FDI is surging, but job creation lags

A 2.5% surge in FDI inflow may help India beat its peers in terms of attracting foreign investments, but translating this into large-scale job creation is still some time away


Graphic: Subrata Jana/Mint
Graphic: Subrata Jana/Mint

Foreign direct investment (FDI) into India touched an eight-year high of $46.4 billion in 2016. It has grown at an annual average of 28.2% for the past three years, compared with stagnant-to-declining flows earlier due to the policy logjam prevalent at that time.

There is much to celebrate about the rising inflow, such as the slew of amendments made to relax FDI norms and the improvement in ease of doing business in India. But on the flip side, analysts point out that the increasing FDI may not necessarily lead to the creation of more jobs.

From the investors’ perspective, the primary aim would be to generate returns, not necessarily to create a large number of jobs, says Aditi Nayar, principal economist at Icra Ltd.

In a recent report, the Organisation for Economic Co-operation and Development said India’s rate of employment has declined, with job creation failing to keep up with the growing working-age population. Over 30% of India’s youth are not in employment, it said.

Theoretically, FDI has a direct and indirect impact on job creation. FDI into a sector generates jobs not only in that sector, but also in ancillary and associated industries. So why the mismatch in India?

For starters, a factor that decides whether there will be meaningful job creation is the type of industry that is attracting FDI. Services continues to draw more than 60% of total FDI inflows, according to economists. Besides, a large part of FDI is in the form of acquisitions, which doesn’t lead to more jobs. In addition, last year’s inflows included a massive infusion by Vodafone Plc into its Indian subsidiary, which was used for spectrum payments and debt repayment.

Girish Vanvari, partner and head (tax) at KPMG India, said, “In services sectors such as e-commerce, we are now seeing a lot of layoffs happening and until new capital comes in, there won’t be any job creation. The same is the case with information technology, where there is a contraction in labour demand due to automation.”

The manufacturing sector, which can drive jobs growth, is largely missing in action. Despite the much-promoted “Make in India”, launched in September 2014, there has been no significant revival in investments in manufacturing, which is a concern.

There are still bottlenecks in terms of infrastructure, and stringent and complex labour laws. Analysts also point to regulatory issues, especially in sectors where natural resources are involved, because of which investors prefer services-related sectors.

“It is vital that a shift in FDI inflows happens from services to manufacturing because there you are creating a large number of jobs for unskilled labour and the probability of sustenance of jobs is higher,” said Madan Sabnavis, chief economist at CARE Ratings.

Meanwhile, though overall FDI inflow has improved, India’s FDI as a share of gross domestic product (GDP) stood at 2.1% in 2015, lower than emerging market peers like Brazil and China (see chart). Apart from making India an attractive investment destination for investors, a key agenda of the current government was also to create jobs. With this surge in FDI, India may beat its peers in terms of attracting foreign funds, but translating this investment into large-scale job creation is still some time away.

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