The priority of the country is to increase manufacturing… which has a multiple employment effect of 1:4, which means for every one job created four ancillary jobs are created
The easing of foreign direct investment rules for 12 sectors, including telecom, refineries and commodity exchanges etc., is a measure of the government’s commitment to focus on attracting FDI rather than depending on inflows of foreign institutional investors to cover its burgeoning current account deficit. The CAD is currently estimated at $87.9 billion for 2013 and the FDI received is around $20 billion.
Whilst the government move is welcome in these sectors and everyone will be awaiting its actual implementation, these sectors are unlikely to generate a huge number of jobs. Most of these sectors, except for defence production, are in services, and, considering the country’s need for jobs, Tuesday’s move is not in sync.
The government should go much further and attract more FDI in the manufacturing sector, in areas where India does not have high-end technology. According to the department of industrial policy and promotion, the country received $194 billion in FDI equity since 2000 of which barely 28.29 per cent, or $54.9 billion, was in manufacturing. The chunk was in the services sector — banking, insurance, couriers etc., followed by real estate, telecom and hardware/software. Together these accounted for $84 billion.
What the government has done on Tuesday is to just facilitate further investment, primarily in the services sectors, by raising the cap in some cases and letting others come through the automatic route, bypassing the Foreign Investment Promotion Board. This will not bring fresh investment in fresh sectors.
The priority of the country is to increase manufacturing, as enunciated by both Prime Minister Manmohan Singh and Union finance minister P. Chidambaram; and to increase employment opportunities and increase exports/reduce imports to cover the CAD. According to an Exim Bank study, manufacturing has a multiple employment effect of 1:4, which means for every one job created four ancillary jobs are created. In the services sector it is 1:2 or 1:3.
The government would do well to think in terms of giving a tax holiday, or other fiscal incentives, to attract FDI in the manufacturing sector where India lacks high-end technology. It should add value so that the products can be exported and India can also become a hub for the global export of these items. This is in addition to the imperative to boost domestic manufacturing by providing legitimate protection against unnecessary imports. If the US can prevent immigration of people to the US, there is no reason why India should fight shy of preventing migration of goods and services into the country by increasing duties in areas demanded by manufacturers.
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