- May 27 2016
At the end of the two years of Modi government, one major weak point has been lack of sufficient job creation. Prime Minister Modi in his election speeches did promise to give jobs to the youth. Around 100 million youth are seeking jobs every year in the Indian job market. But only 1.35 lakh jobs were created in 2015 and 4.93 lakh jobs were created in 2014 across eight sectors according to the Labour Bureau of India. Manufacturing sector is the only important sector which can give jobs to semi-skilled youth who are migrating from rural to urban areas. Manufacturing sector includes MSME ( Micro Small and Medium enterprises) which employs 110 million people.
The slowdown in manufacturing growth has been another weak spot in the last two years of the Modi government. There has been the lack of momentum in manufacturing sector growth despite the launching of Make in India initiative. IIP growth was low at 0.1% in March and manufacturing growth contracted by 1.2% in March 2016. Manufacturing comprises 75% of IIP index and so if manufacturing growth is slackens, IIP is dragged down. Why is it that despite all the hype about India becoming the next China as the factory of the world, the manufacturing growth is not picking up?
Low demand for manufactured goods is a reason and it is coming from the stressed agricultural sector whose growth will be around 1.1% in 2015-16 as a result of two consecutive droughts. The slowdown in exports has also contributed to low demand for manufactures.
But, low manufacturing growth is also due to slowdown in private and foreign investment going into manufacturing. Private domestic investment has been low due to inventory pile up and lack of positive global cues.
In the last two years, FDI inflows have increased substantially thanks to the Prime Minister’s foreign visits and his promise of granting better business environment and warm invitation to foreign investors to ‘come and Make in India’. India recently beat China as the best FDI destination in the world, but most of the FDI equity flow is going into the services sector and not the manufacturing sector.
According to Economic Survey 2016, FDI equity inflows during the period April 2000 to October 2015 into the services sector were at 53.3% and 53% during 2014-15.The services sector consists of a basket of items like financial banking, insurance, non-financial, outsourcing services, R&D and trading. If other services from related sectors like retail trading, ports, agricultural services, education, air-transport are included than the total cumulative share of FDI going to services would increase to 55.6% between 2000-2015 and 54.5% in 2014-15. By comparison, during 2000-2015, only 30.3% of FDI equity flows went to manufacturing sector.
The entire amount of the FDI flows going into manufacturing did not create fresh capacities during this period. Nearly half of the flows in manufacturing during the period 2004 to March 2013 were used for acquiring existing companies.
Services sector has always been a favourite of foreign investors because of the educated and skilled labour force and the rising demand for outsourcing services from India. In the first seven months of 2015-16, while total equity flows grew by 26% to $27.1 billion, the equity flows going to the services sector grew by 74.7% to $14.8 billion.
On the other hand, experience from other countries show that FDI does not actually stimulate manufacturing growth and it cannot drive industrial growth unless there are local capabilities present. FDI has gone to industries which were already developed through government support and initiative of indigenous enterprises which played an important role in their growth.
In the past, FDI has been going to the pharmaceutical, chemicals and automobiles sector and not so much to other manufacturing sectors. These have been sectors which have been growing fastest aided by private investment which made these industries vibrant and strong.
Yet, another reason behind the low manufacturing growth in recent years is increase in India’s imports of manufactured goods due to duty reduction according to WTO rules. According to the 2014-15 Annual Report of Ministry of MSME, there has been a surge in the imports of 12 products that include electrical and electronics, mechanical and metallurgical products, chemicals and glass and ceramic based items. These 12 major product groups are largely manufactured by SMEs in India which comprise 90% of the total industrial units in the country. These items accounted for 74% of India’s total imports from China in 2014-15. As a result, a significant number of SMEs have been adversely affected.
Competition from China has also led to a decline of some handicrafts industries as imported goods have flooded the market. It is hard to find India made toys anymore and during Diwali, Chinese fancy lights and images of gods are ubiquitous by their presence. Imports of both cheap and high end textiles have also affected the handloom sector adversely.
With India having signed FTAs with many countries, foreign companies based in India are importing parts or finished products for sale in India. Hence to get best results from the Make in India initiative, the government ought to make it mandatory for foreign investors to manufacture a substantial part of their output in India. Only then they will be able to create jobs for Indians.
The government has done quite a lot to make the FDI inflows easier and smoother. The permissible FDI limit in the defence sector was increased to 49%. In railway infrastructure, 100% FDI has been allowed and norms in the construction development have been liberalized. Similarly FDI in medical devices have been freed. The bankruptcy laws are in place to make exit of firms possible and easy. This should lead to deployment of capital that had been tied up in bankrupt enterprises.
On both the jobs front however, a good beginning has been made in skills training programme for 76 lakh young people under the National Skill Development Mission and Union Budget 2016 aims at skill development of one crore youth in the next the years. A skilled labour force will increase FDI in manufacturing and generate jobs also.
This commentary originally appeared in The Tribune.