Impact of FDI on the employment sector of India

Foreign Direct Investment (FDI) can be contemplated as one of the most decisive catalysts of generating employment in India. Opening up of trade barriers in India post trade liberalization in the year 1991 has witnessed the influx of FDI at a great extent. Focus on nationalized industries, import substitution and tariff raj were by far the major factors that had plagued the employment generation mechanism before liberalization. However, the scenario transformed drastically post liberalization (Someshu, 2010).

Notion of win-win proposition at the inception

Unemployment was rampant before 1991 and there was a huge gap between demand and supply of jobs in the market. Due to unemployment, labour was cheap and abundant. Removal of trade barriers presented a massive opportunity for the foreign nations to foray into the Indian market. The local workforce also embraced the opportunity of FDI influx for making good fortune. Thus, the FDI inflow could be regarded as a win-win proposition on all fronts (Someshu, 2015). However, the impact of FDI on all the sectors of the Indian economy has not been evenly distributed. Different sectors witnessed different fates.

Mixed impacts on different sectors

The influx of FDI in India increased significantly after 1991 and rose to the peak in the year 2008. Majority of the existent literature on FDI in India revealed that there is a positive correlation between FDI and GDP (Gross Domestic Product). On average the net inflow of FDI as a percentage of GDP has hovered around 2%. This has significantly contributed to the growth and development of various sectors of the economy. However, the relationship between FDI and employment is very different. The figure below plots FDI as a percentage of GDP and employment for the post reform years.

FDI inflow from 1991 to 2016 & employment rate in India

Figure 1: FDI inflow from 1991 to 2016 & unemployment rate in India (Source: World Bank)

Figure above reveals that the aggregate impact of FDI on employment is not uniform. One of the major reasons for this is that the inflow has been majorly in brownfield projects (mainly start-ups) which failed to maintain job generation in a steady manner. Apart from that, another reason is that in India, the income inequality has been pretty high for which the aggregate impact has not been positive throughout (Someshu, 2010). This mixed trend has been validated in the literature by a panel data analysis of the impact of FDI on employment in India (Rizvi & Nishat, 2009). Using a pooled estimation of Seemingly Unrelated Regression (SUR), they found that FDI did not impact employment generation in a significant way for the period 1985 to 2008. Employment to population average is reported to be below the OECD (Organisation for Economic Co-operation and Development) average during the last decade (OECD, n.d.). According to the data, there is lesser effect of FDI towards creation of employment as compared to other BRCIS countries Brazil, Russia, China and South Africa.

Impact on the primary sector

India has always been an agrarian economy and the three sectors that are dominantly present in India are primary sector, secondary sector and tertiary sector. The primary sector is basically the agricultural sector, the secondary sector is the industrial sector and the tertiary sector is the service sector.

The involvement of primary sector in output generation in India has been the highest and not much has been done to transform the agricultural sector via FDI.  There has been no significant impact of FDI on the sector (Mehra, 2013, p. 36).

Impact on the secondary sector

There is a significant positive correlation between FDI inflows and growth and development of the secondary and tertiary sectors (Mehra, 2013, p. 36). The secondary or the industrial sector received a massive thrust from FDI. The employment generation has been also brisk. In the first decade of trade liberalization i.e. from 1991 to 1999, the industries that received maximum FDI inflows in secondary sector were automobile, air and sea transport, railways and ports. The automobile industry by far has received the maximum boost from FDI giving employment to approximately 25 million people directly and indirectly in the year 2016 rising from only 1.8 million people in the year 1991 (Samal & Raju, 2016). The transportation industry includes air & sea transport, passenger car, ports and allied industries. As a whole, it received an aggregate of 9% of total FDI between 1991 and 1999. Following the transportation industry, the industry that received 8% of the aggregate FDI inflow is electric equipments. It includes materials like computer software and hardware, electrical equipments and associated products (Sutradhar, 2014, pp. 8-9).

Impact on the tertiary sector

One of the major areas of growth and employment in the nation via the FDI route is the tertiary sector. The ‘software revolution’ or ‘Information Technology (IT) revolution’ in India can be attributed majorly to the FDI inflow in India. Before 2000-01, software business and communication services fell under the category of miscellaneous services. The software industry in India in the current scenario is the vehicle of enormous employment. Furthermore with FDI inflow, the net exports from sectors like IT/ ITeS gained a massive pace. IT/ ITeS has triggered the export promotion mechanism in India considerably post liberalization.

A new dimension to the trajectory of employment was developed with the inflow of FDI in the software industry. The BPO (Business Process Outsourcing) industry, an integral part of IT/ ITeS sector provided mass scale employment to the Indian youth. The Indian youth got a fresh lease of life through ‘BPO boom’ as bagging a job with a handsome salary after passing out of college has become a sought after trend. As per the data of the Reserve Bank of India (RBI), in the year 2011-12, the aggregate revenue from the BPO sector has been $ 87.6 billion. It employed 2.8 million people directly and around 8.9 million people indirectly. With respect to proportions of national GDP, the development and growth of revenues from IT/ ITeS sector grew from 1.2% in 1997-98 to around 7.5% in 2011-12 (Sutradhar, 2014, pp. 17-18). The growth remains vibrant in the current scenario also.

Bottom-line

The impact of FDI on employment in India is phenomenal. Beyond reasonable doubt, the unconstrained flow of FDI has accelerated the growth dynamics of the nation generating enormous employment especially in the tertiary sector. The agricultural sector has not been significantly transformed by the FDI inflow. However, the long-run implications are uncertain. Is the quick generation of jobs in BPO sectors snatching away the skills of the Indian youth? Is the less dominance of FDI on agricultural sector is not so harmful for the sector’s socio-economic benefit in the future? These questions need judicious justifications both from short-run as well as from long run perspectives.

References

Arijit Shankar Chaudhury

Arijit Shankar Chaudhury

Research Analyst at Project Guru
Arijit is a post graduate in Economics. He has keen interest in finding new patterns from data in different areas of research and analysis. He is proficient with different statistical analysis applications like SPSS, SAS, R and Eviews. In his spare time he listens to music and is an avid guitar player.
Arijit Shankar Chaudhury

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