Article: FDI Is Not a Zero-Sum Game, It Will Generate Jobs


FDI Is Not a Zero-Sum Game, It Will Generate Jobs

Santosh Mehrotra, Director General, Institute of Applied Manpower Research
FDI Is Not a Zero-Sum Game, It Will Generate Jobs

The recent reforms have spurred animated discussions in all corridors of industry and government and everyone is wondering what is round the corner. Will organized retail really contribute to the country’s infrastructure and create the number of jobs that are being talked about and if there will be an employment surge; does the country have required skill sets? Are the apprehensions about kirana stores shutting shop true? The reality is likely to be that, in organized retail there will be neither a decline in employment, nor there will be a jobless growth. In fact it is going to generate new jobs. There is no zero sum game here. An increase in organized retail turnover does not mean that there would be a loss of jobs in the unorganized retail sector. The economy is growing, resulting in a widened middle class. Please note organized retail would only be in urban areas. There is a consistent process of urbanization and increase in income taking place across all sections of the society. Real wages for both casual worker wages as well as regular employee salaries increase. The size of the total retail market is at least $400 billion, and estimates say that it will go up to $650 billion in the next ten years. The current share of organized retail in the total retail pie is 6 percent as compared to the 20-25 percent of China, Malaysia and so on. And within the next ten years even if we manage to double the turnover share of organized retail from 6 percent to 12 percent it will be a huge increase, still it would be nowhere close to the 20-25 percent of China or Malaysia. The point to be noted here is that even when organized retail grew in China & Malaysia etc, very few mom & pop stores were closed. If anything, mom & pop stores are going to benefit as they can buy at lower prices from the wholesale cash & carry store, and sell it at a markup to customers. The bottom-line is that the size of the pie is going to increase and assuming organized retail is going to increase its slice from 6 percent to 12 percent still 88 percent to 90 percent (It is an offhand number) is still with unorganized retail sector.


NIC 1999-2000 2004-05 2009-10
 Source: NSS various rounds
  Total Unorganized Organized Total Unorganized Organized Total Unorganized Organized
50 sale of motor vehicle/fuel 2.05 1.84 0.21 2.69 2.4 0.29 2.49 2.01 0.48
50 Wholesale trade 3.56 3.13 0.43 5.44 4.74 0.7 5.32 4.51 0.81
52 Retail trade 31.02 29.32 1.69 35.23 34.28 0.95 35.72 34.03 1.7
Trade and Repair 36.63 34.3 2.33 43.36 41.43 1.93 43.53 40.55 2.98


Trends in employment in retail show important trends (see Table 1). We focus on the second of the decade of the 2000s. It shows that when organized retail employment grew by a million, unorganized retail employment showed a slight decline of under 200 000 workers. When organized whole trade was growing, there was a slight decline in employment in unorganized wholesale trade. This may be consistent with the ICRIER study of 2009 that suggested that there are some small impacts on unorganized trade employment of organized trade increase in employment. But the most important point is that in the period of the fastest growth of organized retail trade, there was an overall increase in employment in retail trade, organized and unorganized taken together. In other words, it may not be unreasonable to suggest that those losing jobs in unorganized retail were finding them in organized retail.

In retail, or even in other sectors, we do not have the required number of skilled people at present; however the process is in place and it is improving. The private sector is responding to where the demands are for skill providers. Skill provision is emerging as a business in itself. Let me give you some concrete examples which are taking place on a nationwide scale. The number of private Industrial Training Institutes was under 2,000 in 2007. In the last five years the number of private ITIs has gone up to around 8,000. That is the number of approved ITIs by the National Council of Vocational Training. In addition within the last 2 and half years we have seen the National Skill Development Corporation (NSDC) incubating private firms which are providing vocational training outside of firms, e.g. manufacturing firms or services sector firms. The pure business model of providing training to earn profit is emerging.

