When Global Firm Disengage,Employment Suffers

Context: Heavy reliance of India on inward Foreign Direct Investment (FDI) for job creation resulted in unsustainable and low-quality jobs.

Major issues concerning Indian economy

• Rise in unemployment: Centre for Monitoring Indian Economy (CMIE) data 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.
• Concerns regarding quality of jobs: As much of the labour shed by agriculture has been absorbed in low-end activities such as household sector.
  • Non-Availability of sufficient Jobs in manufacturing sector: As the sector shed 0.94 million jobs.
• Low level of investment in economy: Private investment flow remained low, which is affecting employment and demand scenarios.

Policy response: Resorting to Foreign Direct Investment (FDI) by making ‘ease of doing business’ more enticing. Inward FDI does generate jobs both directly and indirectly through an increase in production activities. 

Issues regarding FDI-dependency for economic growth

• Challenge of exit disruptions: Firms exit from an erstwhile location when they find other lucrative opportunities. This leads to

• Unsustainable employment: Exit of Ford, Nokia, and CitiBank from retail market would release a large number of employees, who would be in search of jobs that are hard to find.
• Creates Apprehension among Potential Greenfield Investors leading to wait and watch approach, slow employment growth and leveling down of wages.
• Mismatch of Jobs in Labour Market: Due to destruction of jobs, highly skilled workers compete with fresh entrants, creating a mismatch in labor market leading to leveling down of wages.

• Uncertainties due unpredictable policy environments: Due to global corporate restructuring and changes in economic environment in the lead firm’s home economy.

• New trends in globalisation: Frequent global production re-arrangements becoming a part of the strategy of big firms, as markets tend to be more volatile due to repeated demand fluctuations.
• These challenges are further heightened by growing scepticism towards more open trade policies and the rise of protectionism.

 Conclusion: Considering the challenges and uncertainties, India’s policy response shall focus on stepping up domestic capital formation and private investments.