Parochial economics

Karnataka's proposed job reservation law is regressive

The Karnataka Cabinet has added a twist to a controversy roiling India’s business community by mandating a reservation for locals in private-sector jobs. The Bill, which has now been put on hold, mandates 50 per cent reservation for locals in management and 75 per cent in non-management positions. Unsurprisingly, this proposal has evoked a sharp response from businesses in Bengaluru, the centre for information technology, startups, global capability centres (GCC) and pharma industries – all racehorses for the Indian economy. The National Association of Software and Services Companies has already issued a statement expressing “disappointment” and sought a meeting with state authorities. This bid for nativist employment laws is not novel – Maharashtra set the ball rolling in 2008 (with an 80 per cent mandate), then Andhra Pradesh passed a law (75 per cent) in 2019, and Haryana (75 per cent) in 2020. All these laws have been challenged in courts by industry associations. The first to be struck down was the Haryana law in November 2023, and the Punjab and Haryana High Court’s reasons for doing so are instructive.

The Haryana law reserved 75 per cent of jobs in the private sector for posts drawing a salary of Rs 30,000 or less. The high court struck it down on two grounds. First, it was beyond the state’s purview to restrict private employers from recruiting on the open market. Second, reserving jobs for locals militates against the rights of other Indian citizens. The court observed that the concept of constitutional morality had been openly violated “by introducing a secondary status to a set of citizens not belonging to the state of Haryana and curtailing their fundamental rights to earn their livelihood”. The law violates Article 19 of the Constitution, which provides all citizens the right to practise any profession or occupation and to move freely and anywhere in India to do so. The Andhra Pradesh High Court had suggested the state’s 2019 law to be unconstitutional but is yet to hear the case. The Haryana government appealed against the high court ruling in the Supreme Court, which started hearing the case in February.

Aside from violation of constitutional proprieties, the practical economic logic of such parochialism is hard to fathom. The Karnataka Bill defines “local” as a person born in the state, domiciled in it for 15 years, and capable of reading, writing and speaking Kannada. Eligibility includes secondary school education with Kannada as a language. Those who do not have Kannada in secondary school must pass a proficiency test in the language. This Bill follows a move earlier this year to ask multinational companies in the state to display the number of Kannadiga people they employ. Such challenging structural restrictions on employment are unlikely to attract investment at a time when states are fiercely competing for private-sector investment, especially foreign direct investment. Private industries operating in competitive markets need the freedom to access the best talent available. Restricting the talent pool on parochial grounds is certain to impinge on efficiency and productivity, both critical competitive requirements for knowledge industries that depend on overseas markets. So far, states have thrived on the multicultural talent that India has to offer. Restricting employment for narrow political gains is akin to killing a productive golden goose.