Reservation For Locals: Whither jobs, economic freedoms, and economic unity?

India’s LFPR, which indicates the number of people above 15 years of age who are in the labour force is at an abysmal 39.5 percent.

It is both easy and tempting to dismiss the entire saga of the reservation of jobs for the locals in Haryana as one of misplaced policy action duly corrected by the judiciary. It could even be tempting to celebrate the strength of the checks and balances present in the Indian Republic.

Briefly, to set the context, the Haryana government, acting on the election promise of the current Deputy Chief Minister Dushyant Chautala, passed the Haryana State Employment of Local Candidates Act, which came into effect in January 2022. The law mandates that all private employers in the state must reserve three-fourth of jobs paying less than Rs 30,000 a month for local residents.

Haryana is by no means the only state in India to attempt such protections. Currently, a draft IT policy by the Kerala government released on November 23 plans to provide special incentives to investors who offer at least 50 percent of jobs to Keralites. Other states have also enacted laws providing reservations for their local residents in the private sector. These states include Maharashtra (up to 80 percent), Karnataka (75 percent), Andhra Pradesh (75 percent) and Madhya Pradesh (70 percent) – with varying degrees of success.

The Punjab and Haryana High Court quashed the law enacted by the state BJP government, terming it “unconstitutional and violative of Part-III of the Constitution”. However, going beyond the immediate victory, good policy analysis necessitates looking at the causal factors that led the government to undertake such a drastic policy move, as something similar is playing out already in another state.

Symptom Of Unemployment

The Haryana government’s policy or Kerala’s draft IT policy is merely an indication of myriad structural issues. Firstly, it is emblematic of the deep-rooted unemployment and underemployment problem in India’s economy. India’s unemployment rate was 10.05 percent in October, according to data by Centre for Monitoring Indian Economy (CMIE). While the unemployment rate itself is alarming, the bigger worry is India’s unusually low Labour Force Participation Rate (LFPR).

India’s LFPR, which indicates the number of people above 15 years of age who are in the labour force is at an abysmal 39.5 percent. Put another way, only roughly 400 million out of 1.4 billion people are either looking for a job or already have a job. Among other factors, the lack of job opportunities drives people out of the labour force.

The manifestation of the low LFPR and high unemployment in India often tends to be in the form of demand for reservation of jobs. It stands to reason that there will be hard fought struggles for such a scarce commodity and political manoeuvrings that attempt to take advantage of the fear of losing jobs to the “outsiders”. In fact, the High Court was apprised that the law intends to “protect the right to life/livelihood of people domiciled in the State”, and that the enactment was rooted in the problem of rising unemployment in Haryana.

Paucity Of Economic Freedom

Another worrying structural issue that this episode highlights is the constant interference of the state in economic matters. Of the different freedoms guaranteed by the Constitution – political, religious, personal (speech), and economic – the last one is the most readily trampled upon by the state with carefree abandon. The Indian State will interfere in pricing decisions, inputs, hiring and firing, and all other aspects of running a business. It equally denies the freedom of individuals to choose a job in any part of the country. The High Court recognised this in its judgment: “…we do not see any reason how the State can force a private employer to employ a local candidate…”

Apart from taking an ideological stance against such interference, it imparts significant costs to doing business. The provision of the Act is entirely reminiscent of the fearsome “Inspector Raj”, as has been noted by the High Court as well. The law required the employers to register every employee with a monthly salary below Rs 30,000 on a designated portal (and couldn’t hire anyone new until the registration was complete). The job seekers have to register themselves on the portal as well and all the hiring has to be done through the portal.

Then, in a seeming tribute to the 1960s, every employer will have to furnish a quarterly report mentioning details about local candidates employed during that period. This would be scrutinised by authorised officers, who can impose a fine of Rs 10,000 to Rs 5 lakh for contraventions to the law, giving ample opportunities for rent-seeking.

An (Economic) Union of States?

The Haryana and Kerala episodes, along with other similar attempts, are an indictment of the level of economic integration of the Indian states. While India has done fairly well as a political union of states since Independence, we have left a lot to be desired in the economic realm. An individual in the European Union can reside in any country, buy property, own businesses and conduct any form of economic activity in any other member country of the EU. In India, there are restrictions on buying land, movement of goods, jobs and residence, and there is even friction in driving a car bought in another state.

The danger of such a move is that it could very easily trigger a “beggar-thy-neighbour” competitive protectionist set of policies among states. Each state can retaliate and erect walls of their own leading to the economic and social disintegration of the Indian union.

Each state views economic migration with great suspicion instead of welcoming migrants with open arms. The fastest growing cities in India are the ones which have traditionally attracted migrants. Bangalore, Mumbai and Delhi bear witness to this. Opposition to migration falls into the lump of labour fallacy – a belief that there is a limited number of jobs available and therefore a migrant is “taking away” a local’s job. In fact, the opposite is true – migration leads to increased economic activity, which leads to more job creation.

Instead of relying on such short-term fixes that have huge negative consequences, states would do well to focus on the underlying issues. Reduce compliance costs and ease of doing business to attract fresh investments which can create large scale jobs. Undertake capital investments, like infrastructure that can both create jobs by itself and attract other investments. Invest in skills and training to give better employment opportunities. Increase economic freedom and liberty, which invariably leads to higher and diverse economic activity, which can create the required jobs for locals and others.

Anupam Manur is a Professor of Economics at the Takshashila Institution, an independent think tank and school of public policy. Views are personal, and do not represent the stand of this publication.