शनिवार, ८ जुलै, २०१७

Too much investment but where is capital?

Long-term unemployment can make any worker progressively less employable even after the economy strengthens - Janet Yellen. 

Economy is growing rapidly, FDI is surging but where is Capital? Where are jobs and how can we create jobs without capital?? With business friendly policies, government is doing everything to have large FDI. Okay, let’s discuss some papers related to FDI and Economic growth. 
As far as capital is concerned, FDI is very important which is connected with job creation (Chowdhury, A., & Mavrotas, G. (2005). FDI and growth: a causal relationship (No. 2005/25). Research Paper, UNU-WIDER, United Nations University (UNU)). With two way link between FDI and GDP, India is becoming a favored destination for FDI. FDI is increasing with increasing GDP. GDP is not increased by FDI but this causality runs more from GDP to FDI (Chakraborty, C., & Basu, P. (2002). Foreign direct investment and growth in India: A cointegration approach. Applied economics, 34(9), 1061-1073). FDI is an important factor for developing countries as far as economic growth is concerned. By stimulating investment, increasing human capital and transferring technology, FDI helps economy to grow (Gola, Kali Ram, Mridul Dharwal, and Ankur Agarwal. "Role of Foreign Direct Investment in the Development of Indian Economy." Gyanpratha-ACCMAN Journal of Management 5.1 (2013).). In the development of India, FDI has played very important role as a source of capital but also for creating competitiveness of economy. FDI also affects political and economic stability, budget discipline, inflation, governance, interest rates, institutional and infrastructural development conducive to attract competitive FDI, policy and regulatory framework (Vishwakarma, R. Foreign Direct Investment and Economic Growth: Evidence from India). 

Okay.. I am in agreement with above views. But is capital really being created by this surging FDI? I have some doubts over it. Given figure shows the trends of capital formation in India. [For household investment, I have simply used house saving (I assumed that the household saving is equal to the house investment. I also assumed that the household investment is used for capital formation). For public capital formation, I have used government’s finance for public capital formation. By subtracting the addition of above two factors from total gross capital formation, private capital formation can be obtained.] 

Figure no. 1

Given figure points out certain points. Government finance for capital formation is continuously increasing. But most important thing is that the private capital formation is not increasing (Although it is decreasing in given figure but assumptions don’t allow me to say that but we can say that it is not increasing definitely for sure). 

Figure no, 2

Figure no. 2 shows the trends in foreign direct investment. FDI is decreasing till 2011 but after that, FDI is raising. But still there is no any improvement in private GCF. It means FDI is not creating new capital. Technology might be transferred but capital is very important as far as employment is concerned. Without capital, jobs can’t be created. Investors don’t care about job creation as they are interested in the returns. And if the main aim behind this increase in FDI is not capital creation then the Make in India campaign is just useless. 
Yes proper econometric analysis is required but definitely there is little room for doubt.

(Data sources - World Bank, RBI and Open Government Data (OGD) Platform India) 

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