NSDC is helping to incubate vocational training firms across a large number of sectors and sector skill councils are being created including in retail. One of the functions of these private sector bodies, supported by NSDC, is to provide the facilitation to incubate more private sector providers of Vocational training. NSDC supported firms are now training around 118,000-138,000 people in a year. Number of Vocational Training Providers or partners as NSDC calls them, are growing consistently. NSDC itself is a public-private partnership, 51 percent equity owned by FICCI, ASSOCHAM & CII and 49 percent by govt. These are a few major examples of the change in the supply side scenario of skill producers. Whether it will meet the requirement or meeting the requirements is actually difficult to say, because one of our data gaps is the skill data gap itself. We don’t know on a robust basis where the gaps are with regards to skill. How much is being demanded by the industry, who are the vocational training providers in the country and how many are they training – these things are not known yet on a firm basis. In fact, if we really want to move forward we need to do a thorough skills gap analysis as a nation. Although NSDC claims that it has begun an analysis; however I don’t think that their analysis can give robust answers. Unfortunately there are too many different numbers being used by people in this line of business which have been derived based on questionable assumptions or a weak basis of hard data. Let me give you a remarkable example. Prof C.K Prahalad came up with a number 4-5 years ago, “India needs to train 500 million additional people by the year 2022”. Prof Prahalad had probably never dealt with National Sample Survey data. The point is he was probably not even aware that in 2010 our total labor force was 470 million. By 2022 we have estimated for the 12th Five Year Plan that the size of the labor force will be no more than 550 million people. If I wanted I could rest my case now, but I wouldn’t. I would go on to demonstrate even further, how unfounded his numbers were. If 550 million will be the size of labor force then, then he assumed that everyone including every farmer needs to be vocationally trained. It is an untrue, these are farmers who know what they are doing, and they have been doing it for generations. They may need advice, counseling, facilitation, but I am not sure that they need training. As of now there are 238 million employed in agriculture and there would be some, but not a significant decline in these numbers even by 2022. In the last decade (2000-10) the share of agriculture in the total labor force has decreased from 60 percent to 53 percent. Let us assume that the share of agriculture will drop much faster in the current decade, the best case scenario is that it will drop to 40 percent. That will still leave 220 million of people in agriculture. That is not much of an absolute decrease in the number in agriculture from its absolute level in 238 million in 2010. So clearly the point is that the 500 million additional to be trained is completely off the mark.

The government of India in its Skill development mission five years ago went around allocating the 500 million additional to be trained (as indicated by Prof Prahalad) to various ministries. NSDC was allocated was 150 million to be trained in the next 10 years. Ministry of Labor was allocated a 100 million; Ministry of human Resource Development was allocated 50 million, and the remaining 200 million was allocated to the remaining 15ministries that undertake skill development programmes in the Government of India. The current capacity of all public and private vocational training providers is estimated to be 4.5 million per year. First arrive at an incredibly large (and wrong!) number to be ‘skilled’, and then set targets based on that rather fictitious number, is not the best way to plan the future of skill development in the country.

NSDC had done some estimates four years ago for numbers requiring to be skilled, based on ICRAs estimate for FICCI on the basis of a variety of macroeconomic assumptions, for about 20 sectors, and the sectoral skill gap adds up to around 370 million till 2022. If you change a few assumptions, the numbers would change completely. Hence, I am sorry but these numbers also lack robustness. We have done our own estimate, starting with National Sample Survey data, regarding how many people are currently formally trained vocationally, how many are informally trained, currently in the labour force and those who are still in education (but belong to the age group 15+). So we estimate the following on the basis of robust NSS data:

- What is the current number of people who have been formally vocationally trained?
- What is the number of people who have formal technical education in 18-22 age group?
- What is the number of people in the work force who have more than 10 years of education?

The economy needs all kinds of workers, people with technical diplomas and above, people with vocational training in the age group 15-18; it also needs people with secondary general academic education, and also those without less than secondary education. On the basis of these three categories we have estimated for agriculture, manufacturing, non-manufacturing industry (i.e. construction, mining, electricity, water), and services, and the global number which we have arrived at is 265 million additional persons to be ‘skilled’ (as defined by those 19-22 year olds with technical education (diploma and degree), 15-18 year olds with vocational training, and over 15 yr olds with at least secondary general education) till 2022, i.e. the end of the 13th plan (over the next 10 years)

The important and interesting thing is that our number of 265 million needs to be disaggregated at state level and sector level, and all of that requires much more detailed state level, district level surveys which we will now launch, so as to come up with reasonably robust numbers. A proper skill gap analysis needs to have answers to two questions. One is what is industry saying about how many people they need and that alone requires a large body of research. Second is how many people are being trained today because the number of vocational training providers is growing day by day. There has to be a Labor Management Information System in place which enables us to collect this number on a regular basis in the public domain. Our objective is to put together this structure of information which is then available to be used by industry for its sectoral and geographic needs and also those who are in the need to acquire training.

Not only the 500 million number defies credibility, the 370 million is equally questionable. Even our 265 million, although being sounder, and much more robust, can’t be the basis of planning at the industry level, sectoral level, state level etc. More work needs to be done, but based on a robust methodology, which we in my institute have already arrived in a pilot research project in two districts of India (for the NSDC).

There is another challenge if skill development capacity is to be enhanced: ensuring vocational education, involving the private sector, should be introduced quickly in our secondary schools. I led the task force for Ministry of Human Resource Development for vocational education and the qualification framework for the country for vocational education and one of the outcomes of our blueprint is that vocational education from class 9 on has already been accepted as a national policy and is reflected in the 12th five year plan. Vocational education is going to grow bigger and bigger in the secondary school system, in fact as of now it has been practically absent in our school system. In the government schools itself 150 courses are being offered. Vocational education of many more types including retail will be offered from class 9 onwards. People will have an option to take up vocational education as opposed to simply continuing with regular education, in school, not just in ITIs.

