Wait & Watch After FDI

Source: The Hitavada      Date: 16 Jan 2018 10:24:00


The Narendra Modi-Government’s decision to go in for further liberalisation of FDI norms will help build optimism among investors that the Government hasn’t lost track of the reform path. But, till the time reforms translate into jobs, Modi Government’s biggest economic challenge will remain.

ONE only needs to wait and watch to see what the recent decision of Foreign Direct Investment (FDI) liberalisation could do on the ground and how early. But, it certainly tells us that the reform juggernaut is rolling, albeit, slowly or with brief pauses. The Narendra Modi-Government’s decision to go for further liberalisation of FDI norms will help build optimism among investors that the Government hasn’t lost track of the reform path particularly against the backdrop of Gujarat poll results.

The decision to let foreign investors take up to 49 per cent stake in Air India, opening up 100 per cent FDI in single-brand retail under the automatic route and 100 per cent FDI via the automatic route in real estate broking services sends out strong signal that the Government is not averse to foreign private money including in the national carrier, which has mostly been a burden on the state-exchequer. One of the reasons why policy makers in developing and developed countries strive to attract Foreign Direct Investment (FDI) is to create new jobs in their economies. But are the jobs created by multinational enterprises good jobs?

Some jobs do more for development than others because of their greater contribution to poverty reduction and, perhaps more importantly, because of their knowledge externalities. If we accept this premise, then developing countries should not only focus on job 2 creation but should also strive to create good jobs. From the worker’s perspective, a good job is a job that leads to a higher standard of living -- that is, a job that provides higher earnings, greater potential for growth in earnings and higher satisfaction. From the country’s perspective, good jobs are jobs whose productivity is above the country’s average, jobs with greater productive externalities, and jobs with potential for productivity growth. Whether jobs created as a result of FDI inflows can be considered good jobs?

Allowing more private investment in the aviation sector particularly in the case of Air India makes a lot of sense. This can let many prospective suitors of Air India such as Vistara, Jet Airways and IndiGo to vie for ailing state owned carrier for a significant stake either solo or in partnership with a foreign airline. Despite its well-known financial problems and operational inefficiencies, Air India remains a favourite for potential buyers largely because almost everyone identifies a future giant in the national carrier if fed properly. The 100 per cent FDI in single brand retail is an encouraging move that’ll give a leg up to Modi’s Make in India plan that is struggling to find its way ahead despite the initial campaign. Big international brands can set shop in India. But, as mentioned in the beginning this announcement reconfirms the confidence that reform juggernaut is rolling again.

After a series of disappointing economic data, this is a confidence-builder for investors in the Modi-Government. Even now, it isn’t quite clear whether, towards the end of its term, this Government will continue to show the political will to progress to more politically sensitive reform hurdles such as land and labour reforms and shaping a clear cut plan to continue with the privatisation agenda in ailing PSUs, particularly among state-run banks.

Except in the initial phase, this Government has done well in keeping the momentum on through a series of incremental reforms originated in the UPA-era (Aadhaar-based direct benefit transfer and subsidy reforms, GST) and other structural reforms such as bankruptcy code, monetary policy reforms and NPA-clean up. Despite a series of disappointing economic data, India continues to be seen as an emerging economic power with a strong growth engine. There aren’t too many economists who are surprised looking at the first gross domestic product (GDP) advance estimate of the fiscal year 2018 at a four-year low of 6.5 per cent.

In a year battered with demand-slowdown, demonetisation impact and goods and services tax (GST) transition pain, GDP was expected to perform badly unless there is a statistical miracle. But, if the growth scene picks up in the second half of the year, this estimate can change. The World Bank believes that India will grow 7.3 percent in 2018-19 and 7.5 per cent in the medium term on the back of revival of private investment as businesses adjust to the shift to GST.

But, till the time reforms translate into jobs, Modi Government’s biggest economic challenge will remain. So far, this Government has not succeeded in creating large number of jobs it promised in the beginning, despite initiatives such as Mudra Yojana, which basically has done what state-run banks and agencies such as SIDBI and Nabard had been doing, to a large extent.

This is where the real challenge lies. In a recent meeting with economists ahead of Union Budget, the big feedback the Prime Minister received was to focus on job creation. More number of people approaching the Mahatma Gandhi National Rural Employment Guarantee scheme might appear as a good sign but it actually tells us that more workers are moving away from factory jobs, which isn’t a good sign in an economy. In the three years of Modi rule, unemployment has actually gone up — in 2015-16 to 5 per cent from 4.9 per cent in 2013-14, the year before the BJP assumed power. The renewed focus on reforms is good but the Government will have to make sure the reform process is structured to focus mainly on job creation.