Most of the FDI is going to the service sector followed by pharmaceuticals, infrastructure and manufacturing. Foreign investors are interested in quick and remunerative returns. They are coming to India because of the high GDP growth path in recent years.
India has jumped 30 places at one go in the World Bank’s Ease of Doing Business index which is no small feat for a country in a year’s time. The World Bank must have been very impressed with the Modi government’s track record on reforms. It is commendable that on many of the indicators comprising the index, India has made progress at a fast pace. Still, there is a lot to be done and by World Bank’s standards, the opening up of all sectors needs to be expedited.
The World Bank’s index reflects the voice of all developed countries towards India and its policy framework has been dominated by the US. In its ratings and suggestions, the Bank’s policy is guided by the neoliberal ideology of lessening all regulations on trade and investment. The US wants less regulation on its agricultural exports to India and so also does EU. If India is willing to comply with the wishes of the developed countries keen on prying open its markets, it may be able to climb up further in the Ease of Doing Business index, but will it help in creating jobs or increasing the welfare of the people? And we should not expect any reciprocity from the developed countries regarding opening up their markets, especially for agricultural products or pharmaceutical drugs. The constant complaint is that the standards of hygiene and cleanliness or even the packaging are not high enough and do not conform to the norms of developed countries. In the case of pharmaceuticals, the complaint is about lack of compliance with global norms. Foreign investors from western countries are afraid of copyright infringements and other Intellectual Property Rights issues in India.
As an index, the Ease of Doing Business is deeply flawed as it does not reflect the more serious issues in the social sector, especially in the case of India. It does not take into account whether the country is advancing on the welfare front, especially when it comes to services for the poor and is oblivious of gender equality. India has the largest number of malnourished children under five years old in the world and there is an increase in stunting and ‘wasting’ among children. India has gone down on the world Hunger Index.
How is it that these important indicators and warning signs are glossed over by the government and instead it is crowing about the climb in the Ease of Doing Business index? India has become one of the most polluted countries with regard to air and water pollution. It has serious problems in healthcare and there are not adequate hospital beds per 1,000 population. Similarly, there are not enough doctors, especially in rural areas. The state of sanitation and drainage are precarious and every so often with heavy rains, metro cities like Chennai, Kolkata, Mumbai and Delhi are flooded and clogged.
Obviously, potential foreign investors will have to turn a blind eye to these aspects of India’s business environment when they come to India. Also, the kind of FDI which is coming in should be scrutinised because it may not be the type which establishes green field enterprises that employs local labour. This kind of FDI was encouraged in the past because it brought about transfer of technology and knowhow. The recipient country benefited from the foreign exchange that investors brought which improved the balance of payments.
But, apparently the pattern is different now. The recent FDI inflows are not from leading global producers of goods and services but mainly from private equity (PE) funds. In 2014-15, Private Equity funds like the Canada Pension Plan Investment Board accounted for 60 per cent of the total foreign inflows and went to consumer retails like Snapdeal, Paytm and Flipkart (e-commerce) that are heavily import dependent for their operations. Today, Amazon is waiting to come in with $5 billion capital to increase its presence in India. In such cases, the benefits of FDI in creating jobs is limited and does not entail bringing in fresh technology or leading to new capital formation.
Most of the FDI is going to the service sector followed by pharmaceuticals, infrastructure and manufacturing. Naturally, the foreign investors are interested in quick and remunerative returns. They are coming to India because of the high GDP growth path in recent years. Maintaining high GDP growth is also the concern of the government, along with it is also the concern for job creation. By attracting FDI, mainly to service and e-commerce sector, may lead to quick profits for investors, but it will not bring more jobs to the people. Hence, attracting FDI to ‘Make in India’ initiative has to be the main endeavour of the government, even though it will be difficult.
The FDI in India is highly concentrated and Mauritius is the top source of FDI into India in 2016-17. Singapore is next biggest source and together they account for 50 per cent of total capital inflows. In 2016-17, total FDI grew by 9 per cent to $43.5 billion. Mauritius route is nothing but round tripping of Indian investment which prefers to go to Mauritius to avail of the Double Tax Avoidance Treaty which means it is going to ‘brown field investments’ in existing enterprises. The treaty has been amended but will come into force only from 2019. The preferred destinations are Mumbai, New Delhi and Chennai. But the rest of India hardly attracts much FDI and that is where the unemployed youth are.
The Ease of Doing Business also refers only to Mumbai and Delhi and hence it is not giving a complete picture to the investors. The workers in other states need training in skills and only then they can form a disciplined, dependable labour force which is the backbone of industry. It is of utmost importance to see that FDI goes to the other States and the reforms undertaken by the government in Ease of Doing Business should apply to all. If India is keen on receiving FDI from other countries and build its infrastructure and industrial base, a lot more attention has to be paid to the factors that are not covered by the index. The government has to choose what kind of FDI it wants and where its location should be. Only then can FDI fulfill its role as an accelerator of growth which will create jobs for the people.
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David Rusnok Researcher Strengthening National Climate Policy Implementation (SNAPFI) project DIW Germany
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