Article: The FDI Promise: Challenges and Opportunities


The FDI Promise: Challenges and Opportunities

With recent reforms in FDI, it is time for a conversation on FDI in the sectors benefitting from the reforms and its implication for people strategy. The war for talent is about to begin anew. Is India Inc. ready?
The FDI Promise: Challenges and Opportunities

The reform measures will invariably lead to economic growth which in turn will result in more number of job opportunities at all levels


Increased opportunities for people at all levels of the wage distribution may result in a churn in complimentary industries


Speculating on the economic effects of FDI has become a national pass-time in the last few weeks but there is silence on what opportunities and challenges will confront organizations as these reforms unfold. People Matters spoke to policy experts and industry leaders to capture the pulse of the human side of this unfolding economic story. We asked how exactly the recent reforms will affect the employment outlook in the months and years to come? If the increased flow of foreign funds accentuates the demand for talent, industries facing a talent crunch will need to rethink their people strategy.

What are the likely implications for compensation, for talent management, for skilling and for the legal infrastructure that govern the modern workplace? The service driven industries of Aviation, Insurance, Pension and Retail are businesses that depend heavily on their frontline employees to deliver. Where will these cadres be drawn from when there is an acknowledged skill deficit in these industries? The importance of inspired and creative talent management becomes paramount to keep employees engaged and reduce attrition to rivals in such a scenario. One must also explore if in an economy where skilled employees are a scarce resource, their wages will rise. Or is the answer an investment in skill building that is grounded in a long-term view of developing a talent pipeline that will sustain the industries’ expansion?

This exploration of how organizations must leverage their workforce to fully benefit from the reforms in FDI is also an overview of the challenges that can derail the engine of economic growth that these reforms are expected to be.

The Expanding Pie

Be it retail (single and multi-brand), aviation, insurance, pension or power exchange, employment generation in these sectors will be a critical index of the change that these reforms propose to usher in, especially as permanent hiring has touched a 20 month low. Hopes are pinned to the large-scale employment that these reforms are expected to generate. Santosh Mehrotra, Director-General, Institute of Applied Manpower Research, Planning Commission believes that the reform measures will invariably lead to economic growth which, in turn, will result in more number of job opportunities at all levels. 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 job profiles - sales, supply chain executives, security personnel, attendants, in-shop supervisors, floor managers and warehouse supervisors are likely to see significant increase in demand. That the hiring outlook in insurance and retail sectors is likely to improve is evinced by the positive sentiment of the major players in the field. Companies are now interested in hiring in more numbers, and positions that were held in abeyance for a long time have been opened up. That said, it must be noted that any change will only be gradual and concerns about people working in unorganized sector losing their jobs and kirana stores being shut are most likely misplaced. As far as retail is concerned, Mehrotra is positive about the employment scenario. He says, “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 size of the total retail market is $400 billion, and estimates say that it will go up to $650 billion in the next ten years. The bottom-line is that the size of the pie is going to increase and organized retail is barely going to increase its slice from 6 percent to 12 percent, still 88 percent (it is an offhand number) will be with the unorganized retail sector.”

With the entry of new retail giants, it is obvious that both direct and indirect jobs will be created along the supply chain. However, here is the caveat; there will be an increased demand for skills, which are not readily available at present. On the one hand, it means increased opportunities for people at all levels of the wage distribution, but in the absence of cadres to fill these positions there will also be tremendous churn in the talent pool of all complimentary industries as was witnessed when IT/ITeS and Telecom sectors were deregulated. FMCG, Hospitality and the Consumer Durables sectors are likely to be the most affected as their leadership ranks will be coveted.

Given the skill deficit and lack of employable talent, Shailja Dutt, Managing Director, Stellar Search is unequivocal when she says, “With the recent policy announcements coming into effect, companies need to be prepared for an all-out war for talent.” She further adds that the paucity of talent in retail specific functions like Store Insights, Buying & Merchandising, Store Planning, Visual Merchandising etc., will be one of the key challenges confronting global retailers looking to set up shop in India and Indian retailers looking to compete with the best across the world in their industry.

The capital intensive insurance sector, which allows for 26 percent FDI, is crunched for money. 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. Anuraag Maini, Executive Vice President, HR and Training, DLF Pramerica Life Insurance, believes that the proposed increase in cap will provide the industry with more funds and make the industry attractive for new companies to come to India which typically would like to have a larger shareholder control and ownership.

