When global firms exit, employment suffers (GS-III, Economic Development)

CONTEXT– The Centre for Monitoring Indian Economy (CMIE) Report of August 2021 shows that the unemployment rate has increased from approx 7% in July to 8.3% for August 2021.

Sector-wise analysis shows that most of the jobs lost were farm jobs( fell by 8.7 million) ; while non-farm jobs did increase(non-farm jobs increased by 6.8 million) to absorb some of these, but the quality of new jobs generated is a matter of concern.

The manufacturing sector shed 0.94 million jobs. Therefore, much of the labour shed by agriculture has been absorbed in low-end service activities.

Employment sustainability

During normalcy, agricultural labour gets accommodated in the construction sector. But currently, the construction sector itself is shedding jobs, forcing workers to find employment in the household sector and low-end services. This non-availability of sufficient jobs in manufacturing and higher end services could be the dampener for economic recovery in the subsequent quarters of the current fiscal year.

Elementary economic theory suggests that raising the level of investments is the key to output and employment growth. While public investments are important, especially in the current context of sluggish aggregate demand, there is a need to complement public investments with even more private investments. 

While inward FDI does generate jobs both directly and indirectly through an increase in production activities (which increases demand for labour), the magnitude of employment generated especially in the manufacturing sector, needs closer scrutiny. 

Further, the sustainability of increased employment is often threatened as it depends on the business avenues which other competing economies open up leading to corporate restructuring at the global level and firm exits from erstwhile locations.

While inflow of FDI in India creates jobs, the magnitude and quality of job generation needs to be scrutinised.

An exit and disruptions-

There is a decline in employment growth in the manufacturing sector. Though, some sub-sectors within the manufacturing sector have generated both direct and indirect employment by attracting FDI and entering into global networks of production. For ex.- auto sector.

As per, some information, the automobile sector employs 19.1 million workers, both directly and indirectly. Presently, more than 70% of the auto component companies are small and medium enterprises. It is generally expected that by 2022, the employment in the auto sector will touch 38 million with a higher generation of indirect employment.

However, 3 factors have created roadblocks to the expansion of the sector:-

  • Firstly, due to the covid pandemic, followed by lockdown, aggregate demand in the economy is low, that is reflected in vehicle sales.

  • Secondly, the shortage of semiconductors continues to impact production even when customer sentiments are slowly turning positive. 

  • Third, the recent exit of Ford from the Indian market would release a large number of employees, who will be in search of jobs, difficult to find.

More frequent global production re-arrangements are becoming a part of the strategy of big firms in this phase of globalisation, as markets tend to be more volatile due to repeated demand fluctuations.

Other examples:-

Nokia, shut down its Plant, Sriperumbudur factory (Tamil Nadu) in 2014.

Citibank announced to shut India retail banking business as part of a global decision to exit 13 markets.

Thus, by all these exits, nearly Lakhs of direct and indirect employees are losing their jobs at various levels, creating a massive disruption in the local economy.

Impact on employment generation after exit of Global firms-

The exits of high-profile global firms affect employment generation in two ways:-

First, it creates doubts among potential investors to choose the location for greenfield investments or extend existing facilities. Thus, leading to a ‘wait and watch’ policy, affecting private investments even after an economy being investor friendly. A declining trend in private investments leads to slower employment growth

Second, the process of the ‘destruction’ of jobs through exits of Global companies, creates mismatches in the labour market. Such exits also led to a big influx of low-skilled workers to other sectors. Thus aggravating the existing unemployment problem.

A waning of near-permanency of large foreign firms-

With the emergence of modern transnational corporations (TNC) as key players in an industry, a proliferation of mergers and consolidations across national and International borders might be frequent. 

Such waves of expansions and contractions are aimed at acquiring new markets and new trade opportunities. 

Growing scepticism towards more open trade policies and the rise of protectionism have increased the risk and unpredictability of policy environments, leading to deeper reflection on both existing and new investments by global firms.

TO CONCLUDE– The ‘next to near’ permanency of large foreign firms operating for decades is slowly fading away and the domestic capital formation along with private investments should step in, to let it survive.

BY,

RAJEEV YADAV

Faculty of HISTORY-OPTIONAL and G.S.

PLUTUS IAS

25th september 2021 current Affairs Download

Swarn Singh

Plutus IAS Current Affair Team Member

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