Employment Linked Incentive (ELI) Schemes: Opportunities and Challenges for Inclusive Job Creation

Employment Linked Incentive (ELI) Schemes: Opportunities and Challenges for Inclusive Job Creation

Context:

The introduction of three Employment Linked Incentive (ELI) schemes by the Indian government has sparked discussions around how these schemes could shape the country’s employment landscape. 

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• Announced in the July 2024 budget, these schemes have a budgetary outlay of ₹1.07 trillion over five years and aim to create employment opportunities, especially for the youth. 
• However, several concerns have been raised by stakeholders, particularly regarding the distribution of benefits and potential drawbacks in implementation.

About ELI Schemes:

The three ELI schemes are designed to incentivise employment generation in different sectors:

• Incentives for First-Time Employees: Establishments hiring first-time eligible employees in the formal sector will receive wage reimbursements of up to ₹15,000, spread across three instalments.
• Manufacturing Sector Boost: Additional employment in the manufacturing sector will be incentivised through provident fund contributions for the first four years of employment.
• Support for Additional Employment: Employers will receive ₹3,000 per month for each additional employee hired, for up to two years.

Concerns Over Disproportionate Benefits and Concentrated Growth:

• Disproportionate Benefit: Employer organisations, including Teamlease and the Indian Staffing Federation (ISF), have raised concerns that large companies with greater hiring capacities may disproportionately benefit from the ELI schemes.
• Concentrated Job Creation: This could exacerbate the disparity between developed and underdeveloped areas, leaving rural and less industrialised regions behind. 
• To address this, Teamlease has called for an equitable distribution of incentives across different sectors, particularly those in rural and underdeveloped areas.
• Lower Wages: The schemes are seen as skill-agnostic, offering financial incentives based purely on the number of individuals hired. 
• This raises concerns about employers opting to hire more workers at lower wages to maximise the benefits. 
• Teamlease’s proposal suggests that sector-specific and skill-level-specific incentives should be included to ensure that industries with higher productivity and skill requirements are appropriately rewarded.
• Informal Sector Exclusion and Staffing Companies: Another issue flagged by the ISF is the exclusion of outsourced employees from the ELI scheme.
• Many firms in India hire workers through staffing companies for seasonal requirements, but only insourced employees (those hired directly by the company) are eligible for the incentives. 
• This exclusion, according to ISF, hinders the creation of formal jobs, as staffing companies often provide the same social security benefits as permanent employees. 
• ISF proposes that staffing companies should also be considered as employers under the scheme, ensuring a broader reach for formal employment.
• Employee Retention and the EPFO Issue: The requirement for employers to refund the subsidy if the employee leaves within 12 months is another area of concern. 
• The ISF suggests that this provision places too much burden on employers, particularly in cases where employees choose to leave for better opportunities. 
• Instead, the proposal suggests that if an employee’s contribution to the Employees’ Provident Fund (EPFO) is maintained consistently, regardless of the employer, it should be considered beneficial under the ELI scheme rather than penalising the employer.

Challenges of India’s Segmented Labour Market:

• According to the India Employment Report 2024, around 80% of the workforce is employed in the informal sector, with only 10% enjoying formal employment with written contracts and regular benefits. 
• Even within the formal sector, a significant portion of workers are employed informally. 
• Thus, 90% of total employment in India remains informal, making the task of fostering formal employment challenging.
• As per the 2023-24 Periodic Labour Force Survey, regular wage employment, which offers an average monthly remuneration of ₹20,702, accounts for 22% of employment. 
• Casual wage labour, at ₹8,962 per month, makes up 20%, while self-employment, at ₹10,032 per month, comprises the largest share at 58%. 
• This vast disparity underscores the difficulty in designing employment schemes that promote high-quality, formal jobs in a predominantly informal market.

Maximising Employment Growth in Labor-Intensive Sectors:

• Given the current structure, it is vital for ELI schemes to target labour-intensive sectors that can generate maximum employment. 
• Outside of agriculture, which employs nearly half of the workforce at low productivity levels, there are 21 labour-intensive sectors employing at least 20 persons per ₹1 crore of output. 
• Sectors such as construction, textiles, trade, land transport, education, and food and beverages are key drivers of employment and should be the primary focus of the ELI schemes.
• In the short term, targeting a few subsectors within these large-employment industries through ELI provisions could stimulate rapid job growth. 
• Additionally, informal workers, who currently make up 90% of the workforce, could benefit from formalisation efforts supported by technology platforms like Aadhaar, which can help aggregate these hard-to-reach groups.

Long-Term Shift Towards High-Productivity Jobs:

• While the immediate goal is to maximise employment, a parallel long-term initiative is needed to shift India’s labour market from low-paid, low-productivity informal jobs to high-skill, high-productivity formal employment. 
• This transition will require effective skilling programs that align with the needs of employers. 
• Currently, only 4% of India’s workforce holds certified skills, compared to over 70% in European countries and 90% in some East Asian economies. 
• Skilling programmes, historically ineffective due to the lack of employer involvement, need to be restructured to fill specific skill gaps identified by industries.
• Moreover, India’s workforce must be prepared for three technological revolutions shaping the global economy: energy transformation, biotechnology, and artificial intelligence (AI).