Does Foreign Direct Investment Crowd-In or Crowd-Out Domestic Investment? A Case Study of Emerging Economies

Introduction

Investment is a tool that raises the standard of living for a nation’s citizens and promotes growth. Identifying these factors is one of the biggest challenges in the modern economy. To put it simply, technological knowledge must constantly improve to create new products, markets, or processes that will promote growth. The domestic market comes up with a lot of investment. But after a certain period of time, the domestic investment starts to fade away due to several reasons, where the major reason is the lack of new technology and new skills and implementations. When governments want to grow their domestic economy and drive new technology, business expertise, and capital to their nation, they work to promote FDI.

Source: www.google.com

In economic literature history, there has always been a debate concerning the connection between domestic investment and foreign direct investment, i.e., whether FDI drives domestic investment away or drives it in. The flowchart below (Fig 1) depicts what happens after foreign investment enters the domestic market.

      Fig 1: Crowding-In and Crowding-Out effect of FDI

Source: Own creation 

In order to finance the development of new infrastructure, bring in new machinery and technology, and create jobs for their native workforce, nations have welcomed FDI, as shown in Fig 1. The most obvious benefit of FDI is the creation of employment, which is one of the main reasons a country (particularly one that is developing) will want to entice FDI. FDI increases the manufacturing and service sectors, which leads to job growth and lower unemployment rates in the nation. Increased employment increases earnings and gives the populace greater purchasing power, which strengthens a nation's overall economy. Moreover, employee training and experience-based skills improves a nation's educational system and human resources. It has a cascading effect that trains human resources in other industries and businesses. The introduction of newer and improved technology leads to the diffusion of businesses into the local economy, resulting in increased industrial efficiency and effectiveness. Growing export sales bring in money and profits for enterprises, and through the acceleration effect, this can lead to a rise in capital expenditures. Increased investment boosts a nation's capacity for production, which in turn boosts export potential. For governments with few internal resources as well as those with few chances to raise money on international capital markets, inflow of cash is especially advantageous.

On the other hand, when productivity spill overs occur by the foreign investors, they crowd out the domestic market. FDI aids in the development of a competitive environment and the dismantling of domestic monopolies by allowing the entry of foreign businesses into the domestic market. A good competitive environment encourages innovation by pushing businesses to continually improve their operations and product lines. Additionally, customers have more access to a variety of competitively priced goods. Investors in FDI frequently hold controlling positions in domestic businesses or joint ventures and actively participate in their management. This pushes away the domestic market for the increased want of more lavish foreign goods at affordable prices. Referring to Fig 1, this further leads to a demonstration effect which is the tendency of consumers to copy the consumption patterns followed by others. Foreign companies sourcing locally may cause demand to decline due to stronger competition, or it may rise due to increased competition. The industrial linkage impact calculates how changes in one industry affects other industries' production (mainly the local industries) activity over a specific time period. During this time foreign investors create oligopolies and see at lower prices. International firms when competing with domestic investors tend to provide cheaper costs, better products and services, more options, and more innovation. However, the domestic investors cannot compete with the international investors, in fact the foreign investors start hiring skilled employers from the domestic market as well. This impacts the domestic market over time and the international markets dominate the domestic firm. 

When these FDI’s crowd-in domestic investments, then they act as a complement to each other, which initiates a healthy growth in the economy. Some domestic investments can be complementary because the more FDI’s in the economy, the more domestic investments as well. But as soon as the FDI’s crowd out the domestic investment, they act as substitutes for them. If substitutes rely more on FDI, then it will lead to repatriation of profit back to the origin, and furthermore causes foreign exchange risks to the domestic economy. 

Studies have revealed that since 2000, billions of dollars have been brought back to the United States. According to the Federal Reserve, firms brought back $777 billion worth of cash that had been stashed abroad in 2018. This was mostly caused by the Tax Cuts and Jobs Act, which reduced the transition tax for businesses looking to convert their foreign currency holdings into dollars. Inflows of FDI are frequently seen as an addition to domestic savings that make it easier to finance local investment projects.

 

Trends of FDI and Domestic Investment in Emerging Asia

The table and the graphs below represent the FDI/GDP, DI/GDP, and FPI/GDP in percentage for the South Asia, the South East Asia, and the East Asia regions. 

