India’s reservation of private sector positions for nationals puts investors in a fix

India has a long-standing relationship with reservation, a system that entails reserving quotas or seats in all public sector undertakings for marginalized demographics of the population in order to promote social and economic equity across the national economy.

India’s private sector companies have been the engine of its development and employment generation since the 1990s. The last three decades have experienced copious economic growth and job creation mainly driven by private businesses across sectors such as aviation, banking, telecom, insurance, information technology and manufacturing. The significance of private sector companies in the Indian economy can be seen from the colossal development of Indian Information Technology and Business Processing Outsourcing (IT & BPO) firms delivering services to foreign customers. With the advent of the Fourth Industrial Revolution, India is at the cusp of a technological revolution that could transform its manufacturing and industrial production; the private sector has the power to harness and use technology to unleash greater prosperity for the nation.

On March 2, 2021, the State of Haryana passed the “Haryana State Employment of Local Candidates Bill,” effective May 1, 2021, which orders 75% reservation for local workers in private sector occupations. Following in the footsteps of the Haryana government, the Uttar Pradesh government has also issued an order to implement a 40% reservation for local youth in private companies in Greater Noida. And there is massive demand coming in from other states such as Uttarakhand, Madhya Pradesh, Gujarat, Rajasthan, Maharashtra, and Karnataka for such legislation. This kind of state reservation policy might have some benefits, but it’s not all positive.

“Unnecessary Intervention”

Although this move can be seen as helping the local unemployed population tap into opportunities created by the state along with enhancing the efficiency of the industry by reducing worker absenteeism and dependency on migrant laborers, 80% of companies surveyed by the National Association of Software and Service Companies expressed concerns about future business operations in Haryana due to the new reservation law.

Business Process Outsourcing organizations are already contending globally to get and develop business to help the general economy. This might push their development to different locales with simpler hiring laws, whether that is within or outside of India. In the long haul, states imposing laws like this will lose the edge they have gained over many years.

This new law will bring long and tedious hiring procedures and expanded expenses which will likely hamper economic development. Time will be lost in sorting through the documents of a candidate and giving a “local status” certificate rather than looking for the most suitable ones. While many local candidates would have suitable skill sets for these positions, more specialized roles in manufacturing and IT might require non-local employees who have the right expertise. The lack of qualified specialists in a state will affect the execution of this policy and private firms will only have the option to roll out offers to candidates without the relevant skill sets, which in turn will impact productivity. Instead, greater, more specialized training for local Indian students and workers such as increased diploma opportunities and skill-based courses across manufacturing, IT, and BPO/KPO (Knowledge Process Outsourcing) could lead to better long-term solutions for both workers and companies.

The new reservation policy has made some investors uncertain about the shifting landscapes, according to a recent study by the Confederation of Indian Industry (CII). Investment is moving towards parts of India where the labor landscape is more stable and growth is more certain. Many other businesses share this feeling as there is a concern about talent availability in any specific area. If companies are denied access to the skilled resources through reservation in the private sector they need then it is also possible that they will take their operations overseas or turn to automation to ensure continued profit making.

One step forward or two steps back?

Out of India’s labor market of 500 million people, the structured private sector employment amounts to only 3% of the working population. This move could end up doing very little to benefit local employees while increasing the compliance burden on private firms. In terms of economic development it has been shown that liberal labor laws in Asian markets are more appealing to FDI, which might be detrimental to India under its new reservation policy.

There is a further risk that industry bodies might seek legal redress over reservation in private sector areas and it has a negative impact on members’ ability to be competitive. The Haryana high court is still subject to decisions made by national courts, if the supreme court overturned the reservation in private sector laws the the Haryana high court must comply. The new reservation policy also means that inter-state migration becomes far more difficult as there will be fewer job opportunities outside of the home state. Essentially, it means that India is no longer one nation, but a nation of separate states. This also stagnates talent exchange within the country and creates disparities in employment opportunities and income ranges between regions.

Such laws go against the Prime Minister’s push for ease of doing business and put India’s opportunity to become the next manufacturing hub of the world at risk. This makes a supreme court overturn likely. Reservation in the private sector will lead to an adverse effect on other private industries and cause domestic and foreign companies to think twice before making investments in India, thereby worsening the situation. Governments and other stakeholders must proceed cautiously and carefully.

The COVID-19 pandemic has made it imperative for states to focus on fast and effective economic recovery. However, the compulsion for companies to employ locals might compromise quality and delay economic recovery. Thus, it is better to reskill and train locals and enhance the quality of education so that they are better placed to be hired for such jobs.

A long-term, more comprehensive solution is key.

When unforeseen laws emerge in Asian markets where you may work or invest, the ability to adapt quickly and accept change in the new normal is key. Having a local partner who understands how to swiftly and flexibly change course and realign resources when new laws get implemented or massive disruptions such as COVID-19 take place can save your business. And that is one of the qualities we embody at Tractus.

Graphic: Chad Crowe