The FDI Conundrum

Gyanendra Kumar Kashyap

It was on June 27, 2012 that the government criticized for its inability to push through reform measures decided to ‘reverse the climate of pessimism and revive the animal spirit in the country’s economy.’ Cabinet reshuffle and the so called ‘BigBang’ reform measures announced on September 14, 2012 which allowed for opening  the doors for greater flow of FDI are attempts to bolster economic growth and make India a more attractive destination for foreign investment. Despite the debate and logjam in political circles, India Inc. is upbeat and is hopeful that the measures announced would start showing positive results in the next 18-24 months. Questions on the impact of FDI in the context of productivity, economic growth, employee-employer relations, talent deficit, and infrastructural bottlenecks are being raised as well as addressed. Thus, it becomes all the more important to have a conversation on FDI & what it means for sectors that will probably benefit from it. 

The Indian landscape is not new to FDI.  Automobile, Telecom and IT/ITeS serve as excellent examples of what capital and technology infusion can have. Be it in term of employment generation, contribution towards GDP, providing more choice to consumers and of course raising the productivity of these sectors and making them globally competitive; the impact of FDI is for all to see. Dr. Varun Agarwal and Mohd Aamir Khan in their study, “Impact of FDI on GDP-A comparative study of China and India”, International Journal of Business & Management, October 2011, conclude that their study “confirms FDI promotes economic growth, and further provides an estimate that 1% increase in FDI would result in 0.07% increase in GDP of China and 0.02% increase in GDP of India.”

Perhaps, these served as the background for the recent decision to allow FDI in some sectors (aviation, pension etc.) and increase the cap on others (retail and insurance). In essence FDI will provide for both capital and technology. Capital on its part will help build up the productive capacity in the economy, and providing advanced technology and organizational know-how will help increase the efficiency or productivity of investment. For instance, a general observation is that India has low productivity of food grains and an inefficient distribution system. Increasing the scale of investment in organized retail will enable increase in productivity and distribution efficiency. For the insurance sector, this could provide the private insurers the necessary financial wherewithal to reach out to untapped markets. FDI in aviation will give the much needed breathing space for players.  Apart from these, a higher share of FDI is expected to increase market competition thereby raising competitiveness in terms of products and service offerings.

Retail:

As far as the retail sector is concerned, there is a need to compress the market chain and reduce the ‘distance’ between the farmer and the consumer; build a modern, integrated logistical chain involving grading, transport and storage; and add value to perishable commodities to reduce volatility and create wealth and jobs. All these things need investment, infrastructure, technology, management practices and deep pockets. Capital infusion in the form of FDI is one possible answer. An important aspect is the governments move to move to make it mandatory for multi-brand retailers to invest $100 million with at least half the money being compulsorily spent on back-end infrastructure, in the first three year of operations. While foreign players have expressed their apprehension on this, the proponents feel that the move will improve back-end infrastructure. It is to be noted that though India allows 100 percent FDI in cold storage, this has not evoked much of a response in the absence of FDI in multi-brand retailing. A better infrastructure is expected to increase productivity and distribution efficiency by minimizing the role of intermediaries and link the farmers directly to consumers. It will strengthen rural-urban linkages, encourage agro-processing and check post-harvest losses.

Retail (organized and unorganized) provides employment to about 40 million people in India. The government claims that FDI in the retail sector is likely to create as many as 10 million jobs in a span of 10 years, making it the largest sector in organized employment.  For instance, entry level jobs profiles - sales, supply chain executives, security personnel, attendants, in-shop supervisors, floor managers and warehouse supervisors are likely to see significant increase in demand. The present guidelines ensure that FDI in multi-brand retail must domestically outsource 30 percent of the finished products sold in the market. This will help build domestic capacities in manufacturing, create jobs and help build quality human resource. Given the skill/talent deficit, this implies that the new set of retailers will have to invest in training and skilling the manpower – quality controller, standardizer, certification agency, processor, packaging consultants etc.

Insurance /Pension:

The capital intensive insurance sector, which allows for 26 percent FDI, is crunched for money. It is expected that of the announcement to increase the cap to 49 percent can muster the support of the parliament then it will usher in capital infusion to the tune of Rs. 30,000 crores over the next five years. Besides providing capital to the bleeding insurers, the decision will also pave way for new players. The biggest advantage of increasing FDI limit will be to grow the industry by increasing customer penetration with a range of products that are focused on today’s uninsured.  Given the lack of legislative action, many a private players are not very upbeat about the decision, pointing that other avenues such as listing are available to raise capital.