 

Table 1: FDI/GDP, DI/GDP, and FPI/GDP in percentage

	FDI/GDP (%)		DI/GDP (%)		FPI/GDP (%)
	2000	2020	2000	2020	2000	2020
South Asia
Afghanistan	0.0	0.6	0.0	0.0	0.0	0.0
Bangladesh	0.5	0.4	23.8	31.3	0.0	0.1
Bhutan	0.0	-0.1	50.3	33.8	0.0	0.0
India	0.8	2.4	25.7	27.9	-0.5	-0.6
Maldives	3.6	11.8	0.0	45.5	0.0	-1.8
Nepal	0.0	0.4	24.3	30.4	0.0	0.0
Pakistan	0.4	0.7	17.6	15.0	0.0	0.5
Sri Lanka	1.1	0.5	28.0	25.2	0.3	2.9
SouthEast Asia
Indonesia	-2.8	1.8	22.3	32.4	1.2	-0.3
Philippines	1.8	1.9	15.7	17.4	0.7	-0.5
Cambodia	3.2	14.0	17.5	24.9	0.2	0.4
Lao PDR	2.0	5.1	13.4	0.0	0.0	1.4
Malaysia	4.0	1.3	26.9	19.7	2.7	3.5
Brunei Darussalam	9.2	4.7	13.1	40.6	0.0	9.7
Myanmar	3.7	2.3	0.0	30.0	0.0	0.0
Thailand	2.7	-1.0	22.3	23.7	0.6	2.4
Vietnam	4.2	4.6	0.0	0.0	0.0	0.4
Singapore	16.1	21.6	35.2	22.5	21.9	17.5
East Asia
China	3.5	1.7	33.6	43.4	0.3	-0.7
Hong Kong	41.1	34.1	27.6	19.0	-14.3	19.8
Japan	0.2	1.2	28.4	25.4	0.7	0.7
South Korea	2.0	0.5	32.9	31.9	-2.1	2.6

Source: Own calculations from World Bank Indicators

According to Table 1, Maldives among the South Asian countries (Fig 2) and Singapore amongst the South East Asian countries (Fig 3) have a higher growing FDI/GDP percentage of 11.8% and 21.6% respectively. India has a declining FPI/GDP percentage in 2000-2020 (Fig 4). The graph in Fig 2 depicts the various South Asian countries, where the FDI/GDP %, and the DI/GDP% is highest in Maldives in 2020, but the FPI/GDP% declines in the same year. Sri Lanka has the highest FPI/GDP% of 2.9 in 2020. Sri Lanka has the highest FPI/GDP% of 2.9 in 2020. The South Asian region in 2020, overall has an FDI/GDP % that lies in between 0-12, the DI/GDP% lies between 0-50, and the FPI/GDP% lies between -2 to 3. In Fig 3, The Southeast Asian region in 2020, has an FDI/GDP % that lies in between -1 to 22, the DI/GDP% lies between 0-40, and the FPI/GDP lies between -1 to 18. Thailand has a declining FDI/GDP% in 2020. On an average, China has the highest DI/GDP% in 2020, which indicates a total of 43.4% shares of investment.

 

Fig 2: FDI/GDP, DI/GDP, and FPI/GDP of South Asia (in %)

Source: Own calculations from World Bank Indicators

 

Fig 3: FDI/GDP, DI/GDP, and FPI/GDP of Southeast Asia (in %)

Source: Own calculations from World Bank Indicators

 

Fig 4: FDI/GDP, DI/GDP, and FPI/GDP East Asia (in %)

Source: Own calculations from World Bank Indicators

Summary 

So far, the empirical literature does not draw clear conclusions about the effect of foreign direct investment on domestic investment. Some studies find negative effects on domestic investment, while others show positive effects. Moreover, several experts believe that FDI inflows have no influence on domestic investment.

