Other States should impose heavy taxes on goods made in Andhra Pradesh

On Monday July 22, Andhra Pradesh became first Indian State to enforce 75% reservation in jobs to locals in private sector, regardless of the government helping them financially or otherwise. People would remember that this was one of the pre-poll promises of Y S Jagan Mohan Reddy. This has, in effect, triggered a trade war among states.

As per local media reports, the Andhra Pradesh Employment of Local Candidates in Industries/Factories Act, 2019 was approved by the Assembly on Monday. There is an interesting provision in it, which states that if an industrial unit fails to find enough skilled local workers, then it will have to train them in association with the state government. The company is also required to act in accordance with the new law and submit a quarterly compliance report. Within 3 years of the commencement of this act, private companies will have to comply with these provisions and submit quarterly reports.

While this decision may appear beneficial to few locals, this is catastrophic for the economy of the country in the long term. Additionally, it violates the rights of people of other states to work anywhere in the country. It would also provoke other states to implement similar reservations for locals.

The irony is that goods manufactured in Andhra Pradesh are sold throughout the country. A huge amount of money is remunerated back to AP, which in turn fuels it economy. If AP restricts people from other states to get jobs, it has no right to access the markets of those states. Other states should work out mechanism to ensure that goods manufactured in AP are not sold in their markets. There can’t be a one-way flow of money in the economy.

If this decision is not reversed, other states should impose additional taxes on goods manufactured in Andhra Pradesh and make them noncompetitive to an extent that businesses would pull out from AP.

This should apply to every state which is contemplating reservation for locals in private sector. This is how China has been countering US in the trade war. If only locals are to be hired, then let the production be decentralised. Let companies establish their manufacturing units in states where their market is located.

Xiaomi has manufacturing units in Sri City and Thirupati in Andhra Pradesh (representative image)

The population of a state is a fair indicator of its market size. Andhra Pradesh currently has only 4.08% of Indian population, which comprises of a very insignificant market. Lets compare this with the states of Uttar Pradesh (16.5%), Maharashtra (9.28%), Bihar (8.6%), West Bengal (7.54%), Madhya Pradesh (6%). Together these states comprise nearly half of Indian population, consequently half of Indian market.

If these states impose taxes on goods manufactured in AP, the manufacturers would have no choice but to relocate to any of these states.

For businesses, this news is equally worse. It interferes with rights of the entrepreneur to choose the person they wants to work with. It would dampen the productivity and erode the performance in the companies, resulting in an uncompetitiveness hitherto unheard of.

Let’s understand this with a simple example. There is a company C which has requirement of 100 skilled workers. Right now this company has 5 employees each from 20 different states. Each state has a pool of talents, which can be graded on the scale 1(worst) to 5 (best). The company has the requirement of Grade 4 employees only. If the state where this company is located forces it to hire 75% locals, then it would have to hire 75 workers as against 5 workers earlier. Each state has a mix of category 1 employees to category 5 employees. Due to unavailability of sufficient number of category 4 employees, it would be forced to hire category 3 and category 2 employees to do the work earlier done by category 4 employees. The end result would be erosion of productivity and degradation of performance in the long run.

The argument that employees can be trained in case of unavailability of skilled workers is flawed. The skill comes from within and not everyone is equally skilled. In a classroom, same training is provided to everyone, but few students perform exceptionally well, a few students remain mediocre, while few students fail. This logic is applicable everywhere.