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Daily Current AFfairs 25.09.2021 (When global firms disengage, employment suffers)

Daily Current AFfairs 25.09.2021 (When global firms disengage, employment suffers)

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1.When global firms disengage, employment suffers

While inward FDI in India does create jobs, the magnitude and quality of job generation need scrutiny

The most recent labour statistics, for August 2021, released by the Centre for Monitoring Indian Economy (CMIE) shows that the unemployment rate has increased from around 7% in July to 8.3% for August 2021. In absolute terms, employment shrunk from 399.7 million in July to 397.8 million, that is, 1.9 million jobs were lost in one month.

Sectoral analysis shows that most of the jobs lost were farm jobs; while non-farm jobs did increase to absorb some of these, the quality of new jobs generated is a matter of concern. While employment in agriculture fell by 8.7 million, non-farm jobs increased by 6.8 million, mainly in business and small trade, but the manufacturing sector shed 0.94 million jobs. Thus, much of the labour shed by agriculture has been absorbed in low-end service activities.

Employment sustainability

During normal times, seasonal labour released from agriculture gets accommodated in the construction sector, even though the ideal situation would be their movement to the factory sector. But, currently, the construction sector itself is shedding jobs, forcing workers to find employment in the household sector and low-end services. This non-availability of sufficient jobs in manufacturing and higher end services could be the dampener for economic recovery in the subsequent quarters of the current fiscal year.

Elementary economic theory suggests that raising the level of investments is the key to output and employment growth. While public investments are important, especially in the current context of sluggish aggregate demand, there is a dire need to complement public investments with even more private investments. The economy has been waiting for private investments to flow in for quite some time, but their levels have been very low, accentuating the unemployment situation. Resorting to Foreign Direct Investment (FDI) to augment domestic capital formation is an approach that India has been pursuing by making ‘ease of doing business’ more enticing. While inward FDI does generate jobs both directly and indirectly through an increase in production activities (which increases demand for labour), the magnitude of employment generated especially in the manufacturing sector, needs closer scrutiny. Further, the sustainability of increased employment is often threatened as it depends on the business avenues which other competing economies open up leading to corporate restructuring at the global level and firm exits from erstwhile locations.

An exit and disruptions

Tepid employment growth in the manufacturing sector is not a recent phenomenon in India. However, some sub-sectors within the manufacturing sector have generated both direct and indirect employment by attracting FDI and entering into global networks of production. A prominent segment, often projected as a driver of the manufacturing sector’s output and employment growth, is the auto sector.

Estimates show that the automobile sector employs 19.1 million workers, directly and indirectly. Currently, more than 70% of the auto component companies are small and medium enterprises. It was expected that by 2022, the employment in this sector would reach 38 million with a higher generation of indirect employment.

However, three factors have created roadblocks to the expansion of the sector. First, due to the novel coronavirus pandemic and subsequent lockdown, aggregate demand in the economy is low, which is being reflected in vehicle sales. Second, the shortage of semiconductors continues to impact production even when customer sentiments are slowly turning positive. Third, the recent exit of Ford from the Indian market would release a large number of employees, who would be in search of jobs that are hard to find.

The exit of Ford raises some important issues regarding the unbridled attraction of FDI. While FDI might help in creating a manufacturing ecosystem in certain locations, the uncertainties of global corporate restructuring and changes in the economic environment in the lead firm’s home economy are factors to reckon with. More frequent global production re-arrangements are becoming a part of the strategy of big firms in this phase of globalisation, as markets tend to be more volatile due to repeated demand fluctuations.

Other examples

We have had the experience of Nokia, which at its peak, in its Sriperumbudur factory (Tamil Nadu) was one of the world’s largest mobile phone plant, with 8,000 permanent employees working three shifts, producing more than 15 million phones a month and exporting products to over 80 countries. But in 2014, Nokia halted its production operations from this location, disrupting the livelihoods of thousands of workers.

Recently, Citibank announced that it would shut India retail banking business as part of a global decision to exit 13 markets. The U.S.-based bank wants to focus on a ‘few wealthy regions’ around the world. Citibank’s exit from the retail segment is after more than three decades; the bank has 35 branches employing approximately 4,000 people in the consumer banking business. Closely following this, after 25 years of operations is auto manufacturer Ford deciding to exit India. This will affect about 4,000 direct employees as it stops making cars at its factories in Sanand, Gujarat, and Chennai, Tamil Nadu. Estimates show that another 35,000 indirect employees would also be lost at various levels, creating a massive disruption in the local economy.

