Fragmented India again? Son-of-soil policies threaten labour market

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New Delhi | December 31, 2018 6:27 AM

Many states turn strict in enforcing ultra-protectionist steps, some could take cue from MP’s recent move in the run-up to 2019 polls.

A clutch of state governments seems putting a spoke in the wheel.

Even as the goods and services tax (GST) and other reform steps like an effort to integrate the markets for agricultural goods are moving in the direction of unification of the Indian markets with resultant economic efficiency gains, a clutch of state governments seems putting a spoke in the wheel.

While new Madhya Pradesh chief minister Kamal Nath’s decision to give incentives to industries if 70% or more of their workforce is local people is latest in the series, many other states including Maharashtra, Karnataka, Gujarat, Himachal Pradesh, Telangana and Goa have taken a carrot-and-stick approach to promote local employment. This has revived fears of ultra-protectionism by states, which is expected to only exacerbate in the build-up to the 2019 Lok Sabha polls.

Earlier in the year, Karnataka was planning to even bring a law to reserve jobs for local people and Maharashtra also reportedly had similar plans. Also, several states have tinkered with the tax policies and rates, in violation of the pan-India resolutions like under the value-added tax (VAT) system, either to lure investments or pander to the electorate. Such moves have patently been at odds with the Centre’s efforts to remove tax exemptions, including the area-based ones.

Economists and analysts FE spoke to warned against the trend, saying this could perpetuate India’s economic fragmentation and adversely impact the labour market. Such unconstitutional policies also impose financial costs on the states that resort to such misadventures.

Pronab Sen, former chairman of the National Statistical Commission (NSC), feels incentives to industry for reserving jobs for locals are a “political gimmick that exerts fiscal cost on states”.

Ila Patnaik, professor at the National Institute of Public Finance and Policy, said incentives for employing only locals will affect the country’s economic integration. “The real issue is the choice of location. If a company is planning to set up a factory in a particular state, they will also take into account (local) workforce,” Sen said. Patnaik said: “It will also reduce the labour market into various fragments. I guess the pressure from the people who are not finding jobs are so much that the state governments are taking these populist steps,” she said.

Most states offer industries incentives such as waiver of stamp duty, discounted elecricity tariff, capital support, interest subsidy, financial assistance and free/cheaper land, etc.

For instance, Karnataka has been giving tax as well as non-tax incentives to firms hiring 65-100% Kannadigas, as recommended by the Sarojini Mahishi Committee. Earlier this month, the Karnataka Assembly was informed that employees of auto major Toyota Kirloskar Motors consisted of 6,873 Kannadigas, or 98% of the staff employed by the firm in the state. In return, the firm got sales tax deferment incentive to the tune of Rs 3,733 crore as well as prime land for its plant. The state was contemplating to bring in a law last year to attach a legal sanctity to jobs for locals. The law was also to include IT jobs in its ambit. Being the Silicon Valley of India, Bengaluru not only hosts people from other parts of the country but also from overseas. In recent years, there has been tension between Kannadiga and non-Kannadiga workers in Volvo Trucks India facility.

Since 1968, Maharashtra has a policy that requires industries to employ locals in 80% of their jobs, even though its implementation has been patchy. Since 2008, there has been demands from political parties such as Maharashtra Navnirman Sena (MNS) for a stricter enforcement of the rules as they feel people from Hindi-heartland are lapping up jobs in the state. Being the financial capital of India and hub of the movie industry, Mumbai has seen social tensions in this regard for decades. In 2009, the Congress-NCP government thought of bringing in a law to reserve 80% of junior jobs and 50% jobs at supervisory levels for locals in all small and large industries.

In Gujarat, under a proposed law, 80% jobs will be reserved for locals, with a clause that industries have to recruit 25% of the required manpower from the area where they set up a new unit. Gujarat is a hub of the garment and diamond industries, which employ thousands of people from across the country, including from Odisha, UP and Bihar. Besides tax breather, Gujarat offers a host of other incentives, including interest subsidy and venture capital assistance.

Himachal Pradesh, which houses 46,623 industrial units, has announced that it plans to increase the job quota for locals from 70% to 80%, giving jitters to industries.

In July, the Goa government announced an Employment Subsidy Scheme under which the state would reimburse wage bills up to Rs 25 lakh/annum for MSMEs and Rs 50 lakh/annum for large industries for hiring 60% or more Goan people.

After bifurcation of Andhra Pradesh in 2014, the new state of Telangana has been formulating policies to protect jobs for locals. It plans to treat someone who has studied continuously for four years from Class I to VII in the state as locals to ensure that only natives of Telangana get the maximum benefit of quotas in education and employment. It is believed that people from Andhra Pradesh shift their children to Hyderabad for education after Class VII.

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