According to Department of Financial Services, just 12 percent of India’s active workforce has a formal pension or social-security plan. The intention behind the pension bill – and allowing greater foreign investment in the pension sector – is ultimately to entice more Indians to open retirement-savings plans.  Given the current structure of India’s pension sector, whereby the majority of such assets are managed by a government agency, the Employees’ Provident Fund Organization, foreign players would not be very interested. Add to this the risk averseness and preference to put money into gold and property or in bank deposit. Yet analysts believe that foreign money managers will invest in India anyway, betting on the growth potential of the sector. Perhaps it is too early to figure out whether or not foreign investors will make a real impact on increasing India’s pension assets.

Aviation:

FDI in aviation is expected to bring in much-needed long-term financial and strategic capital and expertise. However, the real question that seeks attention is that why would foreign investors sink money in order to revive Indian carriers with losses running into thousands of crores? Take for instance, in the last reported financial year (2011-12), Jet Airways, India’s largest carrier by market value, reported a loss of Rs 1,236 crores. The Kingfisher’s losses stood at Rs 2,328 crores while Spicejet posted a loss of Rs 605 crores. On top of it, Jet, Kingfisher and Spicejet’s balance sheets are highly leveraged with debt of Rs 13,500 crore, Rs 7,057 crore, Rs 860 crore respectively.  If foreign investors decide to invest, it is the bakers who have lent money to the sector will be happy. What further renders a grim look to the whole sector is the restrictive and retarding environment in which airlines have to operate. Even International Air Transport Association (IATA) has expressed its reservation stating that unless issues of high taxes and infrastructure costs are addressed, sector may struggle to take-off despite allowing FDI. Domestic carriers like Indigo and Jet who have made the most of the fall of Kingfisher and Air India believe that the FDI decision will hamper growth of the airlines.

On the positive side, if foreign investors post their assessment decide to put their money it would help the domestic players to acquire more aircrafts, add more to its existing route, invest in employing & training pilots, technical staff and crew members.  And of course a few domestic carriers would be in a better financial health to pay salaries (pending for months) to employees. New routes provided the government sorts out the policy and infrastructure reforms, besides providing better connectivity would spur economic activity and new businesses.

A few concerns

Focus on human capital development: While FDI inflows create a potential for spillovers of knowledge to the local labor force, the host country’s level of human capital determines at the same time, how much FDI it can attract and the extent to which the local firms can absorb the spillover techniques. FDI is complementary with human capital, that is, human capital needs to be above a certain threshold for FDI to be more productive than domestic investment. Though FDI may bring with it advanced technology and techniques, India needs to have sufficient absorptive capacity, in terms of qualified people, to benefit fully from it. Without a sufficient level of human capital, the country will not have the absorptive capacity to take full advantage of FDI. Given the skill deficit, it makes for a case that India should create a supportive environment of innovation and skill upgrading. Companies on their part need to invest in training and education and put greater stress on skill building.

 Labor laws: Labor laws fall under the jurisprudence of state governments in India.  Thus, states may use labor laws as instruments to attract (or deter) foreign direct investment.  Depending on the political nature of the government in power, states pass amendments to labor laws that are either more pro-worker or more pro-employer. This may affect outcomes of collective bargaining, disputes, and strikes. Given costs of locating in India (exit barriers, lack of adequate infrastructure, and other factors), it is likely that foreign firms will veer away from states that have high incidences of labor conflict, particularly as measured by the number of man-days lost due to work stoppages translating into higher production costs, low productivity, and thus, reduced profits. Nidhiya Menon and Paroma Sanyal in their work, “Labor Conflict and Foreign Investments: An Analysis of FDI in India” conclude that since FDI brings significant positive benefits, from a purely economic perspective, it may be prudent for state governments to try and reduce the incidence of labor disputes.

FDI, though welcome, is certainly not a panacea; it is important to have in place measures that address infrastructural hurdles and business –unfriendly environment. 

