Foreign direct investment (FDI) in India is an important monetary source for Indian Economic Development since 1991. Foreign companies directly invest in fast growing private Indian business firms to take the benefits of cheaper wage rate in India and changing business environment of India that is favorable to them.
India faced the economic crisis in 1991 which led to trade liberalization and thus a heavy influx of Foreign Direct Investment. It created more than 1crore jobs in the economy.
FDI has seen a steady increase in INDIA since 1991 causing continuous infrastructural growth, technological advancements and generation of new employment opportunities especially in the secondary and tertiary sector.
NEED FOR THE STUDY
The need to study the impact and effects of the rising foreign direct investments in India on employment arises due to the widespread unemployment in the economy. Job generation has been a major area of focus for the Indian government since the time of independence because India being an agriculture centric nation employed about 67% of its working population in agricultural activities even though it’s contribution to the GDP was as less as 32.2% in 1990-91. There was a lack of industrial development, opportunities for skilled and unskilled workforce and initiative to develop the private sector.
The new economic policy on 1991 led to LPG which brought about rapid economic growth and an influx of ever rising FDI. This FDI has opened new avenues for the working population, the entrepreneurs, the large number of semi-skilled population and the economy in general. A study of the trends in employment in relation to the Foreign Direct Investments shows us the success and limitations of the New Economic Policy and the nature of unemployment in India. It further helps understand the inflow of Foreign Direct Investment in different sectors of the Indian Economy.
FOREIGN DIRECT INVESTMENT IN INDIA
Before 1991, FDI in India was negligible due to barriers and hindrances to trade. The first year of reform since the introduction of the LPG (Liberalization, Privatization, Globalization) saw a total foreign investment of only $74 million. However, investments have continuously risen since then, except for occasional drops between 1997 and 2000 and 2008 and 2012.
The total FDI that India has received is $371 billion, since 1991(as of march 2016). The highest FDI inflow of $43.40 billion in India was recorded in the year 2008. India has been able to attract around $10.55 billion worth of FDI till March 2016. India received around $63 billion (nearly Rs 4.19 lakh crore) and replaced China as the top FDI destination in 2015, according to The Financial Times.
NEW ECONOMIC POLICY 1991
Liberalization means to end the licenses, quota and many more restrictions and controls which were put on industries before 1991. Methods of liberalization under NEP are as follows-
(a) Abolition of licenses except in few industries.
(b) Removal of restrictions on expansion or contraction of business activities.
(c) Freedom in fixing prices given to the industries.
(d) Trade liberalization through import-export.
(e) Simplification of the procedure to attract foreign capital in India.
(f) Freedom in movement of goods and services.
Privatization refers to decreasing of role of public sector and increasing that of the private sector. To execute the policy of privatization government of India took the following measures:
(a) Disinvestment of public sector to private sector through ownership transfer.
(b) Setting up of the Board of Industrial and Financial Reconstruction (BIFR) for the revival of loss making units in public sector enterprises and bringing them back to efficiency.
(c) Dilution of the Stake of the Government in joint enterprises. If the private sector acquires more than 51% shares during disinvestment then it results in transfer of ownership and management to the private sector from the public sector.
The integration of various economies of world into one big economy. Till 1991 Indian government was following a strict import policy and foreign investment policy in regard to licensing of imports, tariff, restrictions, etc. but after new economic policy government adopted policy of globalization by taking following measures:
(i) Import Liberalization. Government removed various restrictions from import of capital goods to India.
(ii) Foreign Exchange Regulation Act (FERA) was replaced by the new Foreign Exchange Management Act (FEMA)
(iii) Rationalization of the Tariff structure was done.
(iv) Export duty was abolished.
(v) Import duty was reduced.
As a result of globalization, physical boundaries and political boundaries did not remain as the barriers for business enterprise. Whole world was turning into a global village.
CAUSES OF INCREASED FDI
• Large GDP and market potential
• Advanced know-how
• Skilled and competent work-force
• Low labor cost and wage rate
• Low taxation policy
• Lower environmental protection
• High tariff protection
• Favorable laws and public incentives
ADVANTAGES OF FDI
• Stimulates economic development
• Improves trade relations with the world
• Boosts employment in host country
• Human capital development
• Transfer of resources and information
• Increased productivity and output
• Increment in national Income
DISADVANTAGES OF FDI
• Hindrance to domestic investment
• Higher costs
• Risk from political changes
• Modern day colonialism
• May impact exchange rates negatively
• FDI may force local competitors out of business through predatory practices.
IMPACT OF FDI
The following were notable impacts generated by FDI in India-
• Variety of products in the market increased thus benefitting consumers.
• Rise in competition in local market led to development of domestic firms.
