Sanity prevailed: Karnataka has done right thing by hitting pause button on local job quota bill

In 2020, the government of Haryana enacted the Haryana State Employment of Local Candidates Act, 2020, mandating that companies allocate at least 75 per cent of their employment to local candidates. This well-intentioned yet deeply flawed legislation undermines the essence of free market principles and meritocracy, stifling economic growth and innovation.

Adam Smith’s “invisible hand” theory argues that individual pursuit of self-interest benefits society, yet this Act disrupts this natural order. Friedrich Hayek cautioned against the inefficiencies of government intervention in “The Road to Serfdom,” a point further cemented by the Punjab and Haryana High Court’s ruling in IMT Industrial Association and Another versus State of Haryana, that the Act is unconstitutional.

The court emphasised that the Act violates the fundamental principles laid out in the Constitution of India. Quoting the judgement: “Thus, keeping in view the principles laid down by the apex court itself on the principles of morality, the State cannot direct the private employers to do what has been forbidden to do under the Constitution of India. It cannot as such discriminate against the individuals on account of the fact that they do not belong to a certain State and have a negative discrimination against other citizens of the country.”

The court highlighted that the state’s directive to private employers on employment practices contravenes the principles of laissez-faire, where minimal government intervention is preferred: “It is not for the State as such to direct the private employer who it has to employ keeping in view the principles of laissez faire that ‘the lesser it governs, the better itself’.”

Moreover, the judgement pointed out that such directives could lead to a proliferation of similar state laws across the country, creating artificial barriers that the framers of the Constitution never intended: “Once there is a bar under the Constitution of India, we do not see any reason how the State can force a private employer to employ a local candidate as it would lead to large scale similar state enactments providing similar protection for their residents and putting up artificial walls throughout the country, which the framers of the Constitution had never envisaged.”

This is precisely what has happened. Last week, the Karnataka government announced the introduction of the Karnataka State Employment of Local Industries Factories Establishment Act Bill, 2024, aiming to mandate that 50 per cent of management jobs and 75 per cent of non-management jobs in the private sector be reserved for locals. The announcement triggered an uproar from multiple stakeholders, including industry leaders, economists, opposition parties, and even some members of the ruling dispensation. In response to the widespread backlash, the Chief Minister tweeted that the bill is “still in the preparation stage” and that any final decision would be made only after comprehensive discussions. This effectively places the bill on the backburner, signalling a significant retreat in the face of mounting pressure.

Many have speculated that this move was a tactic to divert attention from recent scandals uncovered in Karnataka. As an economic commentator, I find it utterly baffling that the state government proposed such a bill. It is flawed legally, detrimental to the ease of doing business, harmful to the state’s economy, and reinforces the notion that India has a highly unpredictable regulatory environment. The repercussions of this ill-conceived proposal could be far-reaching, signalling a troubling uncertainty for the future.

There are five problems which arise out of such moves. First, as highlighted by the Punjab and Haryana High Court, such bills are bad in law. The Indian Constitution ensures equality before the law and prohibits discrimination based on place of birth (Article 15) while guaranteeing equal employment opportunities (Article 16).

Second, research shows that regions with restrictive labour laws attract less FDI, as investors seek more flexible and business-friendly environments. Employment reservation acts can deter foreign investors who might find the mandated quotas too restrictive and contrary to their hiring practices. Further, labour market flexibility is crucial for economic resilience and growth. Such reservation acts reduce flexibility by forcing companies to hire based on residence rather than skill, which can lead to inefficiencies and decreased adaptability to market changes

Third, such laws create artificial barriers, reducing labour mobility and efficiency, which is crucial for matching workers with suitable jobs and addressing regional labour shortages. This protectionism fosters economic isolation and interstate economic retaliation, as states may introduce similar measures, leading to a tit-for-tat scenario that increases regulatory complexity and administrative burdens for businesses.

Employment reservation legislations for local residents can severely harm the overall labour market, as seen through the lens of Silicon Valley’s success story. Immigrants have played a pivotal role in the Bay Area’s tech boom, founding 55 per cent of startups in Silicon Valley, with 44 out of 87 startups in 2017 being immigrant-led. A University of California, Berkeley analysis revealed that between 1995 and 2005, immigrant entrepreneurs founded 52 per cent of the area’s tech companies, generating millions of jobs and significant economic growth. The Partnership for a New American Economy found that immigrant-founded firms in the Bay Area produced 75 per cent of patent applications from the top ten patent-producing universities in the US.

Moreover, immigrants are twice as likely to start businesses as native-born Americans, with 25 per cent of high-tech companies founded between 1995 and 2005 having at least one immigrant founder. The Brookings Institution reports that immigrants, while representing 36.8 per cent of the Bay Area’s population, make up 70 per cent of its tech workforce, with 57 per cent of engineers and scientists in Silicon Valley being foreign-born. If similar restrictions had been in place to limit the employment of “outsiders”, it is doubtful that the Bay Area would have achieved its current level of innovation and economic prosperity.

Fifth, employment reservation acts can act as significant impediments to innovation. A study by Dany Bahar and Prithwiraj Choudhury found that countries are 3.5 per cent more likely to become significant producers of technology for every twofold increase in the stock of immigrants (30,000 people, on average) from countries that excel in that same technology. The results were particularly strong for skilled immigrants (Bahar & Choudhury, 2018). This suggests that the influx of skilled workers from different regions brings diverse expertise and ideas, fuelling innovation and technological advancement.

By the same logic, internal migration within a country can positively impact innovation, especially in technological hubs like Bengaluru. Internal migration allows for the flow of skilled workers from different states, contributing to a diverse and dynamic workforce. This diversity fosters creativity and innovation, as it brings together varied perspectives and problem-solving approaches.

Ironically, Bengaluru, a city aspiring to be an IT hub akin to Silicon Valley, would implement policies restricting internal migration and, consequently, innovation. The Bay Area’s success is partly due to its openness to skilled migrants from across the globe, which has been a significant driver of its technological leadership and economic growth.

Thankfully, Karnataka has hit the pause button on the local employment reservation bill, proving that sanity can indeed prevail. Imagine trying to build the next tech giant while playing “locals only” — it’s like trying to win a race with your shoelaces tied together.

Aditya Sinha (X: @adityasinha004) is Officer on Special Duty, Research, Economic Advisory Council to the Prime Minister of India. Views expressed in the above piece are personal and solely those of the author. They do not necessarily reflect Firstpost’s views.