Competitive Federalism in India: Is Reserving Jobs For Locals Driven by a Long-Term Vision or Populism?

24 March 2021 Tridivesh Singh Maini, FDI Visiting Fellow

Recent laws passed by various state governments reserving jobs for locals are unlikely to be of much benefit. In fact, many investors may decide to relocate elsewhere in India or even go overseas.


In recent years, there has been an emphasis on promoting “competitive federalism”, or greater competition between India’s various states, especially in attracting Foreign Direct Investment (FDI). This trend began after the economic reforms of the 1990s and was also evident during the Information Technology (IT) boom when South Indian states, like the then-undivided Andhra Pradesh (whose capital was Hyderabad) and Karnataka, competed with each other to woo IT giants like Microsoft. An article authored by Rudolph and Rudolph, Iconisation of Chandrababu: Sharing sovereignty in India’s Federal Market Economy, published by the Economic and Political Weekly discusses how the Chief Minister of Andhra Pradesh at the time, Chandrababu Naidu, reached out to investors and left no stone unturned in attracting investors.


Recent Steps Taken For Enhancing Competitive Federalism

Over the last two decades, a large number of states have held “Investor’s Summits” with an eye on attracting investors. While there has been a degree of scepticism as to whether such summits are actually effective, and to what extent the commitments made by investors are fulfilled, they provide an opportunity for state governments to interact with investors and get constructive feedback regarding their policies.

A number of analysts have argued that the state-wise Ease of Doing Business Rankings prepared by World Bank and Department of Industrial Policy and Promotion (housed within the Government of India’s Ministry of Commerce and Industry), have also instilled a competitive spirit among Indian states, which has resulted in the introduction of economic reforms and policies that could attract investors.

Competition With Regard To Populism

More recently, several states have competed in terms of passing populist policies for political gain. They have passed laws that reserve a fixed percentage of jobs in the private sector for locals. This is especially interesting because of the focus on attracting investors, especially those who want to relocate from China in the aftermath of US-China ties and the COVID-19 pandemic. Andhra Pradesh, for instance, passed the Andhra Pradesh Employment of Local Candidates in the Industries/Factories Bill, 2019. The law was challenged in the High Court under Articles 16(2) and 16(3) of the Indian Constitution. Karnataka, Jharkhand and Haryana have since passed similar laws reserving jobs for locals.

In the northern state of Haryana, the Haryana State Employment of Local Candidates Bill mandates that 75 per cent of those private sector jobs paying below 50,000 rupees ($894.00) per month be reserved for locals. Many analysts have highlighted this decision by the Haryana Government because the suburb of Gurugram, which shares a border with New Delhi, is home to major Information Technology companies like Google, TCS and Microsoft. Such companies seek human resources from outside the state, i.e. they recruit manpower from different parts of India, especially the neighbouring states.

The eastern state of Jharkhand passed a similar law reserving 75 per cent of the jobs that paid below Rs. 30,000 ($535.00) per month for locals. It was part of the manifesto of the ruling Jharkhand Mukti Morcha (JMM).

While most states have enacted laws that reserve jobs for locals in the private sector, the state of Madhya Pradesh passed a law that reserved government jobs for locals.

Interestingly, in poll-bound Tamil Nadu, the manifesto of the Dravida Munnetra Kazhagam party, which is the frontrunner in the upcoming state assembly election, according to a number of opinion polls, also states that 75 per cent of jobs in the private sector will be reserved for locals. Tamil Nadu has been one of the frontrunners in attracting FDI due to the quality of its manpower and infrastructure.

Reasons Cited For These Laws

The main reason cited by governments for passing these laws is to safeguard the interests of locals. Many observers feel that these laws have been motivated by political gain, since companies in any case prefer to employ locals for logistical reasons. Compared to other countries, inter-state migration in India is relatively low. Instead of passing laws that reserve jobs for locals, the focus should be on improving educational standards and creating a pool of high-quality manpower by providing them with adequate skills and training.

Compelling industrial houses to reserve jobs for locals could compel investors to look at other countries and will not benefit anyone, per se.

It would be unfair to blame any one political party or state for passing these laws, given that states all over the country run by different political parties have done so with an eye on short-term political benefit. While in the short run this strategy may bring dividends, in the longer term it may not be beneficial. At a time when countries like Vietnam already outperform India in attracting FDI, state governments clearly need to rethink that policy.

About the Author

Tridivesh Singh Maini is a New Delhi-based Policy Analyst and FDI Visiting Fellow.

Any opinions or views expressed in this paper are those of the individual author, unless stated to be those of Future Directions International.

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