By Sarah Watson —

India’s Labour Bureau just released its latest quarterly report on employment in eight key sectors, responsible for over a third of India’s gross domestic product (GDP), covering the period from July to September 2015. Although the report showed that India had added 133,000 jobs in the quarter (an improvement over the 43,000 lost in the previous quarter), it was still rightly seen as a disappointment. This was the slowest third quarter since 2009, when India began collecting this data.

The Labour Bureau released its report only a few days before the launch of a new real-time unemployment tracker that put the all-India unemployment rate at 8.4 percent in March. These disheartening jobs numbers are all the more surprising given that India’s GDP grew at well over 7 percent in 2015. No matter how high India’s growth, the country will suffer if it cannot find jobs for the net 150 million citizens who will join its workforce in the next 20 years.

Economic research suggests that foreign direct investment (FDI) not only creates jobs, but that the jobs it produces are, on average, better than those produced by purely domestic investment. Thus while FDI may not be the solution to India’s job creation problem, it is certainly an important part of the puzzle. The FDI India receives, however, is severely misaligned with its job-creating industries.

The quarterly report on FDI inflows produced by India’s Department of Industrial Policy and Promotion (DIPP) shows that in the first nine months of Fiscal Year 2016 (April to December 2015) investment in “services” (which covers “financial, banking, insurance, non-financial/business, outsourcing, R&D, courier, [and] tech. testing and analysis”) and the closely related hardware and software sector was responsible for the lion’s share of FDI. The two sectors together received a total of 9.56 billion dollars in FDI — more than all of the other top-ten sectors put together, and nearly a third of total FDI in any sector.

This data is not surprising. Services are the fastest growing sector of India’s economy, and thus an attractive destination for foreign investment. But it is unfortunate from the perspective of job growth. According to the 2015-16 Economic Survey, while service industries contribute 53 percent of India’s Gross Value Added (GVA), they only employ 28.7 percent of its population—a ratio of nearly 2-to-1. The imbalance between the value of India’s service sector and the number of Indians employed in it is even more pronounced when we look solely at higher-end services that attract foreign investment. The Sixth Economic Census, published March 31, 2016, found that India’s information, communication, and administrative and support establishments (including call centers, consultancies, and businesses offering computer programming services) employ just 3 percent of India’s non-farm workers. When financial and insurance activities are included, the number rises to 5.2 percent. Since the census excluded farm and casual employment, the actual percentage of professional, financial, and support workers among all India’s workers is far lower. Yet this sector received 32.5 percent of FDI in FY2015.

Not all of DIPP’s investment categories align neatly with the types of employment recorded in the Economic Census. But where the numbers can be compared they show a continued mismatch between FDI inflows and job opportunities. Construction, for instance, which at $105 million received only .3 percent of FDI, employs 1.8 percent of Indian non-farm workers. The wholesale and retail trading sectors employing 22.6 percent of workers received 9.2 percent of FDI.

Perhaps most importantly, manufacturing, which employs 23 percent of non-farm workers, is represented in the top-ten only by automobiles, chemicals, and pharmaceuticals. Even in the unlikely case that all the investment in these areas went to manufacturing, they still only accounted for 11.3 percent of total inflows. When we look at dollars invested per worker, the disparity is even more obvious: more than $1,400 per tech and professional worker, but only $45 per construction worker.

FDI in India is only equal to 1.7 percent of GDP, and the preferences of foreign investors clearly cannot be held entirely responsible for slow job growth. Ideally, however, India could follow the example of China in attracting FDI that is in sync with its government’s long-term goals: as China has attempted to move its economy away from manufacturing and towards services, for example, the relative proportion of FDI going to services and manufacturing has reversed.

A shift in India’s FDI towards manufacturing and away from technology-based services will be difficult, because it requires reform of the byzantine rules and restrictions that still impede outside investment, and the high factor costs that make India’s non-service sectors unattractive. But just as Prime Minister Modi has asked domestic businesses to invest in labor-intensive sectors, his government should start considering how to attract foreign investment in these areas as well.

Ms. Sarah Watson is an associate fellow with the Wadhwani Chair in U.S.-India Policy Studies at CSIS.