The Yawning Skills Gap in India

Gyanendra Kumar Kashyap 

India, one of world’s fastest growing economies and home to one of the world’s youngest population faces a unique and paradoxical problem. While it has the numbers in terms of manpower, that manpower lacks skill and training. It is specifically this very point that the 2005 study by software lobby Nasscom and consultancy firm McKinsey & Co - just one in four engineers was employable, or could be trained for a job - jolted India out of its reverie on employability. However (late) Dr. C K Prahlad’s prediction in 2007 that a double digit growth in India will see light only if the country is able to make available 200 million graduates and 500 million skilled people by 2022, provided the much needed breather. Today the government as well as the industry shares the same view. India’s GDP growth is still expected to range between 6%-7%. The domestic industry is growing and several international companies are setting up base in India; propelled by the sheer market size. This tremendous growth has increased the demand for labor – skilled labor. Considering the demographic dividend that India enjoys, it is apparent that one would expect that this requirement of a large pool of skilled labor to be the least of all the bottlenecks. However the irony is such that a number of industries are struggling to achieve their growth targets because of shortage of skilled labor.

The awakening:

As India moves progressively towards becoming a ‘knowledge economy’ it becomes increasingly important that the country should focus on advancement of skills  and these skills have to be relevant to the emerging economic environment. The key emphasis has to be on ‘employability’. Though India churns out a large number of educated people every year, they lack the ‘skills’ to make them readily employable. They have to be trained again. Therefore, while in absolute number, there is surplus supply of manpower, in the crucial ‘skilled’ and ‘qualified’ segment, there are acute shortages. These shortages if not addressed properly can lead to a slowdown in the country’s economic growth. In order to achieve the twin targets of economic growth and inclusive development, the country requires significant progress in several areas, including infrastructure development, agricultural growth coupled with productivity improvements, financial sector growth, a healthy business environment, ably supported by a skilled workforce.

Currently, 90 percent of the jobs in India are ‘skill-based’; entailing the requirement of vocational training. This is in contradiction to the fact that only 6% of the Indian workforce receives any form of vocational training. As per industry statistics, only 25 percent of technical graduates and 10 to 15 percent of general graduates have the necessary skills for immediate employment. The education system churns out students that are not immediately employable and skill up-gradation on the job is low; implying that a large section of the currently employed labor possesses outdated skills. This has in a way created an undoubted necessity to scale up vocational education to cater to India’s demand for higher economic growth, demographic changes, and the obvious demand-supply mismatch in available skills in many sectors.

A well-intentioned initiative/ The positive vibes:

The growth prospects of the Indian economy depend to a large extent on how the country tackles certain issues of intellectual capital today. The concern largely centers on the much-debated demographic dividend, or the rising proportion of working-age people in India. Faced with the twin challenge of unemployment and job creation, the Central government’s biggest concern is not just how it can boost new opportunities for India’s burgeoning population of young people, but also how it can overcome the acute shortage of skilled labor. The good news is that the government of India has undertaken a series of initiatives almost on a war footing in the past few years. The government has set itself an ambitious target of training 500 million people by 2022 in its National Skill Development Plan (NSDP). Some of the clear and far-reaching outcomes from NSDP are to look at increasing the capacity and capability of the existing system. This was proposed to be done with multiple, wide-ranging initiatives. Key amongst these are PPP (public private partnerships) to complement private investment in this space, the setting up of a National Vocational Qualifications Framework (NVQF) and establishment of National Skill Development Corporation (NSDC) to foster skill training in the identified sectors.

To this end the National Skill Development Corporation (NSDC) has been entrusted with skilling 150 million people, the ministry of labor and employment (MoLE) has a target of 100 million, the ministry of human resource development (MHRD) 50 million and the rest of the 200 million among 17 other ministries.

The industry’s participation:

To a large extent the industry is the victim as well as the culprit when it comes to the scarcity of skilled workforce. However there is a palpable trend in India Inc., starting to train its people on a scale large enough to alter the nation's future. Dozens of training companies with ambitions of training millions in engineering, construction, manufacturing, retailing, insurance, banking services including microfinance, accountancy, hospitality, health care and other vocations are sprouting up around India. For example, education company Core Education and Technologies Ltd.,  plans to invest at least Rs.225 crore to open a chain of vocational education institutes across India to train some three million people over the next five years. Further there are seasoned players like Centum that bring to the table both backward and forward linkages. They work with companies to understand their skill set requirements over a period of time and then work backwards and decide what courses should they launch and where should they open new training centres.

