Why Make-in-India doing half its job & not creating employment

By: | Updated: May 12, 2016 7:40 AM

Around 60% of the FDI coming into India is in the form of private equity and isn’t creating jobs

The government seems ecstatic over its economic performance since it came to power in 2014. Apart from initiating public programmes to bolster growth, the likes of the IMF predicting a 7.5% growth-rate in the coming year for the country has only added to the euphoria. While exports remain sluggish and rural demand did not match expectations in the last few years, the persistent, near-67% increase in freight charges (a leading indicator) and the recently announced 61% increase in FDI as compared to the previous year are being used to compensate for any negatives.

A significant jump in FDI, from $21.06 billion in FY14 to $34.9 billion in FY15, is being held as a representative of the success of PM Narendra Modi’s Make-in-India initiative, designed to invite investors to produce their products and services in the country. Make-in-India has been this government’s flagship initiative and is used as one of the primary justifications for Modi’s frequent international travels. As of May 2016, the PM has been on 40 different foreign trips to promote Make-in-India, apart from strategic visits under Act East and Neighbourhood First.

While it is true that Make-in-India’s primary goal is to renew interest in the country as an investment destination, it has been also widely advertised by the government as a method to boost employment. Cognisant of the dismal figures in employment generation between 2005 and 2012—wherein only 15 million jobs were added, leaving 50 million youth unemployed—the programme, as per the PM, will increase the pace of employment generation.

But while the programme’s first target is being achieved to some extent, it has been very unsuccessful in creating employment. In fact, in the last quarter of 2015, employment in the eight most labour-intensive sectors had declined as compared to the same period last year. These sectors—which include textiles, garments, BPO, metals and automobiles—only added 1.35 lakh jobs last year, compared to 4.9 lakh jobs in the year before that.

The reason for this disparity is quite simple. According to a Bain India report, of the total $34.9 billion FDI flowing into the country, 60% is in the form of private equity investment (PEI). For the layman, foreign PEI is capital invested in private companies by either high net-worth individuals, private equity firms, angel investors or venture capitalists. These are investments, usually resultant of piqued interest or potential profitability of said company, made to own a piece of the pie (equity). PEI does not necessarily result in job creation.

Private equity deals in 2015 amounted to nearly $22.9 billion, with a 31% increase in the number of deals since 2014. The top-ten PEIs of 2015 account for nearly $4.7 billion, with examples like $700 million in Flipkart or $500 million in Snapdeal. Some supporters of the benefits of PEI will argue that larger infusion of capital will provide means to expand operations and thus add to employment. This argument does have some merit to it, in that some expansion of these firms will result in job creation. Alternatively, companies investing in these firms may evaluate a high profit margin by cost-cutting and reducing jobs. Job creation through this route will never be as clear-cut as it would be if, for example, Boeing’s plans to create a ‘globally-competitive industrial base’ in India through the Make-in-India initiative are successful. In fact, with the declining numbers in employment in the last year and the rise in FDI, especially given the majority of which is through PEI, is proof that very little correlation between such investments and job creation exists.

The silver lining to it all is that India’s investment climate is improving. But the government priority to create jobs, ostensibly on the back of foreign investment in India, will not be achieved if this pattern is to continue. For Make-in-India to be truly successful, ‘Made in India’ must be as important as ‘Own in India’. Without this balance, neither can this initiative nor India have a sustainable future.

The author is an associate fellow  in the economy and development policy team at the Observer Research Foundation

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