• New factories and industrial units emerged leading to a rise in employment opportunities.
• Improvement in the infrastructure and standard of living of the people.
• Introduction to new innovative technology and transfer of information.
• Rise in the contribution to GDP by Secondary and Tertiary sector thus indicating economic growth.
FDI AND EMPLOYMENT
Foreign Direct Investment (FDI) can be marked as one of the most important catalysts of generating employment in India.
Although the impact of FDI on employment is not steady and involves many turbulences, it’s benefits cannot be ignored. The unsteady nature of employment created by FDI is majorly due to disparities between different sectors and industries. While some industries saw a boost in FDI leading to their modernization and rapid growth, other industries did not see a noticeable increase in FDI due to many reasons. The impact of FDI on employment in India overall has been phenomenal. Beyond any doubt, the unconstrained flow of FDI in India has accelerated the development of the nation generating huge amount of employment especially in the service sector.
The agricultural sector has not been significantly affected by FDI. Effects of FDI on employment can be better understood by the table given below.
India has always been an agrarian economy. The primary sector is basically the agricultural sector and includes the fisheries, forestries and other agriculture related activities.
The involvement of primary sector in output generation in India has been the highest and not much has been done to transform the agricultural sector via FDI. FDI concentrated on development of industry and services in India thus the agriculture sector has not seen a significant influx of FDI.
Agriculture already employed more than 66% of the working population in 1991 so there wasn’t much scope for generation of jobs. If anything, agriculture in India is overpopulated with high rate of disguised unemployment still prevailing. There has been no significant impact of FDI on the sector due to these reasons.
The secondary/industrial sector received a massive thrust from FDI. The employment generation that took place has also been brisk. In the first decade of liberalization of trade i.e. from 1991 to 1999, the industries that have received maximum FDI inflows in secondary sector were the automobile industry, air and sea transport industries, railways and ports.
The automobile industry received the maximum growth from FDI giving employment to around 25 million people directly and indirectly in the year 2016 rising from only 1.8 million people in the year 1991.
The transportation industry received an aggregate of 9% of the total FDI between 1991 and 1999.
Following the transportation industry, the industry that received 8% of the aggregate FDI inflow is that of electric equipment. It includes materials like computer software and hardware, electrical equipment and associated products.
One of the major areas of growth and employment in India through the FDI route is the tertiary sector. The ‘software revolution’ or ‘Information Technology (IT) revolution’ in India can be accredited majorly to the FDI inflow in India. The software industry in India in the current scenario is the bearer of enormous employment.
The BPO (Business Process Outsourcing) industry, an integral part of IT provided mass scale employment to the Indian youth. The Indian youth got a fresh life through ‘BPO boom’ as bagging a job with a handsome salary after passing out of college has become a sought after trend. It employed 2.8 million people directly and around 8.9 million people indirectly. This growth remains vibrant in the current scenario also.
The IT sector has been India’s strong sector for quite some time now. It has become the fifth largest industry in India according to it’s contribution to GDP. It majorly includes Bangalore, Chennai, Pune, NCR, Hyderabad and Mumbai. The computer software and hardware sector in India attracted cumulative Foreign Direct Investment (FDI) inflows US$ 29.825 billion from April 2000 to December 2017. The IT sector ranks 3rd in India’s total Foreign Direct Investment share. India’s highly qualified workforce of technical graduates is one of the largest in the world and is available at a much lower cost saving of 60-70 per cent to source countries.
BUSINESS PROCESS OUTSOURCING
• In India, Business Process Outsourcing (BPO) has become the fastest growing segment of the ITES (Information Technology Enabled Services) industry. The BPO boom in India is credited to the comparatively cheap labor costs and India’s huge pool of skilled, English-speaking professionals. A BPO service provider usually manages a particular business function for another company. India is currently the number one destination in the world for business process outsourcing after overtaking China. The BPO industry in India has successfully provided jobs for over 74,400 Indians. This number is continuing to grow on an yearly basis till date. The Indian BPO sector is said to soon employ over 1.1 million more Indians. Indian BPOs have a huge share in the world’s business process outsourcing with 56% to boast.
LIMITATIONS OF FDI
The limitations or areas of improvement of FDI in India in relation to employment have been identified as follows:
• Capital investment can be made in the agriculture sector to improve it’s contribution to GDP and reduce the manpower engaged in it.
• More industries like the textile, cultural arts and crafts and native products like Khadi can be promoted by increased investment in them.
• The investment can be made more evenly distributed across domestic areas within India, as of now it remains concentrated in the technological hubs and industrial areas.
• FDI has not yet been able to create adequate employment due to large qualified workforce, more opportunities can thus be created.
• New factories and outlets continue to open but they sometimes work against the interests of local businesses.