressive in the sense that the poorest of the poor and richest of the rich have to pay the same amount.
Does not matter, if you are an auto-driver or owner of a Mercedes, end of the day both pay the same price for petrol/diesel-that’s why it is regressive in nature.
But unlike direct tax where tax evasion is rampant, indirect tax can not be evaded due to their very nature and as long as huge no of Indians keep evading direct taxes, indirect tax such as excise duty will be difficult for the govt to reduce, because it may reduce the revenue and hamper may programs of the govt.
Globally, around 80% of wastewater flows back into the ecosystem without being treated or reused, according to the United Nations.
This can pose a significant environmental and health threat.
In the absence of cost-effective, sustainable, disruptive water management solutions, about 70% of sewage is discharged untreated into India’s water bodies.
A staggering 21% of diseases are caused by contaminated water in India, according to the World Bank, and one in five children die before their fifth birthday because of poor sanitation and hygiene conditions, according to Startup India.
As we confront these public health challenges emerging out of environmental concerns, expanding the scope of public health/environmental engineering science becomes pivotal.
For India to achieve its sustainable development goals of clean water and sanitation and to address the growing demands for water consumption and preservation of both surface water bodies and groundwater resources, it is essential to find and implement innovative ways of treating wastewater.
It is in this context why the specialised cadre of public health engineers, also known as sanitation engineers or environmental engineers, is best suited to provide the growing urban and rural water supply and to manage solid waste and wastewater.
Traditionally, engineering and public health have been understood as different fields.
Currently in India, civil engineering incorporates a course or two on environmental engineering for students to learn about wastewater management as a part of their pre-service and in-service training.
Most often, civil engineers do not have adequate skills to address public health problems. And public health professionals do not have adequate engineering skills.
India aims to supply 55 litres of water per person per day by 2024 under its Jal Jeevan Mission to install functional household tap connections.
The goal of reaching every rural household with functional tap water can be achieved in a sustainable and resilient manner only if the cadre of public health engineers is expanded and strengthened.
In India, public health engineering is executed by the Public Works Department or by health officials.
This differs from international trends. To manage a wastewater treatment plant in Europe, for example, a candidate must specialise in wastewater engineering.
Furthermore, public health engineering should be developed as an interdisciplinary field. Engineers can significantly contribute to public health in defining what is possible, identifying limitations, and shaping workable solutions with a problem-solving approach.
Similarly, public health professionals can contribute to engineering through well-researched understanding of health issues, measured risks and how course correction can be initiated.
Once both meet, a public health engineer can identify a health risk, work on developing concrete solutions such as new health and safety practices or specialised equipment, in order to correct the safety concern..
There is no doubt that the majority of diseases are water-related, transmitted through consumption of contaminated water, vectors breeding in stagnated water, or lack of adequate quantity of good quality water for proper personal hygiene.
Diseases cannot be contained unless we provide good quality and adequate quantity of water. Most of the world’s diseases can be prevented by considering this.
Training our young minds towards creating sustainable water management systems would be the first step.
Currently, institutions like the Indian Institute of Technology, Madras (IIT-M) are considering initiating public health engineering as a separate discipline.
To leverage this opportunity even further, India needs to scale up in the same direction.
Consider this hypothetical situation: Rajalakshmi, from a remote Karnataka village spots a business opportunity.
She knows that flowers, discarded in the thousands by temples can be handcrafted into incense sticks.
She wants to find a market for the product and hopefully, employ some people to help her. Soon enough though, she discovers that starting a business is a herculean task for a person like her.
There is a laborious process of rules and regulations to go through, bribes to pay on the way and no actual means to transport her product to its market.
After making her first batch of agarbathis and taking it to Bengaluru by bus, she decides the venture is not easy and gives up.
On the flipside of this is a young entrepreneur in Bengaluru. Let’s call him Deepak. He wants to start an internet-based business selling sustainably made agarbathis.
He has no trouble getting investors and to mobilise supply chains. His paperwork is over in a matter of days and his business is set up quickly and ready to grow.
Never mind that the business is built on aggregation of small sellers who will not see half the profit .
Is this scenario really all that hypothetical or emblematic of how we think about entrepreneurship in India?
Between our national obsession with unicorns on one side and glorifying the person running a pakora stall for survival as an example of viable entrepreneurship on the other, is the middle ground in entrepreneurship—a space that should have seen millions of thriving small and medium businesses, but remains so sparsely occupied that you could almost miss it.
