FDI alone won’t do

Jayshree Sengupta

WHY are we so impressed by the World Bank’s ranking of India in its ease of doing business index? The World Bank’s index reflects the voice of all developed countries towards India and in its ratings the bank’s policy has always been guided by the neoliberal ideology of lessening all regulations on trade and investment. The Modi government is celebrating India’s climb to the 100th position in the ease of doing business index by which it hopes to attract more FDI, which, in turn, will create jobs. 

The government should realise that the US, the EU and other developed countries want less regulation on all their exports to India. If India is willing to comply with the wishes of the developed countries keen on prying open our markets, it may be able to climb faster in the business index. But will it help in creating jobs or increasing the welfare of the people? And should we expect any reciprocity from developed countries regarding opening up their markets, especially for our agricultural products or pharmaceutical drugs or movement of our IT personnel in their countries? No. The constant complaint is that the standards of hygiene and cleanliness or even 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. Developed countries are also very strict about Indian IT workers’ entry, residence and movement in their land.

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 regarding services for the poorer sections and is oblivious to question 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 to the 100th position out of 119 nations. How is it that these important indicators and warning signs are glossed over by the government, and instead, it is celebrating the climb up in the business index? India has become one of the most polluted countries, especially in air, water and environmental pollution. It will have serious impact on the health of the population in the future. There are inadequate hospital beds per 1,000 population and not enough doctors in rural areas. The state of sanitation and drainage are precarious and every so often with heavy rains, metropolis 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. The kind of FDI which is coming should also be scrutinised by the government because it may not be the type which establishes greenfield enterprises that employ more labour. This kind of FDI was encouraged in the past because it brought in transfer of technology and knowhow. The recipient country benefited from the foreign exchange that investors brought which improved the balance of payments. 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 total foreign inflows and went to consumer retail like Snapdeal, Paytm and Flipcart (e-commerce) that are heavily import dependent in their operations. Today, Amazon is waiting to come in with $5 billion capital to increase its presence in India. In such cases, the potential of FDI in creating jobs is limited and does not bring in new technology or add to capital formation. 

Most of the FDI is going to the service sector followed by pharmaceuticals, infrastructure and a small amount in manufacturing. Naturally,  foreign investors are interested in quick profits on their investments.  They are coming to India because of the high GDP growth path of recent years. To maintain high GDP growth has been the concern of the government. By attracting FDI mainly to service and e-commerce sector may lead to high returns for investors, but it may not create more jobs for the people. Hence the government has to attract more FDI in its ‘Make in India’ initiative, even though it may be difficult. 

This is because the FDI coming to India is highly concentrated and Mauritius was the top source of FDI in 2016-17. Singapore is the next biggest source and together they account for 50 per cent of the total capital inflows. In 2016-17, the total FDI grew by 9 per cent to $43.5 billion. The 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’ or in existing enterprises. The treaty has been amended, but will come into force 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 of India need training in skills, education and healthcare because 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 other states and the reforms undertaken by the Central government in ease of doing business should apply to all. If India is keen on receiving FDI from developed countries and build its infrastructure and industrial base, more attention will have to be paid on the factors not covered by the index. The government has to choose what kind of FDI it wants and where it is to be located. Only then can FDI fulfil its role as an accelerator of growth, which will also create jobs for our labour force.