Reflecting on the sentiment in the insurance industry, Ashit Ranjan, Vice President HR, Technova says, “Positions which were on hold for long have been opened.” However, Maini believes the shortfall in the workforce will need a creative approach. “We will have to tap into talent pools that we have never looked at before,” he says. But, how will organizations stretch the talent pool? Maini, shares DLF Pramerica’s talent strategy, “We are looking at retaining and attracting women at different stages of their career and life. In addition to that, we are looking at getting more people from other industries; finally we are now more open to look at people from different age-profiles.”

FDI in aviation is expected to bring in much-needed long-term financial and strategic capital and expertise. But Mehrotra is not as optimistic, he augurs “I don’t see much happening very shortly. I know one or two large companies are in discussion, but the 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 significant time.”

Where are the people?

The growth expected because of the reforms will also demand enough leadership talent that can helm verticals and companies. Is there a ready talent pipeline who can take on the mantle? If not, then how does India Inc., plan to leverage the growth opportunity? Maini shares, “Typically we look at not just the top tier talent or top 10 percent but also the next 20 percent. So, more programs would be targeting this top 30 percent. Further, we assess employees at all levels to find who are the company’s key talent and how do we keep them engaged and motivated?” P. Dwarakanath, Director Group Human Capital, Max Group feels the worries about a talent deficit in the insurance sector are unfounded. “The Insurance sector is ready at all levels to face any talent crunch.” Ever since the insurance sector was liberalized in 1999 and foreign capital infusion to the extent of 26 percent was allowed, a number of private players with foreign JVs entered the lucrative Indian market. Despite the cash crunch, in the last one decade, these players have built trained manpower. A number of actuarial institutes and B-schools too have helped bridge the talent deficit. But while the rank and file of the insurance sector may be well populated with quality talent, that the talent in the financial sector is mobile could become a cause for concern in the future.

Banking, financial consulting, retail banking, credit cards etc., all draw from the same talent pool for their leadership talent. In a scenario where the leading PSU banks will be facing an acute talent shortage in the middle and senior levels with around 40 percent of their workforce retiring over the next five years, one can be sure that these institutions will also draw from other financial sector companies.

While foreign investors are still mulling over their India strategy in the aviation sector; the retail sector is already in action. For instance, Pavers England, Brooks Brothers and Damiani have already got the FIPB nod to set up shop in India while IKEA has filed the final document seeking permission to open its store in India. One thing is certain, the decision to allow multinational retail giants to set shop in India will increase competition. The larger question here is whether Indian players have the necessary wherewithal, if not what is it that they need to do? Dutt says “With a vast majority of Indian retailers still new to the game, bringing on board seasoned retail professionals with the requisite vision, strategic foresight and global experience would be necessary.”

Besides the conventional leadership competencies, strategic vision and communication skills par excellence, globally successful retail leaders are characterized by competencies which are a balanced confluence of the art and science of retailing, namely marrying the mind of the local consumer in emerging markets to the application of best practices followed in evolved markets globally. As a way forward she suggests a two-pronged approach that retail firms could adopt to put a leadership band in place. A strategist-operational expert format, one in which the primary responsibility of running day to day operations falls upon an individual familiar with the task at hand (even if the experience has been gained from other emerging markets) whilst the strategist’s responsibility of formulating long term strategic goals, rests with someone well acquainted with the mindset & preferences of the Indian consumer.

Wage-productivity correlation

The demand-supply mismatch in terms of employable talent will probably have a bearing on wages, margins and productivity. Dr. Arvind Agarwal, President - Corporate Development and Group HR, RPG, says, ‘In India, we have shortage of talent at every level.

Wages would also go up because of the supply-demand situation.’ Maini, adds, ‘The top talent, the top 30 percent will be in major demand. That is where the costs will also rise and they will be able to drive the market. So there will be an implication from this level of talent.’

Despite the positive sentiment we are unlikely to see the kind of unbridled optimism and escalation of wages that accompanied de-regulation in the IT-ITeS sector, given the present economic outlook. The lacunae in infrastructure will slow down growth in these sectors as costs of operation in India are high for them. This in turn will result in increased pressure to keep manpower costs low. The question of wage increase in these sectors cannot be looked at in isolation. All firms operating in these sectors, whether they are domestic or international players, will also be concerned about the productivity.

Addressing this point Dr. Agarwal says, “In India, wages are anyways growing at a very fast pace as compared to many countries of the world. Every year we see a wage increase of 10 percent to 12 percent which is higher than any country, anywhere. The problem is that at all levels, the salaries are going up but the productivity is not. Wage increase needs to be justified by increase in productivity else it would not sustain. We as a nation will become non-competitive. The fact that we say we are a low-cost economy is not true because on multiplying the factor of productivity, we are already a high-cost economy.”