Not only this, there are a number of private firms across industry verticals that are adopting ITIs. For instance, Maruti Suzuki India Ltd.,  is adopting 40 state-run technical schools to create a customized labor pool it will need to fuel its Rs. 18,000 crore expansion in Gujarat. The ITIs, mostly in northern India, will not only ensure a steady supply of trained personnel to the auto maker, but also to its dealers and vendors such as Sona Koyo, Amtek Auto Ltd and Rico Auto Industries Ltd. In fact the ITIs adopted by various companies such as the Taj Group, Hindustan Unilever Ltd, Videocon Industries Ltd, India Cements Ltd and Punj Lloyd Ltd have shown to have better placement record. This is primarily because in such cases ITIs get better infrastructure, contemporary curricula in sync with the industry demand which consequently also improves their placement record. As facts would have it, the adoption of government ITIs is a win-win situation as it helps the cause of modernization, and from the company perspective, it helps them to get a customized workforce.

The government’s well intentioned initiatives as well as India Inc's newfound push on skilling could help it follow the footsteps of its South Korean or even German peers where an intense vocational focus in education and training helped the countries rapidly expand their economies. If the dozens of training institutes mushrooming in India can deliver it a skills edge, the country could reap benefits of its demographic dividend. On the contrary, if it fails, India better get ready to deal with a demographic debt or in a worst case scenario a demographic disaster. But at this juncture failure just cannot be an option for India. 

The academia – industry alignment:

Education, broadly speaking, equips or should equip an individual for the world in which s/he has to operate and successfully so. In the light of this, education as it is falls short of empowering the youth for the competitive market scenario. As studies suggest, only a part of graduates are employable out of the enormous volume of the output of educated youths. If education has to strengthen its role and remain relevant to the world, it will have to render skills development an integral part of its endeavor. The challenge of skilling / up skilling 500 million by 2022 will require both fundamental education reform across primary, secondary and higher education and significant enhancement of supplementary skill development.

In India, approximately 12.8 million people join the job market every year. The current skill capacity of the country is about five million - a deficit of more than seven million annually. To add to the woes is the quality of training, which has limited industry linkages and fails to meet the industry standards. As the gap between skills, employment needs and the quality of the output continues to widen, there is a need for drastically different strategy to bridge this gap and a need for the intervention of the government, academia and industry. Thus, the curriculum for training and skill development, which is critical for providing decent employment opportunities, has to be evolved in consultation with and active involvement of the industries which require the manpower. An industry-academia team must be in place which understands the industry needs and thereby factors this in the teaching and curriculum.

Change of hearts / the mind shift:

There is an obvious and widening disconnect between education imparted to the youth and the market requirement and demand. While education imparts one kind of training to them, industry and markets are looking for another kind of skills set in the job seekers. As a result of this - the degree holders are seeking jobs while there is manpower crunch and degree holders are being denied the jobs. This paradoxical situation is in a way reflective of the obsession with degrees and the white-collared jobs that they potentially secure. The importance and hence the acceptance of vocational education has been clearly undermined.  As a matter of fact formal education system in India still remains divorced from any sort of vocational education or training.

Skills development is going to be the defining element in India’s growth story. There is a need to re-define the relationship of education, employment and skills development. Often vocational education is even dismissed as good education. People perceive vocational education as something which one pursues when one cannot get into a mainstream course. It is believed that a vocational course takes one to a shop floor while a graduation will leads to a good office. All this has to change and people’s perception needs to undergo a change.

The change in perception is all the more important as the prevailing higher education system in India is not churning out skilled individuals and thereby affecting the employability quotient. There is also a dearth of quality institutions as compared to the number of students coming out of secondary schools and joining higher education. Thus, in such a scenario, vocational education can prove to be a lucrative option for students as it will skill them and provide them with jobs.

This can be brought about only when there is proper recognition for the various courses and acceptance of the same by the industry. Further vertical mobility options for students opting for vocational education at the UG and PG level is also essential failing which students may not prefer it at the school level.

The way forward:

In the present context of continuing demographic dividend the unique problem facing the country is that of labor surplus and skills scarcity. The International Monetary Fund’s April 2012 Regional Economic Outlook: Asia and Pacific, “Managing Spillovers and Advancing Economic Rebalancing”  categorically states that India’s continuing demographic dividend can add about 2 percent to the annual rate of economic growth, if harnessed properly. Hence, if India is to maintain its growth and prevent the economy from derailing the ‘skill gap’ issue has to be addressed immediately.

The government is keen on encashing this demographic dividend. The Budget for 2012-13 has doubled allocation under the National Skill Development Fund (NSDF) to Rs 1,000 crore, raising the corpus of the fund to Rs 2,500 crore. Besides this the launch of credit guarantee fund and exempting vocational training institutions from service tax will make skills training affordable. While the 500-million target is stiff, experts in the field believe that it is achievable.