What will it take for India to create jobs for millions of young people?

It was supposed to be a red-carpet affair, both literally and figuratively.

Electric vehicle maker Tesla CEO Elon Musk was expected to announce an investment of “$2 billion to $3 billion” to build a factory in India during his April 21-22 visit to New Delhi.

There were also indications that Musk’s satellite communication business was going to receive a licence to operate in the tightly regulated Indian space sector.

But all the hullabaloo came to naught when the eccentric billionaire postponed his visit a day before his scheduled arrival citing “heavy Tesla obligations”.

The postponement has taken some shine off the re-election bid of Prime Minister Narendra Modi, who recently claimed that Musk was a “supporter of Modi”. India is in the middle of a weeks-long election process.

A multi-billion-dollar investment in a manufacturing facility by one of the world’s richest businessmen would have bolstered the electoral prospects of Modi, who’s running for a third term as prime minister of the world’s fifth biggest country by GDP size.

A new global factory

New Delhi has been trying to cash in on the trade war between the United States and China by rebranding India as a global manufacturing hub. Major US firms like Apple and Amazon have recently set up assembly and cloud infrastructure facilities in the $3.4 trillion economy.

China has remained for decades a production outpost for US-based high-end technology firms. But growing tensions between the two largest economies of the world have led the United States to prop up India as an alternative investment destination for large US firms.

Yet India has a long way to go before it can snatch the mantle of the world’s factory from China.

“There’s been a significant shift of manufacturing production to Asia in the last 30 years, but India has not been a significant participant in that process,” says Dr Surajit Mazumdar, professor of economics at Jawaharlal Nehru University, New Delhi.

“If you look at the size of the industrial sector relative to its population and GDP, India is one of the least industrialised countries in the world.”

In fact, India has been one of the economies that are experiencing premature deindustrialisation, he tells TRT World.

In his election campaign, Modi has vowed to bring the kind of foreign direct investment (FDI) that “engages (Indian) citizens in the manufacturing process” to ensure there’s a job for each one of the 12 million young people who enter the labour force every year.

Even though India has nearly doubled its exports in the last decade to $777 billion, most of the dollar-based proceeds are generated from less labour-intensive businesses in the non-manufacturing sector.

“The prospects of India emerging as a major manufacturing hub that attracts significant investment from the rest of the world don't appear to be very bright. It hasn’t happened so far,” Mazumdar says, noting that the services sector generates more than 60 percent of Indian exports every year.

Old economy, obsolete laws

Modi has made efforts to change an archaic regulatory regime where a non-resident investor often had to navigate through multiple layers of approvals from ministries and government departments under a “government route” mechanism.

For example, the Indian government has relaxed as many as 87 FDI requirements across 21 industries in the last three years and opened “traditionally conservative areas” to foreign investment.

Until early this month, one such area was satellite manufacturing where foreign investors needed hard-to-get government permission. But the Modi government eased the rule, allowing 100 percent FDI in the manufacturing and operation of satellites, satellite data products and ground segment and user segment.

But even then, any equity investment beyond the limit of 74 percent in a space-related business will require the government’s prior approval.

The government seems to have changed the FDI policy to accommodate Starlink, a company owned by Elon Musk that provides internet access to users via a constellation of satellites orbiting around the earth. A licence application by Starlink to operate in India is currently pending.

In the same vein, the Indian government notified in March a substantial cut in import taxes on electric vehicles (EV) for those carmakers that promise to invest at least $500 million in India and start production within three years.

The relaxation appears to be tailored for Musk’s Tesla, which has been “lobbying” for concessions for months, much to the chagrin of existing EV makers like Tata Motors.

EVs constitute only two percent of all car sales in India, even though their market share is expected to surge given the government’s target of 30 percent by 2030. This has given rise to concerns that a Tesla manufacturing plant in India will mainly serve the domestic market instead of generating dollar revenues through foreign sales.

Furthermore, an assembly plant for Tesla will add to India’s import bill given that almost all of Tesla components are sourced from China. It’ll worsen the country’s trade deficit, as the value of imports outstripped dollar-generating exports by as much as $122 billion in the latest fiscal year.

Fewer, low-paying jobs

Up until now, the FDI inflows have created jobs mainly in the services sector, which has turned the South Asian country into the “office of the world”, says Dr Praveen Jha, a New Delhi-based development economist.

Most of these jobs are, therefore, low-paying, business process outsourcing or gigs in customer service, marketing, payroll and human resources.

“Almost every company from Fortune 500 has had a back office in India since around 2010,” Jha tells TRT World, adding that such an arrangement leads to no technology transfer – something that has more sustainable and long-term benefits for developing economies.

One of the consequences of the services-oriented FDI has been a “jobless growth” in India, Jha says.

“Of the 27 sub-sectors of the Indian economy, the labour absorption rate in at least 10 categories has actually been negative. The rate has been going down in many other subsectors,” he says, while referring to the share of employed people within the working age population in an economy.

“So in the aggregate, labour absorption per unit of growth has been going down in India,” he says, meaning economic growth is taking place in India but the number of jobs created as a result are fewer than before.

Quality-wise, even those fewer jobs are “absolutely terrifying”, he says.

Even the formal sector is allowed under the law to employ people as casual workers who perform exactly the same tasks as regular workers, but at a “pitiable salary” and without any job protection, health coverage or pension benefits.

A Japanese automaker in India pays its casual workers about one-sixth of what it pays its regular employees, and gets away with it, he says.

“There’s absolutely no reason why the so-called organised sectors should be allowed to employ workers on an informal basis.”