Bridging the gap

One of the biggest challenges faced by industry is the skill-training gap in the Indian workforce. According to the Planning Commission the skill gap will be 265 million by 2022, the end of the 13th plan. The government, on its part, through NSDC and other bodies has initiated skilling efforts but these will take time to reach fruition. The immediate need for skilled manpower must be addressed by companies themselves to build a talent pipeline that can be utilized in 24-36 months. Dr. Agarwal, reckons that hiring quality talent would get tougher and thus the need for talent management to be executed thoroughly. He exemplifies, “Today we may still put someone on the front line, but tomorrow, with increased competition – the person put on the job will represent your company and your brand. Hiring in terms of quality would get tougher.” The emphasis on quality and quantity will make training the need of the hour.

To this end companies such as Future Group and Bharti Walmart have already taken steps to build robust skilling programmes through public-private partnership. For instance, over 10,000 people have been trained and certified at the Bharti Walmart Training Centres, BWTCs, in 18 locations of which approximately 4,000 have been absorbed into Bharti Walmart’s operations and others are free to take employment elsewhere. The graduates of the BWTCs are all covered by a 100 percent scholarship. This indicates that the industry is aware of the need to create a skilled workforce pipeline for its own expansion without being limited by concerns about immediate costs or returns.

The expectation that the roles can be filled by dipping into an international talent pool or the talent pool in other industries is not a sustainable strategy for the long-term. Dutt concurs, “Relying exclusively on expatriate professionals to bring in key competencies is not a viable proposition. Development of local talent will be the key for sustained success over the long term.” She further argues that lack of adequate training for personnel at the shop floor level could also emerge as a major stumbling block, for domestic and global players alike. She says, “It would be imperative for large players to focus on this segment of their workforce to ensure they provide their customers with a shopping experience at par with global standards. They need to put the necessary structures in place to ensure a steady pipeline of such talent from the very inception of their entry into the market.” As a way she suggests instituting vocational development programs in collaboration with academic institutions, government vocational skilling institutes and not for profit bodies.

The roadblocks

Of 185 economies around the world that were analyzed for ease of doing business (Doing Business 2013, prepared by World Bank and IFC), India ranks a lowly 132rd place! In essence, it is important to have in place measures that address infrastructural hurdles and create a business friendly environment if we want to draw foreign investment. The other aspect of the legal concerns pertains to whether India’s legal framework is ready to absorb the permutations that will occur in the way people will be employed once these industries start to expand.

While there is no dearth of regulations, what perhaps is lacking is their relevance in a changing business scenario. Applying manufacturing laws to service industries, where frontline employees often serve in roles that are neither entirely blue collar nor entirely white, leaves enough scope for ambiguity and complying to regulations becomes all the more difficult. “If we look at retail, despite the statutory compliances which are applicable to unorganized store as well, do you think that the millions of mom & pop stores follow these compliances? Of course not,” says Mehrotra. Growth of retail, insurance and aviation will create new job avenues; this calls for the need to revisit the existing employment regulations and make necessary changes. It is in the interest of industry that it collaborates with the government to either streamline existing laws for ease of interpretation or to develop new ones. Mehrotra is optimistic that the rise in organized retail, on the back of FDI, is a positive step for working conditions of the store staff. The optimism perhaps emanates from the expectation of compliance from the MNCs as they have the resources and the commitment to guarantee a certain level of working conditions for their employees. The concerns surrounding the workplace conditions and compensation for contract employees must also be addressed as the ranks of contract employees will swell in the sectors benefitting from FDI just as they have in manufacturing, telecom etc.

Capital and technological infusion can make the desired impact only when the country has sufficient absorptive capacity, in terms of qualified people, to benefit fully from it. This necessitates the need for both government and India Inc., to put in place a collaborative effort to address the challenges posed by the infrastructure deficit. Reforms in agricultural procurement, rationalization of labor laws, and changes in the irrational tax structure could be a beginning. India Inc., on its part, must be proactive to maximize the benefits of the policy changes and put in place a robust people strategy to leverage the level playing field that reforms have made possible.

The final summing of socio-political and economic costs and benefits of the reforms in FDI can only be done years from now when the reforms have catalyzed the growth they were intended for, but the arithmetic will be disappointing for India Inc if people strategy isn’t factored into the equation.


Read full story

Topics: C-Suite, Strategic HR

Did you find this story helpful?



How do you envision AI transforming your work?

Your opinion matters: Tell us how we're doing this quarter!

Selected Score :