On Wednesday, the newly elected Andhra Pradesh Assembly passed legislation that would reserve 75 per cent of industrial jobs in the state for locals. This fulfils an election promise the YSR Congress, the ruling party in the state, had made in this year’s Assembly election campaign. Companies have been told they have three years to comply with this law. Only certain factories in sectors such as pharmaceuticals and petroleum will be exempt, and that too only on a case-by-case basis. This is a new development in what has been a long-running conflict — not just in Andhra Pradesh but in many states that have seen substantial migration, such as Maharashtra.
Politicians who operate in states are often tempted to keep their promises of jobs by forcing private companies to hire locally. But the consequences of such legislation are unlikely to satisfy job-seekers. Companies will think twice about locating in Andhra Pradesh. In fact, companies there will see their labour costs rise and the pool of hireable labour shrink, and will in many cases choose to leave for a more satisfactory business climate — whether in another state or outside India altogether. Capital flight will become a reality. This is not a recipe for job creation and growth, but one for stagnation and urban distress.
Andhra Pradesh has long had a reputation for being business-friendly, but this legislation will dampen sentiment considerably. The state government has said a shortage of skilled labour is not an excuse for not hiring locals — the companies themselves will have to train unskilled workers in that case. This passes on the responsibility to build a skilled workforce from the government to the private sector, which has, of course, every incentive now to leave. What is worse is that this legislation may well find imitators elsewhere in India. Indeed, a less expansive variation exists in the industrial policy of the Congress-led government in Madhya Pradesh, which requires that 70 per cent of jobs in any factory set up with financial or other assistance from the government be reserved for locals.
Bad but populist policy can spread like wildfire. It is entirely possible that other states with large pools of migrant labour — such as Maharashtra or Karnataka — will begin to discuss their own variation of this law. It is hard to see this as being in keeping with the principles of the Indian Constitution. It will also severely hamper Indian growth prospects. A basic and well-understood principle in growth theory is that unskilled labour must move to the cities, where it can then feed into the modern economy. In India, with its regional disparities, this process will naturally have to work between states and not merely within them. Restrictions on labour mobility will affect India’s growth prospects.
Large countries such as China have done better, partly because of this internal migration
effect. Such legislation will also enhance the resentment that is already growing between those parts of India that are more embedded in the world economy, such as the coasts and the south, and the hinterland of north India, which has a large reservoir of unemployed youth with few prospects close to home.