One of the major challenges facing the economy is sluggish consumption. Consumption, in turn, depends on the ability of the people to spend. After adjusting for inflation, the crux of the issue lies in having more income in people's pockets to spend, which is ultimately determined by employment levels in the country. Increasing employment depends on the overall performance of the economy. With the economy slowing from 8.2% growth in FY24 to under 7%, the corporate sector's ability to create jobs is limited. Employment increases only when companies perceive value in hiring. They are unwilling to keep staff on the bench and drag down their profit-loss account.
Direct Action Is Good
The government has started taking direct action to create employment, a move that deserves appreciation. While the government has focused on filling vacancies within the public administration, it has also taken steps to encourage the private sector to hire more people. A recent example is the decision by the insurance behemoth Life Insurance Corporation of India (LIC) to hire “Bima Sakhis”. The scheme, aimed primarily at women aged 18-70 years who have completed at least 10th grade, offers a three-year training programme with stipends of Rs 7,000, Rs 6,000, and Rs 5,000 per month, respectively, over the course of these years. The goal is to empower women and equip them with the skills to be gainfully employed, specifically as LIC agents who will help onboard customers for insurance products. This initiative represents a progressive step by the government in collaboration with the LIC. Depending on the success of the scheme, the government may consider similar partnerships with other insurance agencies, including general insurers. In a way, this mirrors the banking correspondent model used for financial inclusion.
Additionally, the FY25 Budget announced two schemes to boost employment by providing incentives to employers. One scheme ensures that the government offers a contribution of a month's wage for first-time employees. Another provides a benefit to both employers and employees through government contributions to the employees' provident funds. Like the Bima Sakhi initiative, the budget also introduced an internship scheme targeting 1 crore youth over five years. The government will provide a stipend of Rs 5,000 per month to these interns, who will receive on-the-job training at the country's top 500 companies, potentially leading to full-time employment. It will certainly help them become more employable.
An Incomplete Approach
These are commendable steps by the government to encourage India Inc. to hire more people and address the job creation issue. Two ideas emerge from these initiatives: First, such programmes could be replicated across various industries, and second, state governments could take the lead in implementing them in their regions. But, is this the only approach for creating jobs?
The challenge lies in the fact that companies are driven by the need to maximise profits for their shareholders. This is achieved by growing the business and cutting costs. Employee costs are a significant part of any company's expenditure, so there is hesitation to hire more people than necessary to run operations. This has resulted in periodic layoffs, even in profitable companies, leading to temporary unemployment among highly skilled workers. Often, those laid off are made to accept jobs that pay less than their previous positions.
While the government's initiatives are a positive start, such measures cannot be sustained indefinitely as they require substantial financial commitment to keep people employed in the private sector. Alternatives must be explored to create employment in non-government sectors. One possible solution is to provide incentives for companies to hire more workers. This could take the form of tax incentives for companies that show a growth rate in permanent headcount higher than the average of the last three years. Similarly, the PLI (Production Linked Incentive) scheme could be linked to employment targets, allowing companies to claim subsidies from the government if they hire more people.
A Carrot And Stick Policy
By linking fiscal benefits to employment growth, companies can be incentivised to hire more staff. This is particularly important as many sectors are increasingly deploying AI technologies, which may not be the best fit for a labour-surplus economy like India's. To counter this, the government could consider imposing higher taxes on AI technologies to discourage their use. Additionally, a “layoff tax” could be considered for companies that engage in firing despite being financially healthy. Admittedly, this would be difficult to administer, as often, laid-off employees are forced to resign.
While the government has taken the right steps to increase private-sector employment, these measures may be costly in light of other fiscal commitments. The approach should be expanded to include other government layers. More importantly, a “carrot and stick” policy should be adopted to ensure that the private sector contributes to the nation-building process, particularly in terms of employment.
(The writer is Chief Economist, Bank of Baroda, and author of Corporate Quirks: The Darker Side of the Sun)
Disclaimer: These are the personal opinions of the author