Karnataka’s draft reservation bill—a threat to Bangalore’s tech hub status—is on hold

Enterprises planning to offshore or outsource services to India—particularly Bangalore, part of the Karnataka state—must reconsider their investments if a draft proposal is enacted. The bill, drafted by the state government to promote local hiring by mandating private job reservations, has been put on hold after industry pushback. This law hinders the ability to hire top talent across India, pushing companies to look for alternative cities or towns to remain competitive and sustainable.

Bangalore, the Silicon Valley of India, is home to India’s largest technology services companies, such as Infosys, TCS, Cognizant, and Wipro, and the most vibrant startup ecosystem in the country. It isn’t uncommon to go to a coffee outlet and hear conversations about valuations and unicorn ideas. In terms of numbers, the tech sector alone accounts for 25% of the state GDP, houses a quarter of the country’s digital talent, boasts more than 11,0000 startups, and commands a 39% share of the global capability center (GCC) market with more than 600 in the city.

The draft bill focuses on creating employability for locals but would kill diversity

The government’s draft proposal of a law mandating that 50% of managerial positions and 75% of all other roles be reserved for residents threatens to disrupt Karnataka’s macroeconomic environment. As news about the draft bill went viral, the National Association of Software and Service Companies (NASSCOM), a non-governmental trade association of IT/ITES companies in India, expressed disappointment with the Karnataka State Employment of Local Candidates in Industries, Factories, and Other Establishments Bill, 2024.

The bill aims to create employment for locals and support the pro-Kannada movement. About 3.5 million people from other Indian states live in Bangalore, which is seen as a threat to residents’ quality of life. The congestion, cost of living, dominance of the non-local population, threat to the local language and culture, and increasing water problems are some of the concerns driving these proposed policies.

Other approaches to address these problems in the longer term include investing in rural and higher education and keeping talent ready for technological advancements. However, the abrupt and unexpected draft bill raised concerns over national employability, diversity, protectionism, and unconstitutionality.

The imperatives for investors considering Bangalore as a target location

Due to the increased adoption of AI, blockchain, cybersecurity, and other emerging technologies, India needs more skilled workers. According to NASSCOM, the country needs about 600,000 qualified professionals to meet growing demand. The IT bellwether TCS recently said 80,000 roles are unfilled because of the lack of qualified workers. When there is an existing shortage, additional hiring restrictions will make corporations question the value of continuing to invest in the city.

The Indian IT services industry is already transforming talent by reskilling and upskilling individuals to keep pace with emerging technologies. That’s another reason this new draft bill fuels concerns among investors and IT companies.

This draft law would require companies to execute many unproductive processes to comply with new rules as part of government enforcement and compliance. This would directly impact companies’ ability to hire, deliver quality projects, and operate productively. If the requirements prove too cumbersome, companies will likely shelve expansion plans and seek greener—and less restrictive—pastures elsewhere. This will threaten the whole GCC story, fundamentally changing the Indian IT ecosystem.

Enterprises must consider alternative GCC investment in India

According to NASSCOM, the total GCC market in India was $46.0 billion, with a CAGR of 11.4% between 2015 and 2023. It is expected to reach about $100 billion by 2030. The number of GCCs in India will increase to 2,400 from the current 1,600-plus, positioning the country as a hub for IT services exports. Software exports and AI services are driving this growth.

Every investment must project outcomes regarding productivity, profitability, and sustainability. If businesses can’t meet these requirements, they will either shut down their operations or change their strategy. India’s growth story and abundant resources make it a sweet spot for setting up shop. If not Bangalore, many other tier-1 and tier-2 cities would be eager to work with frustrated business owners as a new host and strategic partner for your business.

Hyderabad (the second largest city hosting GCCs after Bangalore), NCR, Chennai, and Pune are other cities to consider for your GCC. They provide sufficient business infrastructure and a smooth approval process. Business-friendly governments such as Gujarat and the newly formed state government in Andhra Pradesh have already announced they would welcome companies to set up shop in cities such as Vizag and Vijayawada.

The Bottom Line: Karnataka’s proposed new labor law is currently on hold, but if enacted, it will deter new investors. Enterprises must consider investing in other cities for productive, profitable, and sustainable business opportunities.

To safeguard Bangalore’s status as a global tech hub, the Karnataka government should withdraw the proposed bill and open discussions with industry bodies such as NASSCOM to find a more balanced solution.

Focusing on enhancing local talent through investment in education and skill development programs will ensure that graduates are well-prepared for future job opportunities without disrupting the city’s dynamic and diverse workforce. This approach will help maintain the city’s economic stability and appeal to both domestic and international businesses.