The data and evidence depict that the FDI in the economies demonstrates a favourable trend of investment, which ultimately leads to a rise in the GDP and the growth of the nation. FDI is necessary for DI to improve. If foreign investors hire qualified workers from the domestic market, that is one form of crowding out as well, since FDI establishes oligopolies and sells at cheaper prices yet they are unable to compete. The FDI and Domestic Investment growth period of most of the countries has been between 2011-2020. The data collected and processed until now depicts that India has the highest FDI and DI among the South Asia countries, whereas China highest FDI and DI among the East Asia countries. Among the Southeast Asian countries, Singapore and Vietnam have the highest FDI and DI respectively. Maldives and Singapore have a higher growing FDI/GDP percentage. India has been showing the highest domestic investment throughout the span of 40 years. Between 2011-2020, the highest FDI CAGR is depicted by Philippines with a rate of 13 and Lao with a rate of 12.4. The South Asian region in 2020, overall has an FDI/GDP % that lies in between 0-12, the DI/GDP% lies between 0-50, and the FPI/GDP lies between -2 to 3; whereas, the Southeast Asian region in 2020, has an FDI/GDP % that lies in between -1 to 22, the DI/GDP% lies between 0-40, and the FPI/GDP% lies between -1 to 18. China has the highest FDI among all the countries and has received four times more investment than India. China's development is mostly driven by domestic investment and consumption rather than exports. Countries such as Malaysia, Myanmar, Afghanistan, and Sri Lanka have a negative Compound Annual Growth Rate from 2011-2020 which depicts that over a certain amount of time, their foreign investment has declined rather than risen, and indicates losses. Japan has a domestic investment of approx. twice that of India over the span of years. During times of uncertainty like the year 2020, countries with a high amount of FPI such as Hong Kong and Singapore experienced increased market volatility and currency upheaval.

 

References

Hayes, A., (2022). General Information on FDI. https://www.investopedia.com/terms/f/fdi.asp#:~:text=FDI%20can%20foster%20and%20maintain,jobs%20for%20their%20local%20workers.

Javorcik, S., (2004). Does Foreign Direct Investment Increase the Productivity of Domestic Firms? In Search of Spillovers Through Backward Linkages. American Economic Review https://www.aeaweb.org/articles?id=10.1257/000282804146460

Markusenab, J.R., & Venables, A.J., (1999). Foreign direct investment as a catalyst for industrial development. European Economic Review. https://www.sciencedirect.com/science/article/abs/pii/S0014292198000488

Murphy, C.B., (2020). General information on Repatriation. Investopedia. https://www.investopedia.com/terms/r/repatriation.asp#:~:text=The%20term%20repatriation%20refers%20to,nationals%2C%20refugees%2C%20or%20deportees

WTO (1990-2020) World Trade Report

Ms. Aryaa Parida, B.A. Honors Economics (batch 2020-23), Department of Economics, Faculty of BEhavioural and Social Sciences (FBSS), Manav Rachna International Institute of Research and Studies (MRIIRS), Faridabad, Haryana. Written under the supervision of Dr. Durairaj Kumarasamy, Associate Professor and Head, Department of Economics, Faculty of Behavioural and Social Sciences (FBSS), Manav Rachna International Institute of Research and Studies (MRIIRS), Faridabad, Haryana.  aryaaparida@gmail.com

Wellbeing: An Occam’s Razor Example of Case Studies

 Introduction

Over the course of human history, we have realized that for the growth of a society and economy, civilization and culture requires a constant set of economic activities. These economic activities driven by human labour are required no matter how much technological progress we make. Further, these economic activities are propelled by the need for a labor force.  A labor workforce is a collective of human beings who comes from different socioeconomic and cultural constructs. They drive the economic activities.

Happiness of a labor workforce is crucial for an economy or a larger society to stay happy. However, it is also important to understand how and which factors are impacting the labor workforce and in what way they are impacting. While their impact is being considered, one also needs to understand the degree of impact on various happiness indicators. This degree of impact can only be understood by trying to understand the hidden, latent factors which finally impacts the happiness and wellbeing of the individuals of a labor workforce. This is because, if a labour workforce in an employing economic sector is happy, the economy and the larger society are expected to attain a state of wellbeing. Well being is often defined by the mental health and state of happiness of people which is in reality a subjective context.

