National Council of Applied Economic Research
Opinion: Isha Dayal, Bornali Bhandari, and Ajaya Kumar Sahu.
The Employment Linked Incentive scheme could be made more holistic by incorporating skilling and training aspects of work. Emphasis should be laid on increasing awareness, as well as digitising and simplifying processes and payments linked with it.
India has experienced job growth, albeit slowly and of poor quality. According to the employment-unemployment survey and periodic labour force survey (PLFS), between 2011–12 and 2023–24, the workforce grew at 2.2 per cent while the labour force (those employed and those seeking jobs) grew by about 2.3 per cent. The latest data shows that about 78 per cent of workers did not have a written job contract, about 76 per cent were not eligible for any social security benefits, and about 72 per cent did not have paid leave. Contractualisation of jobs is becoming the norm, where workers employed on contract in formal manufacturing increased from 38 per cent to 41 per cent during 2018–19 to 2022–23 (as per the annual survey of industries). The female worker population ratio remains lower than males, and the youth unemployment rate is relatively high compared to overall unemployment rate.
In light of the above, schemes targeting formal job creation are welcome. A key budget announcement this financial year has been the implementation of the Employment Linked Incentive (ELI) Scheme to create over two crore jobs in the country in two years. Under the ELI, there are three paths.
Scheme A offers one-month wage (up to Rs 15,000 in three instalments) to first time employees registered with EPFO. This is open to all formal sectors. Scheme B focusses on job creation in the manufacturing sector, by incentivising both employees and employers for the additional employment of first-time employees, based on their EPFO contributions during the first four years of employment. Scheme C reimburses employers up to Rs 3,000 per month for two years towards their EPF contribution, for each additional employee across all sectors.
The question is whether ELI can help attain the desired objective of creating new and sustained quality employment in the country for both males and females. The standout feature of ELI is to target employees registered with EPFO, that is, moving workers (earning a salary up to Rs 1 lakh per month) towards formality by giving them a pension. However, the schemes raise some critical questions:
One, the size of the incentive. Is the subsidy on the salary cost in Scheme A enough to create first-time quality jobs across sectors? Is the quantum of incentives in Scheme B enough to change the nature of employment relations from short-term to long-term in the manufacturing sector?
Two, benefits linked to employment length. Short-term-ness in employment relations is prevalent on the demand-side, but the supply-side of the workforce too is increasingly mobile and frequently changing jobs — requiring companies to hire on a continual basis. Even if firms offer a permanent contract, what is the guarantee that the worker will stay for long? Rather, a key complaint is that freshers join, gain some experience, and leave for alternate opportunities. Though it is not explicitly stated, but any ELI benefits, if linked to a guarantee of a certain length of employment, are potentially unlikely to be of any benefit to companies.
Three, benefits for experienced employees. On-the-job training is a cost to companies. Hiring first time employees without experience, especially for specialised jobs, may not appeal to firms. From that perspective, Scheme C is more viable and will help generate more quality jobs in the existing workforce. But in proportion to the salary, EPF benefits get smaller as the salaries increase for skilled and experienced workers.
Four, the existing informal workforce. The three schemes are ambiguous on the existing informal workforce. Can informal workers be enrolled in EPFO as first-time formal employees to receive ELI benefits? This could especially be relevant for new and experienced informal workers alike.
Whether or not to hire, whether to hire first-time employees or experienced professionals, and on temporary or permanent basis, are all firm-based decisions. However, incentivising women employment in India via ELI can have both economic and social impact. Women are regarded as stable and disciplined employees, who are also easier to retain. Mandating non-discriminatory job advertisements clubbed with subsidising the “cost” of women employment for firms, including their initial on-the-job training, can incentivise firms to hire more women employees. This could go a long way in overcoming gender biases and erasing societal-norms that have kept women away from non-traditional job roles, particularly in the manufacturing sector. It should be supported with measures to provide working women hostels and creches at workplaces – as was also announced in the budget.
While ELI is focused on the demand-side of the problem, it can also link with the supply-side by improving the employability of the youth. Financial incentives for job creation have been introduced in other countries like Germany and the UK as well, with an integral focus on this aspect. While there are other schemes introduced in the country to support internships and apprenticeships, the ELI scheme could be made more holistic by incorporating skilling and training aspects of work. For instance, if a firms’ own apprentices/interns are hired as first-time employees, the size of their incentive increases.
The efforts towards facilitating job creation are appreciated. Given the realities of the Indian context, tweaks in the existing schemes can perhaps help better address the persistent issues in India’s labour market concerning women employment, youth employability, and informal and contractual workers. Firms will choose to be a part of any such scheme if they are aware of it, if the scheme’s modalities are clear and transparent, if there is timely monetary disbursal, and if there are clear remedies for quick redressal. Therefore, along with the scheme’s design, emphasis should be laid on creating awareness, as well as digitising and simplifying processes and payments linked with the scheme.
Dayal is fellow, Bhandari is professor, and Sahu is fellow, National Council of Applied Economic Research. Views expressed are personal.