Impact on job generation

The exits of high-profile global firms affect employment generation in two ways. First, it creates apprehensions among potential investors about choosing that location for greenfield investments or for scaling up existing facilities. Such circumstances generally lead to a ‘wait and watch’ approach, affecting private investments even if an economy claims to have the tag of investor friendliness. A downturn in private investments leads to slower employment growth. Second, the process of the ‘destruction’ of jobs through exits creates mismatches in the labour market. That is, there is a sudden release of high skilled workers which could block possible new entrants who have already invested in their skills; this leads to a levelling down of wages which occurs when high-end services firms exit. When large assembly firms exit there would be a big influx of low-skilled workers to other sectors as the same sector might not be able to absorb the workforce released. This churn in the labour market aggravates an existing unemployment problem.

A waning of permanency

The euphoria on the inflow of FDI and associated benefits needs to be tempered with the reality of the emergence of modern transnational corporations (TNC) with ‘agility, rapidity and mobility’. When these TNCs emerge as key players in an industry, a proliferation of mergers and consolidations across national and international borders might be frequent. These are efforts to open up new opportunities in new markets. Such waves of expansions and contractions are aimed at acquiring new markets and new trade opportunities. This process of an internationalisation of production is driven by the big firms by investing in and out of developing economies.

Growing scepticism towards more open trade policies and the rise of protectionism have increased the risk and unpredictability of policy environments, leading to deeper reflection on both existing and new investments by global firms. Thus, the ‘next to near’ permanency of large foreign firms operating for decades is slowly waning. It is here that domestic capital formation and private investments should step in. We are still waiting for it to happen.

  • Government Measures to increase FDI:
    • In 2020, schemes like production-linked incentive (PLI) scheme for electronics manufacturing, have been notified to attract foreign investments.
    • In 2019, the Central Government amended FDI Policy 2017, to permit 100% FDI under automatic route in coal mining activities.
    • Further, the government permitted 26% FDI in digital sectors. The sector has particularly high return capabilities in India as favourable demographics, substantial mobile and internet penetration, massive consumption along with technology uptake provides great market opportunity for a foreign investor.
    • FDI in manufacturing was already under the 100% automatic route, however in 2019, the government clarified that investments in Indian entities engaged in contract manufacturing is also permitted under the 100% automatic route provided it is undertaken through a legitimate contract.
      • Contract Manufacturing: Production of goods by one firm, under the label or brand of another firm.
    • Foreign Investment Facilitation Portal (FIFP) is the online single point interface of the Government of India with investors to facilitate FDI. It is administered by the Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry.
  • Increase in FDI Inflows is further Expected:
    • As foreign investors have indicated interest in the government’s moves to allow private train operations and bid out airports.
      • In March 2020, Government permitted non-resident Indians (NRIs) to acquire up to 100% stake in Air India.
    • Valuable sectors such as defence manufacturing where the government enhanced the FDI limit under the automatic route from 49% to 74% in May 2020, could also attract large investments going forward.

Foreign Direct Investment

  • FDI is the process whereby residents of one country (the home country) acquire ownership of assets for the purpose of controlling the production, distribution and other activities of a firm in another country (the host country).
    • It is different from Foreign Portfolio Investment where the foreign entity merely buys stocks and bonds of a company. FPI does not provide the investor with control over the business.
  • Flows of FDI comprise capital provided (either directly or through other related enterprises) by a foreign direct investor to an enterprise.
  • FDI has three components, viz., equity capital, reinvested earnings and intra-company loans.
    • Equity capital is the foreign direct investor’s purchase of shares of an enterprise in a country other than its own.
    • Reinvested earnings comprise the direct investors’ share (in proportion to direct equity participation) of earnings not distributed as dividends by affiliates, or earnings not remitted to the direct investor. Such retained profits by affiliates are reinvested.
    • Intra-company loans or intra-company debt transactions refer to short- or long-term borrowing and lending of funds between direct investors (or enterprises) and affiliate enterprises.
  • Routes through which India gets FDI:
    • Automatic Route: In this, the foreign entity does not require the prior approval of the government or the RBI.
    • Government route: In this, the foreign entity has to take the approval of the government.
      • The Foreign Investment Facilitation Portal (FIFP) facilitates the single window clearance of applications which are through approval route.
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