Originally Published 2010-09-30 00:00:00 Published on Sep 30, 2010
If the government wants to reduce poverty through FDI, then some fine-tuning in policies will have to be undertaken. FDI will have to be directed to labour-intensive sectors, especially from the unorganised sector. In Bangladesh, much of the FDI has gone to the garment sector which has enriched workers and reduced poverty.
Attracting FDI: Look beyond retail and defence
THE continuing need for industrialisation and foreign investment was emphasised by Prime Minister Manmohan Singh recently for rapid poverty reduction. While it is true that export growth with the help of foreign investment has helped reduce poverty quickly in many countries, its role in India has been ambiguous. While India’s domestic rate of investment is rather high at 33 per cent of the GDP at $430 billion, the importance of FDI has been stressed by our leaders and many changes in the FDI policy have been introduced in recent years to make India an attractive foreign investment destination. The idea of establishing special economic zones (SEZs) for attracting FDI has also gained in importance, especially since the SEZ Act of 2005, which guarantees exemption from the payment of tax on book profit and exemption from the dividend distribution tax for developers.

As pointed out by Sonia Gandhi, SEZs should not be established on prime fertile agricultural land. Alongside industrialisation, a nation of over a billion people needs a robust domestic agricultural production. Enhancing agricultural growth through technology, water management, better land use, land reforms as well as building rural roads is going to remain important for any strategy aimed at rural poverty reduction.

In the SEZs FDI plays an important role as it brings not only foreign exchange but also technical knowhow, intellectual property rights and efficient organisational and managerial practices. In a of a few years China’s poverty was reduced to 2 per cent (ours is 37 per cent) in which FDI played an important role as it went to exporting industries that were mainly labour intensive.

All big American companies opened their subsidiaries in China since its opening up in 1979. This created jobs and boosted exports. But unlike China, in India, FDI has not gone into the labour-intensive export sector. It has remained in capital-intensive sectors like cars, consumer durables and electronics — catering mostly to domestic demand. FDI has not been able to absorb a big proportion of India’s labour force. Most workers ( 92 per cent of the 523.5 million workforce) still remain in the unorganised sector. They are semi-skilled and semi-literate.

Foreign investors have always sought out prosperous states in which there is a good supply of skilled labour, which is educated and this preference for FDI to go to some states and not to others has not helped in poverty reduction much.

Yet India’s policy-makers have been in an overdrive to facilitate the opening up of various sectors for FDI. The result so far has been encouraging and more foreign investors have come in the last few years than before but FDI has not increased the number of jobs. In fact, India has been witnessing jobless growth. The invested FDI was 12.9 per cent of the GDP in India and 10.1 per cent in China last year. India gets around $34.6 billion a year and China gets $108 billion a year.

The government has been trying to open up multi-brand retail and defence to FDI. Already India allows 51 per cent in single-brand retail and 100 per cent in multi-brand retail but only in ‘cash-and-carry’ outlets. By opening up the muti-brand retail sector fully, the government hopes to attract bigger amounts of FDI.

The prospects of India being an attractive FDI destination seem good because of the high rate of economic growth that India has been experiencing lately. A recent UNCTAD survey reveals that India will be the sixth most-favoured FDI destination and China will be the second most attractive destination after the US in 2010-2012.

However, if the government wants to reduce poverty through FDI then some fine-tuning in policies will have to be undertaken. FDI will have to be directed to sectors using workers from the unorganised sector. To make labour-intensive industries attractive, the government will have to improve infrastructure and invest in training labour. In Bangladesh much of the FDI has gone to the garment sector which has enriched workers and reduced poverty.

But in opening up the multi-brand retail sector there is the issue of rendering jobless people engaged in petty trading. It is a serious matter as there are 10 crore small and medium enterprises (SMEs) and traders in the retail sector whose growth has been 15 per cent. If retail is opened up fully then Walmart and European retail giants like Metro and Macro would walk in and capture a sizeable market of $450 billion because the Indian middle class would shop for everything available under one roof.

Of course, many of the poor would not go to Walmart-type stores because they could feel intimidated by the grand façade etc. and would probably still buy from small “kiryana shops”. The main argument in favour of opening up retail is that big multinational firms would source their products from small producers within the country and hence help in creating jobs. But what guarantee is there that they would not outsource their products from cheaper producers like China, Thailand and the Philippines?

Similarly, defence is a capital-intensive sector which would not be inclined to employ a semi-literate and semi-skilled workforce. The government is contemplating tripling the cap on FDI going into that sector to 74 per cent.

Making FDI more hassle-free and giving approvals quickly would also help attract more FDI but the main reason why India is not able to attract a big quantum today is also the general recession in the countries from where FDI originates. There has been a decline in the FDI flows in 2010 as compared to 2009.

India is also emerging as an important country from which FDI originates. While the outward flow of FDI from India is 6.1 per cent of the GDP, it is 4.9 per cent of the GDP in the case of China. India and China can be important global investors in future and not just recipients of FDI. It will strengthen their role as global powers and India can assist industrialisation in Africa like China is doing. Why not emphasise on that role more and leave industrialisation of the country to well-planned domestic investment strategies instead of reliance on FDI? Moreover, domestic investment in local industries that are labour intensive could be assisted with poverty-alleviation programmes in the poorest regions.

Courtesy: The Tribune

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David Rusnok

David Rusnok

David Rusnok Researcher Strengthening National Climate Policy Implementation (SNAPFI) project DIW Germany

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