Debunking the Myth of Job Creation

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Source: The Hindu

Context

On July 1, 2025, the government authorized the Employment Linked Incentive (ELI) Scheme to encourage employment generation, with an outlay of ₹99,446 crore. However, the policy design may increase structural inequities in the labour market.

What is the Employment Linked Incentive (ELI) Scheme?

• Approved by: Union Cabinet
  
  
• Aim: Boost formal job creation and enhance social security.
  
  
• Focus: Encourage new hires, especially first-time employees, and incentivize employers to create jobs.
  
  
• Special Emphasis: Manufacturing sector.

Key Features of Employment Linked Incentive (ELI) Scheme 

Incentives for First-Time Employees

• Eligibility:
  
  
1. Salary up to ₹1 lakh.
   
   
2. Registered with EPFO.
   
   
• Benefit:
  
  
1. One-month equivalent of EPF wages (up to ₹15,000).
   
   
2. Paid in two installments over a year.
   
   
• Payment Schedule:
  
  
1. First installment after 6 months of service.
   
   
2. Second installment after 12 months + completion of a financial literacy program.
   
   
• Savings Component: Part of the incentive kept in a savings instrument for later withdrawal.
  

Incentives for Employers

• Eligibility: Hiring & retaining employees with salaries up to ₹1 lakh.
  
  
• Benefit:
  
  
• ₹3,000/month for two years per additional employee.
  
  
• For manufacturing, extended to four years.
  
  
• Conditions:
  
  
• Sustained employment for at least six months.
  
  
• Manufacturing hiring targets: e.g., at least two additional employees for firms with fewer than 50 workers.

Current Unemployment Rate in India

• The Ministry of Statistics & Programme Implementation (MoSPI) has lately begun providing monthly labor data reports for both urban and rural areas.  
• The second monthly Periodic Labour Force Survey (PLFS) reports that India's unemployment rate increased to 5.6 percent in May 2025, up from 5.1 percent the previous month.  
• This figure is lower than the 7% rate reported by the Centre for Monitoring the Indian Economy (CMIE), an independent research tank.
• A press release by MoSPI reveals that in rural areas, the overall Labour Force Participation Rate (LFPR) among people 15 years of age and above stood at 54.8 percent in April 2025. It was 56.9 percent for rural areas and 50.4 percent in urban areas.

Employer-Centric Design of the ELI Scheme

• The Employment Linked Incentive (ELI) Scheme follows an employer-centric model.
  
  
• Objective: Provide fiscal incentives to employers, mainly in the manufacturing sector, to promote job creation.
  

Key Concern – Labour Market Mismatch

• Skill Mismatch Problem
  
  
• Structural issue ignored by the scheme.
  
  
• Economic Survey 2024–25 shows:
  
  
• Only 8.25% of graduates find jobs aligned with their qualifications.
  
  
• Over 50% are underemployed in semi-skilled or elementary roles.
  
  
• Wage Disparities
  
  
• 46% of graduates in low-skill jobs earn less than ₹1 lakh per annum.
  
  
• Only 4.2% in specialised positions earn ₹4–8 lakh per annum.
  
  
• Low Vocational Training Coverage
  
  
• Only 4.9% of Indian youth receive formal vocational training.
  
  
• Creates a gap between industry demand and workforce preparedness.

Implications of Current Approach

• Limited Productivity Gains
  
  
• Incentives to hire under-skilled workers do not improve efficiency.
  
  
• Employer Bargaining Power Increases
  
  
• Strengthens employers’ position over workers.
  
  
• Widening Wage Gaps
  
  
• Low skills → low wages → persistent inequality.
  
  
• Cycle of Low-Skill, Low-Wage Employment
  
  
• Without skill enhancement, the economy risks being stuck in a low-value job market.
  
  

• Integrate Skill Development
  
  
• Pair hiring incentives with vocational and technical training programs.
  
  
• Targeted Upskilling
  
  
• Focus on sectors with high productivity potential.
  
  
• Industry-Academia Collaboration
  
  
• Align curricula with market needs to reduce mismatch.

Problems with the Employment Linked Incentive (ELI) Scheme

Employer-Centric Approach

• Focus on fiscal incentives for employers to generate jobs, particularly in manufacturing.
  
  
• Overlooks skill mismatch between employability and available opportunities.
  
  
• Mimics capital subsidisation, promoting capital-labour asymmetry.
  
  
• Strengthens employers’ bargaining power instead of workers’.
  
  
• May widen wage gaps, harming informal and low-skilled workers.
  

Skill Mismatch and Underemployment

• India’s labour market crisis is not just about job shortage but severe skill mismatch.
  
  
• Economic Survey 2024-25 data:
  
  
• Only 8.25% of graduates employed in roles matching qualifications.
  
  
• 53% of graduates and 36% of postgraduates are underemployed in semi-skilled or basic jobs.
  
  
• Only 4.2% of specialised graduates earn ₹4–8 lakh/year.
  
  
• 46% in low-skill jobs earn less than ₹1 lakh/year.
  
  
• Vocational training access is low — only 4.9% of youth (15–29 years) have formal training.
  
  
• Without strong skilling infrastructure, ELI pays employers to absorb an unprepared workforce.
  

Exclusion of Informal Sector

• Scheme prioritises EPFO-registered firms in the formal economy.
  
  
• 90% of workforce in informal sector excluded from benefits.
  
  
• Informal workers lack social security, formal contracts, stable job protection.
  
  
• Risks deepening structural inequalities by:
  
  
• Providing state support to formal sector.
  
  
• Ignoring informal sector needs.
  
  
• Public resources flow to well-off enterprises, bypassing low-wage workers.
  
  
• Dual labour market structures are reinforced.
  

Risk of Disguised Unemployment

• Could normalise disguised unemployment — workers appear employed but contribute little to output.
  
  
• Common in agriculture and informal services.
  
  
• Leads to low productivity and stagnant wages.
  
  
• Firms might relabel existing jobs as new to claim subsidies.
  

Sectoral Imbalance

• While manufacturing receives special attention, automation and capital intensity are causing a decline in employment elasticity in this sector.
  
  
• Manufacturing: less than 13% of total employment.
  
  
• Agriculture + Services: employ nearly 70% of workforce.
  
  
• Ignoring these sectors marginalises:
  
  
• Women
  
  
• Rural youth
  
  
• Informal workers in low-skill services/agriculture
  
  
• Relies on outdated assumption that manufacturing will drive job creation.

Way Forward

Current Situation

• The Employment Linked Incentive (ELI) Scheme shows political will to reduce unemployment.
  
  
• However, current design risks worsening structural inequalities in the labour market.
  

Limitations of the ELI Scheme

• Focus on short-term headcount increases rather than sustainable job creation.
  
  
• Limited impact on low-skilled workers due to mismatch with industry needs.
  

Needed Policy Shifts

a) Skill Development & Education Reforms

• Strengthen skilling infrastructure so low-skilled workers can access better-quality jobs.
  
  
• Align training with industry demand for long-term employability.
  

b) Long-Term Employment Strategy

• Prioritise sustained employment and productivity enhancement over temporary subsidies.
  
  
• Ensure labour rights protection for all workers.
  

Root Causes to Address

• Inadequate skilling infrastructure.
  
  
• Weak social security coverage.
  
  
• Sectoral imbalance in job creation.
  
• Employment generation must go beyond wage subsidies.
  
  
• A balanced, equitable approach is needed to include both formal and informal workers in economic growth benefits.