Haryana Reserves 75% Private Sector Jobs for Locals, In Force from May 1, 2021

Foreign investors should pay attention to new compliance requirements to secure employment reservation in Indian states in private sector companies.

In this article, we discuss the implications of Haryana’s job quota for the private sector, which joins a spate of recent state policies across India that encourage or incentivize hiring local talents.

On March 2, 2021, the Haryana state government notified The Haryana State Employment of Local Candidates Act, 2020. It will be enforced from May 1, 2021.

This new law entitles Haryana residents domiciled in the state to benefit from a reservation of 75 percent of private sector jobs, if their job profile falls within the INR 50,000 gross monthly salary slab.

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Touted as a populist move by industry experts, the new law has received much criticism for being excessive, and unconstitutional. The government, however, has invoked the Directive Principle under Article 41 of the Indian Constitution, which directs the states to make provisions for providing employment to their citizens.

According to the Act, the employment quota will initially remain for a period of 10 years.

Haryana’s Deputy Chief Minister Dushyant Chautala, who spearheaded the industry consultation process, informed news outlets that eight rounds of discussion have been held with industry representatives and clauses have been added according to the feedback. Recently, the government has also amended the Haryana residency requirement to get a bona fide resident certificate by reducing the time of residency from 15 years to five years. It must be noted that such amendment has been made only with respect to the private sector.

Meanwhile, industry stakeholders have continued to show their disapproval of the new law, calling it regressive. This negative sentiment is reflected in the results of a survey by the National Association of Software and Service Companies (NAASCOM), where 80 percent of the surveyed companies expressed concerns and apprehensions about their future business operations in the state due to the new reservation law.

Previously, before the new law mandating local hiring was passed, the Haryana government also floated incentives to encourage employers to hire locally. For example, the Haryana Enterprises and Employment Policy, 2020 provides incentive of INR 48,000 (US$644.88) per person per year to employers in Haryana who hire locally. Apart from cash incentives, several other incentives are also available to industries for establishing their units in the interior blocks of the states.

Government rationale in Haryana

• Leverage local population who are unemployed due to shifts in pattern of economy

The move in Haryana is primarily aimed at helping the local unemployed population tap into opportunities created by the state’s transition from being a predominantly agrarian economy to an industry-based one. The rapid urbanization and industrialization of the state has led to huge land acquisition, in turn reducing growth and employment opportunities in the agriculture sector. Private sector enterprises have flourished in the state, especially along the Gurugram-Manesar belt, with several IT/ITeS, automobile manufacturing, and export companies based here.

• Reduced absenteeism and enhanced efficiency

Availability of suitable workforce at a local level would enhance the efficiency of the industry by reducing worker absenteeism and dependency on migrant laborers. In light of the ongoing pandemic and subsequent labor shifts, the need for consistent and stable labor availability has become a necessity. This stability and consistency can be ensured by local employment reservation laws.

• Private sector must share the burden

Since private industries use public infrastructure as well as avail various incentives (infrastructure, subsidized land, and liberalized access to credit), the state feels it has a legitimate right to require them to adhere to the policy.

Objections raised by industry stakeholders on employment reservation in Indian states

NAASCOM recently conducted a survey to assess the impact of The Haryana State Employment of Local Candidates Act, 2020. The survey, covering around 73 companies with a workforce of approximately 1,44,000 employees, has found that the new law will impact about 150,000 current jobs in the state. The respondents also expressed concerns over equality of opportunities and inclusion policies, which might be negatively affected due to the new local reservation law.

Below is a round-up of key objections raised by experts:

• Domicile-based reservation is unconstitutional

Legal experts have voiced their concerns regarding the constitutionality of the law as it violates freedom of equality and is discriminatory. A similar law introduced for job reservation in the private sector in Andhra Pradesh was also challenged in court on constitutionality grounds.

• Raises cost of compliance for the employer

This new law will result in increased costs to companies that will have to spend more time and resources in verifying the documentary status of selected candidates and searching for appropriate candidates.

• Distortion in the labor market

Domicile-based reservation laws cause distortion in the labor market by significantly changing the demand and supply dynamics. A mandatory requirement of reservation for 75 percent locals will cause a demand supply mismatch in terms of skills sought. This, in turn, might also lead to a decreased demand among employers, who might notify lesser vacancies in order to avoid hiring unsuitable candidates and opt for an informal and remote based employment of candidates from other states. Thus, it is a possibility that instead of a reduction in the state unemployment rate, there might be an increase in the nationwide unemployment rate.

• Increased informalization of labor market

There is a possibility that companies may opt to hire non domiciles informally to avoid legal penalties. This will put a substantial proportion of the workforce out of the social security net.

• Detrimental to real estate sector

To avoid legal curbs, employers might consider relocating. For example, this move might accelerate the trend of companies shifting from Gurugram, Haryana to Noida, Uttar Pradesh due to high costs. This shift will negatively affect the office space and residential property market in Gurugram. Many cities in India, including Gurugram, have flourished due to the inflow of highly talented migrants from other states. This move might reverse that growth trend.

• Negative impact on foreign investment

FDI in sectors like IT might also suffer as investors will be hesitant to invest in an area where the skill pool is limited. Businesses will possibly lose out on profitability and scaling up.

• Increased scope for bureaucratic intervention, corruption

The new law gives substantial discretionary power to government officials, who might abuse the power. The clauses mandating inspection and penalties might usher in “Inspector Raj”, where private employers are subjected to bureaucratic red-tapism. The provisions related to penalties might also create a fear psychosis among employers who may find it more convenient to move base rather than get involved in legal hassles.

• Balkanization of labor market

There are fears that if states continue to introduce such laws, there will be restrictions on the free movement of labor, which, in turn, will constrain India’s ability to grow rapidly, expand manufacturing capacity, become more self-reliant as promoted under the Atmanirbhar Abhiyan program, reduce poverty, or raise the overall consumer spending power already reeling from recent years of economic slowdown and the effects of the pandemic. A market competitive approach is essential to retain efficiencies, ensures industries can follow best practices, and the economy remains integrated. India’s labor dynamics in the past have been impacted due to recruitment from select social bases – such as from a particular region or caste – creating disturbances. This is more apparent in labor dependent industries, like auto manufacturing.

• Loss of revenue to the government

This move to implement a job quota will usher in a cumbersome process of recruitment and might lead to considerable delays in projects. The consequent possible exodus of employers to other business friendly locations will hamper the state’s economic activity, thereby resulting in a loss of revenue for the government.

Key takeaways

India’s federal government has emphasized the need to integrate India into a single unified market in recent years, introducing the GST and farm laws in the same spirit; the trend towards rolling out regional employment quota compliance works against this goal and will introduce market distortions.

Domicile-based reservation will severely hamper the regional industrial development and could influence the direction of private investment. Most importantly, these laws will create hindrances in the ease of doing business.

Recently notified laws and policies are also being challenged on constitutional grounds, such as the legislation in Andhra Pradesh that is sub judice in the high court. Their outcomes will likely influence how such labor compliance is enforced.

Meanwhile, it remains to be seen how the Haryana law is implemented and how responsive the state will be to industry feedback. India Briefing will continue to track these developments.

This article was originally published March 15, 2021. It was last updated on April 16, 2021.

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