The Hindu Business Line : Focus on investment that is employment-oriented

There is some good news on the foreign direct investment (FDI front). During the fiscal years from 2000-01 through 2004-05, the annual inflow was of the order of $3 to $4 billion. There was a spurt in 2005-06, when FDI inflow was a record $5.5 billion. It could have been just a flash in the pan, except that the most recent figures indicate that in the first seven months of fiscal 2006-07, the inflow was already $6.1 billion. If the tempo is kept up (and why not?), the inflow for the full fiscal could be around $10.5 billion.

The latest indications on the current account deficit, however, seem to warrant caution. For April-September 2006, the deficit was $11.7 billion, compared to $7.2 billion for the corresponding period last year. This is in spite of the surplus on the invisibles account running into some $23.5 billion. Trade deficit figures were, respectively, $35.1 billion and $27.1 billion, and merchandise export growth rates were 23 per cent and 34 per cent. Despite the deficit, the exchange rate appears to be nowhere near the modest depreciation, largely pumped up by short-term capital inflows, including sizeable inflows into the stock market.

A comprehensive study published in 1999 by the Brookings Institute, Washington DC, looks into the relationship between foreign capital inflows and investment, based on evidence from 58 developing economies.

The authors, Professors Barry P. Bosworth and Susan M. Collins, find that an increase in FDI inflow brings forth almost identical increase in domestic investment, but there is hardly any investment-enhancing impact from portfolio inflows. Though the study is a bit dated, the conclusions appear intuitively appealing. Thus, our strong preference should be for FDI and we need not appear eager to invite foreign investors (including NRIs) to invest in the stock market.

For Employment's Sake

My bias in regard to investments is simple and straight. The nationality or ethnicity of the investor is of no consequence, as long as the investments lead to transparent, sizeable and lasting benefits to the people.

Of course, an implicit assumption is that there is a foolproof regulatory system which ensures that agricultural land is not used for non-agricultural uses and lakes and rivers are not polluted. Benefits must be in terms of employment, direct and indirect. Thus, a mining project may not directly create huge employment but could generate several thousand jobs in upstream industries.

Similarly, there is little permanent direct employment that a national highway could provide, but shops and services are bound to come up along the highway that provide employment to a large number of people. Thus, the highway acts as a catalyst for the growth of industrial and service activities in areas hitherto unconnected and augments further employment.

It is, therefore, desirable that India should focus on attracting employment-oriented investment, which will translate into employment-oriented growth. The preference for employment-oriented FDI is especially justified as India's real resource is in its people, who form a steadily growing pool of diverse skills, talents and strengths.

It is important that the country's human resource capabilities are projected globally in an honest and employment-friendly fashion and the information is available to potential investors.

This is hardly the case. The "Ready Reckoner on Investing in India", available on the Web site of the Department of Industrial Promotion and Policy of the Commerce Ministry, has a section on labour rules/regulations that reads as follows:

"Under the Constitution of India, Labour is a subject in the Concurrent List where both the Central & State Governments are competent to enact legislation subject to certain matters being reserved for the Centre. Some of the important Labour Acts, which are applicable for carrying out business in India, are:

"Employees' Provident Fund and Miscellaneous Provisions Act, 1952; Employees' State Insurance Act, 1948; Workmen's Compensation Act, 1923; Maternity Benefit Act, 1961; Payment of Gratuity Act, 1972; Factories Act, 1948; Dock Workers (Safety, Health & Welfare) Act, 1986; Mines Act, 1972; Minimum Wages Act; Payment of Bonus Act, 1965; Contract Labour (Regulation & Abolition) Act, 1970 and Payment of Wages Act, 1936"

China is a study in contrast. The guidelines for foreign investors provided on the Internet by the Chinese Government in respect of labour laws, taxation, etc., are simple and succinct. In regard to labour and industrial relations, for instance, the English version of the guidelines is just two pages long and has, in all, 16 short paragraphs (for a set of illustrations, see Box).

True, China has the advantage of a vibrant one-party `democracy'. But it is time India's multi-party democracy too finds ways to match the only other billion-plus nation in regard to rules and regulations, skills, attitudes and implementation of rules on the ground.

China's simple rules for JVs

The following are sample extracts from the People's Republic of China's "Provisions for Labour Management in Chinese-Foreign Joint Ventures".

Termination (Article 4): A joint venture may dismiss staff and workers who become superfluous as a result of changes in production and technical conditions if, after training, they cannot meet its requirements and they are not suitable for transfer to other work; but the venture must give them compensation in accordance with the provisions of the labour contract.

Punishment (Article 5): A joint venture may, in accordance with the seriousness of the case, impose necessary sanctions against staff and workers who violate the rules and regulations of the venture and, thereby, cause certain bad consequences. The sanction or discharge must be reported to the department in charge of the venture and the labour management department for approval.

Industrial Relations (Articles 6): If the trade union considers the joint venture's dismissal of or imposition of sanctions against staff and workers to be unreasonable, it has the right to raise an objection and to send representatives to resolve the matter through consultation with the board of directors; if the matter cannot be resolved through consultation, it shall be handled in accordance with the procedures set forth in Article 14 of these provisions.

Wage Fixation (Articles 8): The wage levels of the staff and workers of joint ventures shall be fixed at 120 to 150 per cent of the real wages of the staff and workers of state enterprises in the locality in the same line of business.

Industrial Relations (Articles 14): Labour disputes that occur in a joint venture shall first be resolved through consultation between the two disputing parties; if consultation cannot resolve the matter, one or both parties to the dispute may request arbitration by the labour management department of the people's government of the province, autonomous region or municipality directly under the central authority where the joint venture is located; if one party does not accept the arbitration award, it may file a suit in the people's courts.

(The author, formerly with the National University of Singapore and the World Bank, is Professor Emeritus, GITAM Institute of Foreign Trade, Visakhapatnam and Visiting Faculty, Sri Sathya Sai Institute of Higher Learning. He can be reached at bhanoji@gmail.com.)

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