The Haryana government has recently passed a legislation that mandates companies in Haryana to provide jobs to local Haryanvis first.
Similar legislations by other states reflect a rising trend of subnationalism in the States of India which call for course corrections.
What was the need for Haryana’s legislation?
The jobs situation in Haryana is staggeringly dismal.
The unemployment rate there is the highest of all States in India.
A whopping 80% of women in Haryana who want to work cannot find a job.
More than half of all graduates in Haryana are jobless.
Politically, 11 out of the 18 million voters of Haryana do not have a regular job.
When such a vast majority of adults are jobless, it inevitably leads to social revolutions and political upheavals.
Given this, Haryana government chose to reserve the few available jobs for its own voters.
What is the concern with this?
Many States in India have embarked on this nativism adventure.
Jharkhand too approved a similar legislation to reserve jobs for Jharkhand residents.
The Dravida Munnetra Kazhagam (DMK) in Tamil Nadu recently announced a similar proposal in its manifesto for the upcoming Assembly elections.
The objective is to protect the interests of the vast number of their jobless locals.
However, such policies have attracted criticisms as it is against the liberal idea of a free economy.
Focusing on creating more jobs, and not on reserving the few available ones, is said to be a better approach.
But, it is to be understood that creation of new jobs is not entirely in the control of State governments.
It is a complex interplay of multitude of factors.
How do states create jobs?
Job creation is obviously an outcome of the performance of the larger economy.
The Chief Minister of a State in India has limited control over the management of the larger economy.
A State, thereby, aims at attracting new investors and businesses that can create jobs.
In that case, a firm, for its expansion, would look for -
abundant high quality skilled and unskilled labour
land at affordable prices
uninterrupted supply of electricity, water
other such ‘ease of business’ facilities
State governments in India can theoretically compete with each other on these parameters to attract a firm to set up operations in their State.
Further, any tax advantages that a particular State can provide vis-à-vis others will increase its attractiveness.
What are the challenges to job creation?
Realistically in India, a poorer State can compete only in very few of the above parameters against a richer State.
An elected State government can certainly, during its five-year tenure, attempt to provide high quality local infrastructure.
State governments may also have the ability to provide land at affordable prices or for free.
However, the availability of skilled local labour is a function of many decades of social progress of the State.
It cannot be retooled immediately.
After the introduction of the GST, State governments have particularly lost their fiscal autonomy.
They have no powers to provide any tax concessions to businesses.
In simple terms, states have less or no control over immediate availability of skilled manpower or to use taxes as a tool to attract firms.
Agglomeration effect - Beyond all the above factors, the most critical factor in the choice of a location for a large business is what economists term as the ‘agglomeration effect.’
It refers to the ecosystem of supply chain, talent, good living conditions and so on.
A State with an already well-established network of suppliers, people, schools, etc are at a greater advantage.
E.g. if Amazon’s competitor Walmart is already established in Karnataka, then there is a greater incentive for Amazon to also locate itself in Karnataka to take advantage of the established ecosystem
This leads to a cycle of the more prosperous States growing even faster at the expense of the lagging States.
What is the ‘3-3-3’ danger in this regard?
The ‘3-3-3’ phenomenon is already evident in India’s increasing economic divergence among its States.
The ‘3-3-3’ effect points to the below:
The three richest large States (Maharashtra, Tamil Nadu and Karnataka) are three times richer than the three poorest large States (Bihar, Uttar Pradesh and Madhya Pradesh), in per-capita income.
This is an increase from the 1.4 times in 1970.
This gap between the richer and poorer States in India is only widening rapidly and not narrowing.
The increasing gap is due to the agglomeration impact of modern economic development paradigms.
What is the implication?
In effect, there is the absence of a level playing field among states and lack of fiscal autonomy.
Given this, it is difficult for the developing states to attract new investments and create new jobs.
There is clearly a widening inter-State inequality with a ‘rich States get richer’ economic development model.
Also, there is an impending demographic disaster and shrinking fiscal autonomy for elected State governments.
A combination of these factors would inevitably propagate nativistic sub-nationalism among the States of India.
So, an elected government would naturally resort to appeasement policies to deal with the worrying employment situation.
It is in this line that the States go for policies on reservation for the locals.
The need of the hour is a level playing economic field for the various States and much greater fiscal freedom.
This is crucial to create new jobs and not just protect the available ones.