If we are to achieve meaningful economic growth in our country, we need to incorporate, in our national conversation on entrepreneurship, ways of addressing the missing middle.
Spread out across India’s small towns and cities, this is a class of entrepreneurs that have been hit by a triple wave over the last five years, buffeted first by the inadvertent fallout of demonetization, being unprepared for GST, and then by the endless pain of the covid-19 pandemic.
As we finally appear to be reaching some level of normality, now is the opportune time to identify the kind of industries that make up this layer, the opportunities they should be afforded, and the best ways to scale up their functioning in the shortest time frame.
But, why pay so much attention to these industries when we should be celebrating, as we do, our booming startup space?
It is indeed true that India has the third largest number of unicorns in the world now, adding 42 in 2021 alone. Braving all the disruptions of the pandemic, it was a year in which Indian startups raised $24.1 billion in equity investments, according to a NASSCOM-Zinnov report last year.
However, this is a story of lopsided growth.
The cities of Bengaluru, Delhi/NCR, and Mumbai together claim three-fourths of these startup deals while emerging hubs like Ahmedabad, Coimbatore, and Jaipur account for the rest.
This leap in the startup space has created 6.6 lakh direct jobs and a few million indirect jobs. Is that good enough for a country that sends 12 million fresh graduates to its workforce every year?
It doesn’t even make a dent on arguably our biggest unemployment in recent history—in April 2020 when the country shutdown to battle covid-19.
Technology-intensive start-ups are constrained in their ability to create jobs—and hybrid work models and artificial intelligence (AI) have further accelerated unemployment.
What we need to focus on, therefore, is the labour-intensive micro, small and medium enterprise (MSME). Here, we begin to get to a definitional notion of what we called the mundane middle and the problems it currently faces.
India has an estimated 63 million enterprises. But, out of 100 companies, 95 are micro enterprises—employing less than five people, four are small to medium and barely one is large.
The questions to ask are: why are Indian MSMEs failing to grow from micro to small and medium and then be spurred on to make the leap into large companies?
At the Global Alliance for Mass Entrepreneurship (GAME), we have advocated for a National Mission for Mass Entrepreneurship, the need for which is more pronounced now than ever before.
Whenever India has worked to achieve a significant economic milestone in a limited span of time, it has worked best in mission mode. Think of the Green Revolution or Operation Flood.
From across various states, there are enough examples of approaches that work to catalyse mass entrepreneurship.
The introduction of entrepreneurship mindset curriculum (EMC) in schools through alliance mode of working by a number of agencies has shown significant improvement in academic and life outcomes.
Through creative teaching methods, students are encouraged to inculcate 21st century skills like creativity, problem solving, critical thinking and leadership which are not only foundational for entrepreneurship but essential to thrive in our complex world.
Udhyam Learning Foundation has been involved with the Government of Delhi since 2018 to help young people across over 1,000 schools to develop an entrepreneurial mindset.
One pilot programme introduced the concept of ‘seed money’ and saw 41 students turn their ideas into profit-making ventures. Other programmes teach qualities like grit and resourcefulness.
If you think these are isolated examples, consider some larger data trends.
The Observer Research Foundation and The World Economic Forum released the Young India and Work: A Survey of Youth Aspirations in 2018.
When asked which type of work arrangement they prefer, 49% of the youth surveyed said they prefer a job in the public sector.
However, 38% selected self-employment as an entrepreneur as their ideal type of job. The spirit of entrepreneurship is latent and waiting to be unleashed.
The same can be said for building networks of successful women entrepreneurs—so crucial when the participation of women in the Indian economy has declined to an abysmal 20%.
The majority of India’s 63 million firms are informal —fewer than 20% are registered for GST.
Research shows that companies that start out as formal enterprises become two-three times more productive than a similar informal business.
So why do firms prefer to be informal? In most cases, it’s because of the sheer cost and difficulty of complying with the different regulations.
We have academia and non-profits working as ecosystem enablers providing insights and evidence-based models for growth. We have large private corporations and philanthropic and funding agencies ready to invest.
It should be in the scope of a National Mass Entrepreneurship Mission to bring all of them together to work in mission mode so that the gap between thought leadership and action can finally be bridged.