Source: www.google.com

Well-being is a generic term and used frequently in a loose, rhetorical way in our day to day lives. In an Aristotelian definition, well-being is often seen from relational, material, and aspirational way. It also imbibes the concept of equity and fairness. Even a beggar who scores poorly in terms of material well being can exist at a higher level of happiness and well being in terms of relational wellbeing. The beggar can be contained with his or her state of mind, situation and be happy and more self contained and at peace than an individual staying in a sky scraper. Hence, wellbeing is a relative, debatable term. Development discourse and economics often defines wellbeing as a capacity to fulfill one’s need and sustain the basic needs of human life defined by access to clean food, water, house, clothes,education, health and sanitation and various other indicators defined by the Sustainable Developmental Goals of UN.

In this regard, Amartya Sen has defined well-being through three distinct categories which are materialistic, social and relative. Furthermore, according to Sen’s definition, the three well being categories are stated as –

1. Materialistic wellbeing of a person is defined as a state in which a person holds or earns a certain amount of regular income through which the person can get access to food, cloth, education and shelter for the individual and the larger family of the individual. 
2. Social wellbeing refers to the attitude and behavior of a person and deals with the level of satisfaction or happiness of a person?
3. Relative wellbeing refers to the comparative nature of human beings and it innately includes the desire to want more because other people have more of what they want.

It is assumed that with a growth in employment, income of individuals will go up and it will therefore enhance the material and psychological well being of individuals by providing them more liquidity and access to material aspects of life. However, this is in a large way a materialistic definition of wellbeing.

Literature provides an ample evidence of the relation between employment and psychological wellbeing. For instance, Cropanzano and Wright (2000) studied the happy worker hypothesis in which they conducted two field studies studying the relation between psychological wellbeing of individuals and job performance of employees and later compared between these two studies. 

The comparison of the studies showed that there was a positive relation between a happy worker with better psychological wellbeing and higher performance. The comparison showed that a “happy” worker with a relative higher psychological wellbeing often have higher performance than the worker with lower psychological wellbeing.

In a study conducted by Cooper et.al (2005)2, the predictors of labour productivity (i.e., in terms of work performance) were investigated with “A Shortened Stress Evaluation Tool”. Around 16001 employees were studied with 26 various occupations.  In the study, 3 variable parameters were studied and they were psychological wellbeing, physical well being and job satisfaction. The study found that people with more stressful occupations tend to have a lower psychological wellbeing and had the least job satisfaction in comparison to other people who had higher psychological well being and greater job satisfaction. Darko et.al (2021)found out that not all employed people are always happy.

Therefore, there is a need to understand the relation between wellbeing and work efficiency of the people from different sections of the society working in different sectors of the economy. This is because socio-cultural constructs and background do impact the wellbeing of people and hence on their efficiency in the workplace. After understanding the differential nature of impact of the socio-cultural constructs on worker efficiency, it is important to assess why the same or different factors impact workers in different working contexts in a varied form. Therefore, some of the questions that we need to ponder are –

1. Is there any relationship between efficiency and the psychological wellbeing of an employee?
2. Does higher income indicate better psychological wellbeing?
3. Which sectoral employees have the highest job satisfaction?

In order to explore these questions, a survey based method was used focusing on age groups of 18 -30 and 30-40. The survey was conducted for employees from the private, government sector. Questions regarding their well being were asked and further insightful interview methods were applied to understand why they were in a certain state of well being.

Moreover, it was also found whether their status of wellbeing had any relation between their psychological wellbeing and efficiency in their respective workplaces. Indicators of wellbeing were marked on a scale of 1 to 5.  The well being indicators followed Cropanzano and Wright’s (2000)1 self-marked indicators. People were asked how often they get the following feeling (as stated in Table 1) in a week on a scale ranging from 1 to 5,with 1 being not at all and 5 being all the time. The factors related to the feeling were demarcated as Lonely, Depressed, Bored, Restless, Uneasy, Excited, Pleased, Top of The World. Within each category of the factors further sub-categorisation was created as – Very lonely or remote from other people (within lonely), Depressed or very unhappy (within Depressed), Feeling nothing interesting or nothing to do (within Bored), Restless and not able to sit in chair (within Restless), Uneasy (Uncomfortable in different situations), Excited (feeling enthusiastic), Pleased (feeling satisfied), On top of the World (Extremely Happy).

