BUSINESS: INDIA'S FDI PARADOX, INEQUITABLE GROWTH

by Vinta Nanda July 22 2024, 12:00 am Estimated Reading Time: 4 mins, 35 secs

Understanding the Paradox of FDI-Driven Growth in India: Why Employing Labor at International Rates is Key to Equitable Development. Vinta Nanda finds out…

Photography: Vinta Nanda

India's rapid economic development over the past few decades has been significantly influenced by Foreign Direct Investment (FDI). While FDI has boosted GDP and created numerous jobs, the quality and type of these jobs remain concerning. The paradox of FDI-driven growth in India results in educated youth seeking jobs abroad and unskilled labour enduring poor wages due to systemic corruption, lack of political will, and socioeconomic inequalities. This article attempts to understand why employing Indian labour at international rates is crucial for equitable growth, drawing insights from prominent economists like Amartya Sen and Raghuram Rajan who advocate against crony capitalism and for inclusive development.

Countries like India often find themselves in a trap where educated youth seek jobs abroad while unskilled labourers endure poor wages due to a complex interplay of systemic corruption, lack of political will, and entrenched socioeconomic inequalities. Corruption skews the labour market and economic opportunities, prioritizing connections over merit. This results in a lack of transparency and accountability, which impedes the ability of educated individuals to find suitable employment domestically. As Nobel laureate Joseph Stiglitz notes, "Corruption undermines economic development and exacerbates inequality, allowing the elite to consolidate power and wealth at the expense of the broader population" (Stiglitz, "Globalization and Its Discontents").

The lack of political will to implement fair wage policies and robust labour laws further aggravates this situation. India's demographic dividend, often touted as a significant advantage, can turn into a demographic trap if not managed properly. This resistance from the wealthy elite, who benefit from maintaining the status quo, perpetuates a cycle of inequality. Amartya Sen has consistently argued for the need to invest in human capital—education, healthcare, and skill development—to transform the demographic dividend into a genuine economic boon. He warns, "Crony capitalism and corruption are major obstacles to achieving inclusive development" (Sen, "Development as Freedom").

Similarly, Raghuram Rajan has been a vocal critic of crony capitalism, emphasizing that sustainable economic growth requires fairness and efficiency in the market. Rajan argues, "Crony capitalism is harmful as it skews the level playing field, favouring certain businesses over others and leading to inefficiencies and economic distortions" (Rajan, "The Third Pillar: How Markets and the State Leave the Community Behind"). He advocates for reforms that promote transparency, accountability, and fair competition to ensure that the benefits of economic growth are widely shared.

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India's attractiveness as an investment destination largely stems from its vast pool of cheap labour. This advantage has led to the establishment of numerous low-paying jobs, particularly in sectors like manufacturing and services, where cost competitiveness is key. According to the India Employment Report 2024, around 90% of India's workforce is engaged in informal employment, greatly characterized by low wages and poor working conditions (Drishti IAS) (PWOnlyIAS).

While these jobs contribute to GDP growth, they do not necessarily translate into improved living standards or equitable growth. The organized sector, which offers better pay and job security, employs only about 10-15% of the workforce (Drishti IAS) (Wikipedia). Consequently, most well-educated Indians find themselves either unemployed or underemployed, seeking opportunities abroad. According to the India Employment Report 2024, nearly 83% of India's unemployed population are youth, with a substantial proportion being well-educated. Specifically, the share of young people with secondary or higher education among the total unemployed has risen dramatically from 35.2% in 2000 to 65.7% in 2022 (LiveMint) (Drishti IAS) (Business Standard).

The prevalence of low-wage jobs has broader socio-economic implications. It exacerbates income inequality, as the benefits of FDI primarily accrue to business owners and investors. This scenario aligns with the observations of economists like Thomas Piketty, who argue that when capital income grows faster than labour income, wealth inequality increases (PWOnlyIAS).

Attracting investment by offering cheap labour is a short-term strategy that can undermine long-term economic health. Indian labour should be employed at international rates to ensure sustainable and equitable growth. This approach would not only improve living standards but also enhance the quality of the workforce, making India a hub for high-value industries. Joseph Stiglitz has also criticized the race to the bottom in labour standards, arguing that it leads to exploitation and hampers genuine economic development. He advocates for global labour standards that ensure fair wages and decent working conditions.

To achieve equitable growth, India must shift its focus from attracting investment solely on the basis of cheap labour to emphasizing efficiency. Economists like Raghuram Rajan have highlighted the importance of creating a conducive environment for businesses to thrive while ensuring that workers receive their fair share of economic gains. He emphasizes the need for a balanced approach that promotes both growth and equity.

Today, India stands at a crossroads where it must choose between a model of growth driven by cheap labour and one that promotes equitable development through fair wages and quality employment. Attracting FDI based on efficiency and quality rather than low costs is essential for achieving sustainable economic growth.

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