The educational system needs a revamp. The revamp has begun and resources will get pumped in for vocational education. The challenge before industry and private sector in particular is to come on board, and provide the trainers, engage with the school system, help design curriculum, and internship so that the students can be readily absorbed, instead of industry saying that the students are not employable. Industry is aware that the German dual system of education (involving both vocational education plus practical training in-firm by industry) is one of the best in the world; but it is founded upon industry itself being willing to pay the cost of training the youngsters. The German government’s share of total expenditure on vocational education and training is only 16 per cent of the total; the private sector meets the rest, and everyone benefits: industry, the students and the country. Germany remains one of the most competitive manufacturing countries in the world, even in a time of economic crisis.

There are a number of reasons why input costs for services and industry are rising, but rising wages is one of them. Real wage rates (after adjusting for inflation) have risen at the lower end of wage distribution as well as the top end of the wage distribution.

The probable reason for rising wage rates at the lower end of the skill distribution is the following. In 2006 NREGA came in and gave an alternative employment to the landless laborers. The wages offered by NREGA were not only higher than the rural open market, but also the wages offered to both male and female laborers was equal, which was not the case in rural open market. The increase in opportunity closer to home decreased migration from rural to urban areas. This resulted in the tightening of the labor market in urban areas which, which together with the rise in rural wages, translated into higher wages in the urban areas for the unskilled labor force. This was an example of the upward wage pressure at the lower end of the wage distribution. Unskilled wages rose in urban labour markets because of the dual effect of tightening labour market and rising wages (both emerging out of rural India and NREGA).

There is also a rise in wages at the higher end in the wage distribution. There was a rise in public sector wages as a result of the 6Th pay commission (effective 2006) and there was a knock-on effect on the private sector as well. But that was not the only reason, there is another reason. The skills pyramid in India is narrow; there is a shortage of relatively well trained, well-educated people at the top end, resulting in high attrition and higher wages. The skill pyramid is like the Eiffel tower, very narrow at the top and not so broad either at bottom. What we need is a skill pyramid like the Pyramids of the Egyptian pharaohs and if we have that then we wouldn’t have this kind of wage rise in excess of productivity increase.

For the recent wave of economic reforms by the central government to bear fruit labor reforms are required else they can prove to be a roadblock. The problem is that there are too many labor laws. There are laws at both central government and state government level, and the two are overlapping. There is not enough clarity in the minds of the enterprises especially the relatively smaller ones in terms of what applies to them, so they prefer to be unregistered so that they are never in the radar. So the first thing that the government needs to do is to simplify the laws to make interpretation easier. That is a massive exercise that needs to be undertaken.

The second point is that the central government needs to provide social insurance to all the private sector workers (and this becomes more important because I am not terribly hopeful of the first point being acted upon simply by virtue of the multiplicity of players involved). Social insurance is a very urgent need, because it includes insurance against death and disability and old age pension. The government needs to have completely non-contributory social insurance for the bottom three deciles of the wage distribution. The remaining seven deciles need to have a part-contributory insurance where a fraction is paid by the individual and the remaining is paid by the central & state government combined. This is a dire urgent need of the day.

From the employee perspective, I believe that there is good news here. If we look at retail, despite the statutory compliances which are applicable to unorganized sector as well, do you think that the millions of mom & pop stores follow these compliance requirements? Of course not. There is a possibility of unionization in organized retail, the probability is the same as in any other organized sector.

Taking all the factors into account, growth is inevitable however things would not change immediately. I don’t see much happening in aviation very shortly. I know one or two large Indian companies are in discussion with potential foreign partners, but the aviation industry is so uncertain, the tax structures are so heavy that the foreigners are not going to come up with partnerships with the existing firms. If the foreign players are going to come at all, they will come with new partners, and having said that it may take quite long.

It may not take as long in retail but it is not happening tomorrow either. It is just a policy that has been announced. Political uncertainties are still there, and international firms take time to make decisions. Whatever talks might be going on in National Investment Board to make investments easier, but we need to remember that our process of approval is burdensome and foreign direct investments take enormous amount of time. Plus policy paralysis had become the order of the day, though that is changing now. So we do not see the scene changing immediately due to the FDI related reforms (in retail and aviation), but two years down the line we will see the real impact. And we should remember that only 10 states have accepted the FDI in retail, 11 have not and even if all 21 had accepted there would be only 53 cities because there is a population cut off, so the number of cities is effectively 18 out of total 5000 towns & cities in India.

States not cooperating with the FDI policies could be a bottleneck and create gaps in the supply chain; however sourcing will happen even if stores are not operating in certain states, and if products are being sourced from particular states which have not permitted FDI, the supply chain is unlikely to get affected. The naysayers of today might become the yaysayers of tomorrow, when they see that hardly anyone is getting negatively impacted.

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Topics: C-Suite, Strategic HR

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