Various indicators were considered linking the wellbeing and efficiency of the workers. Cooper et.al (2005)2 discusses different factors affecting psychological wellbeing of an employee in the work place. The following factors were analyzed in the survey based study where each factor was being explained by a certain, specific descriptive questions like – a) How much do other people affect each other in a work place? Is it a healthy atmosphere? (Within Work Relationships), b) How the work place balances its extra work? And how is the nature of the job itself? (Within Overload), c) How much control does the employee has on its time? Is the job very binding in nature? (Within Control), d) What is the level of job security being given to the employee? (Within Job Security), e) Are the resources, tool or materials being given to the employee? (Within Resource and Communication), f) How much time does the job take of the employee on a daily and weekly basis? (Within Work Life Balance), g) What are the extra pays and benefits being given to the employee and how often are they given? (Within Pays and Benefits), h) To what level is the organization committed to their employee (Within Commitment of the organization to employee), i) To what level is the employee committed to their organization (Within Commitment of the employee to organization)

Psychological well being of child and teen aged labor are explained by various latent factors as explained by Darko et. al (2021). Some of these other latent factors which have been considered in the survey deals with the following questions – a) What is the condition of their household emotionally? What is the bond they share with their family? How supportive and listening their family members are? (Household Factor), b) What is the financial condition of their family? Do they inherit a good financial status or is it made up by them? How much financial support do their families give? (Wealth Factor), c) Have they faced any biases at work, home or any place due to their gender? How does their gender affect them? What are the extra responsibilities they have to take care of due to their gender? (Gender Factor),  d) How their childhood has been in terms of financial and emotional? What are the memories they remember the most? What do they crave the most from their childhood? (Childhood Health Factor),  e) Have they experienced any shock and how has it affected them? (Experience of Shocks Factor).

Findings:

The survey findings using the above questionnaire framework clearly highlight that well being is not a homogenous concept at all within the employees of an organization. Different people with same set of inducing wellbeing factors behave differently in varied contexts. Even the same person can behave differently in terms of his or her well being under the same set of well being inducing factors. Hence, one set of policy is not enough to address the issues and challenges of wellbeing of human labour in workplaces. One individual can go through a range of well being emotions within the same organization under different working, cultural and larger societal, individual contexts. This can happen even with the presence of same set of well being incentives given by the organization. The insights emerging from the study and related to well being are therefore like an Occam’s razor where even one particular case study finding can be a distinct truth and no generalization can be done. A particular case study finding can act like an absolute truth for policy making. Keeping this in mind, 15 distinct people from different income, social and cultural backgrounds were interviewed for the research. An ethnographic analysis was conducted based on a questionnaire based method. Out of the total interviewed population, 33% was female and the rest being the male. In the survey most young employees were employed in private sector.

The findings from the study indicated that the human labour in the workplaces of the different economic sectors were enthusiastic, passionate and excited about their work. However, at the same time, more than 50% of them were also lonely. This indicated a situation, that while people who are joining the private sector to work are excited about to work with a dream about their future aspiration, they at the same time are lonely, depressed, bored and restless. Many of these employees are new employees who have a dream for their future and hence when they are joining the job market, they feel excited or at the top of the world. However, slowly that top of the world feeling has been fading away and is also complemented by emotions of loneliness, boredom.

The cause of concern is that there is a tendency of boredom which is setting in these workers making them lonely in future. Thus, the policy to address the well being of these labour work-force cannot be uni-dimensional or cannot be too rigid or restrictive. The policy has to give space to the multiple layers of conflict and feelings of the labour workforce which is ranging from depression, boredom, loneliness to extreme happiness and being at the top of the world. This indicates well being of the future society will be more complex to address as it is going to be marked by large range of conflicting individuals within the same person. Hence, a more, dynamic, innovative, malleable policy framework for addressing well being of labour work force will be required in future. Such a framework will also have to reinvent or re-innovate itself regularly to address the emerging, dialectical, conflictual challenges of wellbeing which a hyper consumerist, materialistic society is facing everyday in India.

