Addressing India’s Employment Challenge: Mixed Signals and the Path Forward
Context:
Recent job data collected from EPFO , NSSO & CMIE have shown a mixed trand in present Indian job status. This advocates for a Job linked incentive scheme to boost job creation.
Mixed Data on Job Status in India:
- India’s employment data presents a complex picture. On one hand, formal employment figures suggest progress, with the Employees’ Provident Fund Organisation (EPFO) reporting the addition of 12-13 million formal jobs annually.
- On the other hand, unemployment statistics from the Centre for Monitoring Indian Economy (CMIE) and the National Sample Survey Organisation (NSSO) reveal a contrasting scenario, with joblessness rates ranging between 6.5% and 9%.
Recent Steps Taken by the Indian Government for job creation:
To address the persistent job crisis, the Indian government has initiated several measures:
- Employment-Linked Incentive (ELI) Scheme: Introduced in the 2024-25 Union Budget, this scheme subsidises wages or provident fund contributions for two years for first-time employees, encouraging companies to create more jobs.
- Corporate Internship Scheme: Aimed at equipping youth with industry-relevant skills, the government has partnered with leading companies to provide internships, bridging the gap between education and employment.
While these steps show promise, structural challenges in private sector hiring and technological advancements demand more robust interventions.
- This discrepancy highlights the nuanced nature of employment in India, where growth in formal jobs does not necessarily align with overall labor market health.
The Need for a Job-Linked Incentive (JLI) Scheme:
- Private sector hiring dynamics have shifted significantly in recent years. Post-COVID, many companies prioritise productivity and profits, often viewing salaries as fixed costs.
- The increasing adoption of artificial intelligence (AI) has further exacerbated the situation, reducing the demand for human workers even in technology-driven industries like IT. The earlier model of maintaining a reserve workforce has been replaced by “just-in-time” hiring practices.
- In this context, a Job-Linked Incentive (JLI) scheme can play a transformative role. By incentivising companies to expand their workforce, the JLI can counterbalance the trend of replacing human labor with technology and ensure sustainable job creation.
Proposal for Effective JLI Models:
To make the JLI scheme impactful, the following models could be considered:
- Subsidy Model
- Companies achieving a net workforce growth of at least 5% (compared to their peak headcount over the last three years) would receive subsidies equivalent to 4-6% of their incremental turnover.
- Tax Set-Off Model
- Companies meeting the same workforce growth target could avail of a 5% tax rebate, providing financial relief linked directly to employment growth.
- Rationale for the 5% Workforce Growth Target
- This target aligns with historical corporate workforce growth rates of 5% during stable economic periods.
- With India’s GDP projected to grow by 6-7%, corporate headcounts typically rise by 7-8%, making the target realistic yet impactful.
Both models link incentives to output and turnover per employee, ensuring that employment growth corresponds to increased productivity.
Broad Ways to Implement the JLI Scheme:
- Expenditure Outlay: Direct financial payouts to companies that meet workforce growth targets.
- Tax Relief: Employment-linked tax benefits for eligible companies.
These mechanisms ensure that government spending is outcome-driven, as fiscal implications arise only when companies achieve the desired workforce expansion.
Benefits of JLI Over Current Central Government Models:
The JLI scheme offers several advantages over existing measures like internship programs and provident fund contributions:
- Performance-Based Incentives: Companies must achieve specific workforce targets to qualify, ensuring accountability.
- Sustainable Job Creation: The scheme promotes sustained employment growth rather than short-term measures.
- Alignment with Economic Goals: By linking benefits to incremental output and turnover, the scheme supports both employment and economic growth.
Challenges in Implementing JLI:
Despite its potential, the JLI scheme faces several challenges:
- Fiscal Implications: The scheme could strain government finances if widely adopted, necessitating efficient fund allocation and monitoring.
- Tracking Workforce Growth: Compliance would rely on audited annual reports, which may not always reflect nuanced changes like contract employment or part-time hires.
- Layoffs and Retrenchments: To address layoffs, a corporate tax cess could be introduced, creating a fund to support affected employees. However, distinguishing between voluntary resignations and forced layoffs could complicate implementation.
- Balancing Incentives and Accountability: Ensuring that companies do not misuse benefits while maintaining a conducive environment for business growth would require careful regulation.
