Editorial 1 : A Legal Void
Context: How to deal with the national security risk from FDI and trade
Legislative framework to deal with FDI and international trade on grounds of national security
- India does not have a comprehensive legislative framework to deal with FDI and international trade on grounds of national security.
Press Note 3 (PN3)
- India adopted a new FDI regulation called Press Note 3 (PN3) in April 2020 during the pandemic.
- PN3 is enforced through the Foreign Exchange Management Act (FEMA), a law that provides the architecture for the orderly development and maintenance of the foreign exchange market in India.
- To curb opportunistic takeovers and acquisitions of Indian companies weakened due to the pandemic, PN3 subjects inward investments from land-bordering countries to prior approval of the central government.
- India subjected Chinese FDI to greater control for national security reasons, though PN3 does not contain the words national security.
India’s Method in dealing with Chinese FDI
- The debate on Chinese foreign direct investment (FDI) into India oscillates between economic benefits and security risks.
- India was not the only country restricting Chinese FDI during pandemic but the method remains an aberration.
- Several liberal democracies like Canada, and Australia too limited Chinese FDI during the pandemic.
- These countries did so under dedicated legal provisions designed to deal with risks FDI may pose to national security.
Foreign Exchange Management Act (FEMA)
- FEMA does not contain explicit provisions to deal with FDI on national security grounds.
- National security in the military sense is not directly linked to managing foreign exchange.
- Since India doesn’t have a specific law that deals with risks that FDI might pose for national security, FEMA, a foreign exchange control law doubles up as a legal instrument to screen foreign investment for national security, pointing to a legal vacuum.
Customs Tariff Act
- The legal vacuum in India on this point is not restricted to foreign investment. It extends to international trade.
- India relied upon section 8A(1) of the Customs Tariff Act to increase customs duties on all Pakistani imports to 200% after Pulwama attack.
- Section 8A(1) confers “emergency powers” on the government to increase tariff rates. It is typically meant for economic emergencies, not for trepidations arising from terrorist attacks.
- Like FEMA, the Customs Tariff Act doubled up as a national security instrument in this case.
International Agreements
- India’s international treaty practice further provides evidence of this vacuum in India’s domestic legal system.
- Unlike the domestic legal regime, India’s past and current international investment treaties and investment chapters in free trade agreements have separate provisions to deal with issues like current and capital account transactions and national security.
- International trade agreements such as the General Agreement on Tariffs and Trade, contain separate provisions to deal with trade restrictions arising out of foreign exchange difficulties and national security.
Way Forward: Need for Specific Domestic Law
- The absence of a specified domestic law to deal with FDI and international trade on security grounds makes India vulnerable if its measures are challenged at international courts and tribunals.
- The debate on national security risks and Chinese FDI shall trigger another national debate i.e. the need for India to have a dedicated law dealing with national security risks that FDI and international trade might pose.
Editorial 2 : The Elusive Jobs
Context: Employment Data
Growth and Employment
- Reserve Bank of India has pegged the Indian economy to grow at 7.2% this year.
- Medium term forecasts, such as those by the IMF, expect the momentum to continue over the coming years.
- But the concern over the lack of quality jobs continues to persist.
State of the Labour Market in India as per the recently released Periodic Labour Force Survey
- At the aggregate level, the labour force participation rate (15 years and above) has risen from 49.8% in 2017-18 to 60.1% in 2023-24.
- Much of this is due to the sharp rise in female participation, especially in rural areas, where it has risen from 24.6% to 47.6% over this period.
- rise in female participation maybe point to a sign of distress i.e. women stepping out of the house to augment their household income.
- The share of women engaged in salaried employment has fallen. More are now engaged in self-employment. Across the country, the share of women who are self-employed has risen from 51.9% in 2017-18 to 67.4% in 2023-24.
- A large section of the labour force continues to be employed in informal firms.
- The percentage of workers engaged in informal enterprises (proprietary and partnerships) stood at 73.2 per cent in 2023-24. While it has fallen marginally from 74.3% in 2022-23, it remains higher than the estimate of 68.2% in 2017-18.
- The share of the labour force engaged in agriculture continues to edge upwards, while that engaged in manufacturing remains almost stagnant.
- In 2017-18, 44.1% of workers were employed in the farm sector. By 2023-24, it had risen to 46.1%, underlining the reversal of the trend of the falling share of the farm sector seen over the past decades.
- The share of the labour force engaged in manufacturing remains roughly the same, 11.6% in 2021-22 and 11.4% in 2023-24.
- The unemployment rate (15 years and above) has fallen from 6% in 2017-18 to 3.2% in 2023-24.
- While youth unemployment has fallen from 17.8% in 2017-18 to 10.2% in 2023-24, it still remains high.
- The unemployment rate is higher among the more educated. Those with a secondary and above level of education have much higher rates than others.
The Challenge
- The labour market data reinforces the key development challenge facing India i.e. inadequate creation of more remunerative and productive employment opportunities.
- Production process is becoming more capital intensive and labour saving. This is making it difficult to address the challenge of creating jobs.
Way Forward: Overcoming the challenge of creation of more remunerative and productive employment opportunities should be at the top of policy agenda.