References

1. Cropanzano, R., & Wright, T.A. (2000). Psychological Well-Being and Job Satisfaction as Predictors of Job Performance. Education publishing foundation. https://www.researchgate.net/publication/12655756_Psychological_well-being_and_job_satisfaction_as_predictors_of_job_performance
2. Cooper, C., & Johnson, S., & Cartwright, S., & Millet, C., & Donald, I., & Taylor, P. (2005). The experience of work-related stress across occupations. Emerald Group Publishing Limited. https://www.researchgate.net/publication/232516798_Work_Environments_Stress_and_Productivity_an_Examination_Using_ASSET
3. Rajeswari, M., & Magesh, R. (2017). A Study on Psychological Well-Being among Employees of I.T Companies. Canadian Center of Science and Education. https://www.researchgate.net/publication/318676104_A_Study_on_Psychological_Well-Being_among_Employees_of_IT_Companies
4. Darko, C.K., & Carmichael, F., & Vasilakos, N. (2021) Well-being and employment of young people in Ethiopia, India, Peru and Vietnam: Is work enough?. Development Policy Review. https://onlinelibrary.wiley.com/doi/full/10.1111/dpr.12565
5. Mokona, H., & Yohannese, K., & Ayano, Getinet. (2020) Youth unemployment and mental health: prevalence and associated factors of depression among unemployed young adults in Gedeo zone, Southern Ethiopia. International Journal of mental health system. https://ijmhs.biomedcentral.com/articles/10.1186/s13033-020-00395-2
6. Fisher, C.D. (2010). Happiness at work. International Journal of Management Reviews. https://www.researchgate.net/publication/227533694_Happiness_at_Work
7. Gil-Monte, P.R., & Salas-Vallina, A., & Pozo-Hidalgo, M. (2020) Are Happy Workers More Productive? The Mediating Role of Service-Skill Use. https://www.frontiersin.org/articles/10.3389/fpsyg.2020.00456/full
8. Guerrero, R.F., & Salas-Vallina,A., & Alegre, J. (2018).  Happiness at work in knowledge-intensive contexts: Opening the research agenda. European Research on Management and Business Economics. https://www.sciencedirect.com/science/article/pii/S2444883418300883
9. Tordera, N., & Peiró, J.M., & Kozusznik, M.W., & Molina, I.R. (2019). The Happy-Productive Worker Model and Beyond: Patterns of Wellbeing and Performance at Work. Int J Environ Res Public Health. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6388150/#__ffn_sectitle

Excerpted from Sayyed S; Goswami A, "Wellbeing: An Occam’s Razor Example of Case Studies", The Dispatch. Original article accessible here.

Professor Anandajit Goswami is Professor and Head of the Department of Social and Political Studies and Director of the School of Behavioral and Social Science, Manav Rachna International Institute of Research and Studies. anandajit.fbss@mriu.edu.in

Saba Sayyed is an undergraduate final year student of Economics Honours in the Department of Economics, School of Behavioral and Social Science, Manav Rachna International Institute of Research and Studies.

The G20 can bridge India’s digital financial service gap

Financial inclusion — which aims to provide access to financial services for all individuals and businesses regardless of their social and economic status — has gained significant attention globally. The COVID-19 crisis increased the need for contactless financial products and services, accelerating financial inclusion and the evolution of digital finance.

Source: https://www.eastasiaforum.org/2023/05/18/the-g20-can-bridge-indias-digital-financial-service-gap/

Globally, there has been a great increase in formal bank account ownership from 51 per cent in 2011 to 76 per cent in 2021, with a steep average increase in developing countries from 42 per cent to 71 per cent. During the same period, bank account ownership more than doubled from 35 per cent to 78 per cent in India. But challenges to free access remain, such as the digital divide, lack of financial literacy, cybersecurity and data privacy.

The G20 has recognized financial inclusion as a fundamental driver of economic growth, which reduces economic vulnerability and poverty and enhances people’s quality of life. In 2010, it implemented the first G20 Financial Inclusion Action Plan (FIAP) as part of the Global Partnership for Financial Inclusion (GPFI) — a global platform for promoting financial inclusion.

In 2017, G20 FIAP was aligned with the UN Development Programme 2030 Agenda for sustainable development. Further in 2020, G20 FIAP recognised the role of financial inclusion in mitigating COVID-19’s negative effects through government intervention and technology adoption.

India has been actively involved in the G20 GPFI and participated in various GPFI working groups and task forces. The country contributes to the development of international standards, best practices and policy recommendations for financial inclusion.

One of the key pillars of India’s financial inclusion policy is Pradhan Mantri Jan-Dhan Yojana (Prime Minister’s People’s Wealth Scheme, PMJDY) — a flagship program launched in 2014 that aims to provide financial services to unbanked and underbanked populations. This program has been providing millions of previously unbanked individuals with basic savings accounts, insurance and pension services.

India has also implemented various other policy measures to promote financial inclusion, such as Pradhan Mantri Mudra Yojana (Prime Minister’s Micro Units Development and Refinance Agency Scheme, PMMY), which provides credit facilities to small- and medium-sized enterprises, as well as Pradhan Mantri Jeevan Jyoti Bima Yojana and Pradhan Mantri Suraksha Bima Yojana (Prime Minister’s Life Insurance Scheme), which provide affordable life and accident insurance coverage to economically vulnerable segments of society.

Since its inception in 2015, the PMMY scheme has granted Rs 23.2 trillion (US$283.8 billion) worth of loans to over 408 million beneficiaries. These loans help facilitate collateral-free micro-credit and generate employment opportunities.

The PMMY scheme has also benefited women entrepreneurs as 68 per cent of accounts are reserved for women under this scheme. But the government still needs to address regional and gender disparities, social and regional inequalities, financial illiteracy, information asymmetry, vulnerability to financial fraud and the digital financial divide to achieve inclusive economic growth.

Recent research based on the 77th round of All India Debt and Investment Survey using 2019–20 survey data finds that government financial inclusion programs like the PMJDY have a noticeable impact on households. This research suggests that despite being illiterate, 57 per cent of household heads have access to at least one financial instrument, such as deposits in saving bank accounts, fixed deposits and post office accounts.

Moreover, 50 per cent of the household heads with higher education have access to two or more instruments. Around 6 per cent of illiterate household heads use at least three financial instruments. This indicates that the financial literacy of family members, higher economic activities in the region and better information pass through increase the awareness of financial products and services.

Financial literacy can potentially reduce the marginal impact of illiteracy, allowing more people in rural households to benefit from financial inclusion. But women and other socially excluded entrepreneurs have lower utilisation rates of financial instruments. This is due to the high collateral requirement, preference-based supply-side discrimination and high-interest rates while accessing formal financing. These barriers arise because of the small size of loans and the perceived riskiness of women entrepreneurs.

Despite numerous government programs — including the PMMY Scheme, the Udyogini Scheme, the Dena Shakti Scheme and the Annapurna (Goddess of Food) Scheme — there is still scope to improve the business environment for entrepreneurs in rural areas through financial outreach programs. Appointing more women business correspondents, increasing digital literacy and implementing more women-centric policies would facilitate access to formal finance.

Digital financial services can also fill the gap in improving access to financial services through the G20 High-Level Principles for Digital Financial Inclusion. Doing so would help achieve the gender equality goal of sustainable development. Continued efforts towards advancing financial inclusion policies are crucial to promote empowerment and inclusive growth.

Excerpted from Kumarasamy, D; Singh P and Kaur, S, "The G20 can bridge India’s digital financial service gap", East Asia Forum. Original article accessible here.

Durairaj Kumarasamy is Associate Professor and Head of the Department of Economics at the Faculty of Behavioral and Social Science, Manav Rachna International Institute of Research and Studies. durairaj.fbss@mriu.edu.in

Prakash Singh is Assistant Professor at the Goa Institute of Management.

Sukhvinder Kaur is Research Scholar in the Department of Economics at Faculty of Behavioral and Social Science, Manav Rachna International Institute of Research and Studies.

Cross-border trade is the missing piece for India’s growth

The potential for cross-border trade between India and its neighbouring countries — Bangladesh, Bhutan, Nepal, Myanmar, Pakistan, Afghanistan and China — has not been fully realised. India’s formal cross-border trade with these countries was about US$2.48 billion in 2021 despite the US$115 billion trade potential. Only nine of India’s seventeen border states are actively engaged in cross-border trade. 

Source: East Asia Forum

This is due to political and security reasons, difficult geographical terrain for connectivity and growing informal trade which has stemmed from open borders in most of the northeastern region. 

Borders with neighbouring countries are often not properly fenced and guarded, resulting in insurgency and illegal movement of goods and people. Most of the northeastern region, as well as Jammu and Kashmir, face insurgency issues. Insurgents take advantage of porous borders to escape from the army as they are internationally well-connected and have hideouts in neighbouring countries. 

Another persistent issue is the undocumented cross-border migration from Bangladesh to India’s border regions, which results in human trafficking and other crimes. This has catalysed bilateral tensions between the two countries. The realities of the northeastern region pose a challenge to India’s open economic policy as conceptualised by the ‘Act East’ policy, which is currently oscillating between the need for basic economic development in the region and security constraints. 

Despite these challenges, northeastern states possess the potential to leverage their strong ethnic and cultural ties with neighbouring countries to facilitate the trade of locally produced goods via border haats (local markets along borders) and other channels. These channels can create numerous employment opportunities for young people. 

The proposed increase in border haats with Bangladesh, construction of new airports and the new PM-DevINE scheme (a regional development initiative) allow northeastern states to break the cycle of dependence on the central government. 

Both the central and state governments have introduced many developmental and infrastructural initiatives, such as Bharatmala — an intra-national transport network to strengthen land route connections with neighbouring countries. 

But despite these initiatives, northeastern states still face an infrastructural deficit. Poor road connectivity and a lack of bridges remain the biggest infrastructural challenge in the border districts of the state. Most villages do not even have access to tap water and electricity, and the Border Area Development Program does not have sufficient funds to fulfil the needs of border districts. Most borderlands lack basic amenities and employment opportunities, causing people to leave. 

The central government’s flagship initiatives, Make in India and the Self Reliant India Campaign, are efforts to make India a manufacturing hub. Given that vision, regional integration should be at the top of India’s foreign policy agenda, because it would help overcome constraints to the flow of goods, services, capital, people and ideas — all of which are critical to delivering high economic growth.

The central government needs to increase budget allocations for infrastructure and development initiatives in the border areas to provide necessary facilities for local populations. State governments could establish Export Promotion Zones for border trade through Integrated Check Posts by providing institutional and financial support to local entrepreneurs. They could also initiate an institutional framework at the state level to boost local trade, with designated ministries identifying local challenges and strengths.

The role of sub-regional groupings such as the Bay of Bengal Initiative for Multi-Sectoral Technical Economic Cooperation (BIMSTEC) and the Bangladesh, Bhutan, India, Nepal Initiative in facilitating border trade in India cannot be ignored. These groupings help reduce trade barriers, harmonise trade policies, develop infrastructure, enhance cooperation and promote regional integration which are essential for facilitating cross-border trade. 

BIMSTEC is in line with India’s ‘Act East’ policy, which seeks to foster greater regional cooperation in Southeast Asia. During the 2022 summit, Indian Prime Minister Narendra Modi urged BIMSTEC leaders to transform the group into a means of connectivity, prosperity and security — the three drivers of India’s regional diplomacy. 

India considers soft and hard infrastructure connectivity a key priority of its regional foreign policy. New Delhi’s recent initiatives such as the Bangladesh, Bhutan, India, Nepal Initiative Motor Vehicles Agreement, the expansion of cross-border railway linkages with Nepal and Bangladesh, the India–Myanmar–Thailand trilateral highway, efforts to start direct flights between Indian cities and Southeast Asian tourist destinations and the Security and Growth for All in the Region initiatives are all evidence of India’s commitment to this goal.

It is difficult to deliver high GDP growth without simultaneous growth in trade, particularly where manufacturing relies on integrated cross-border value chains. 75 years after independence, India — with its experience in soft power diplomacy to manage international relations — can lead the cross-border territorial integration with neighbouring countries to promote peace and prosperity across the border states. 

Excerpted from Kumarasamy, D and Nayyar, M (2023), "Cross-border trade is the missing piece for India's growth", East Asia Forum, Crowford School of Public Policy, Australian National University. Original article accessible here.

Durairaj Kumarasamy is Associate Professor and Head of the Department of Economics at the Faculty of Behavioral and Social Science, Manav Rachna International Institute of Research and Studies. durairaj.fbss@mriu.edu.in

Manisha Nayyar is Assistant Professor in the Department of Economics at the Faculty of Behavioral and Social Science, Manav Rachna International Institute of Research and Studies. manisha.fbss@mriu.edu.in