John Maynard Keynes, the renowned British economist, once proposed a rather unconventional method for employment generation: burying bottles filled with banknotes in disused coal mines and letting people dig them up. His point was that any form of employment could help boost the economy during a downturn, no matter how absurd. While Keynes's suggestion was meant to illustrate the power of government spending in stimulating job creation, it also serves as a humorous reminder of the lengths one might go to generate employment. This year's Union Budget has thankfully taken a more practical approach, focusing on employment and skilling with clear, strategic initiatives to ensure that the jobs created are meaningful and sustainable.
What The Economic Survey Flagged
Previously, the Economic Survey flagged several pressing issues with employment in India. It spoke about the significant share of regular wage/salaried employees lacking social security benefits, the low proportion of formally skilled young workforce, and the need for job creation in sectors that can absorb workers transitioning from agriculture. Regulatory hurdles, particularly for MSMEs, and the need to improve the quality of employment, including decent wages and job security, are critical. Female labour force participation remains low, requiring measures to address barriers such as unpaid care work. Despite a declining trend, youth unemployment and the impact of rapid technological change on job displacement are also concerns. The rise of the gig and informal economy presents challenges in ensuring fair wages and social protection.
The Union Budget has made a concerted effort to tackle these challenges head-on, with employment and skilling being the second-highest priorities among its nine focus areas. The budget has proposed three important schemes under the Employment Linked Incentive (ELI) programme, designed to stimulate formal employment, support new entrants to the workforce, and incentivise job creation in the manufacturing sector. Additionally, targeted efforts to increase women's participation in the workforce and a new skilling programme in collaboration with state governments and industry underscore a multifaceted approach to addressing employment challenges.
Direct Benefits For First-Time Employees
Scheme A targets first-time employees by offering direct benefit transfers (DBT) equivalent to one month's wage, distributed in three instalments to newly registered workers in the Employees' Provident Fund Organisation (EPFO). With a cap of ₹1 lakh per month, this initiative is anticipated to benefit approximately 210 lakh youth. By lowering the initial entry barriers for formal employment, this scheme leverages economic theories suggesting that reducing the cost of entry can significantly enhance workforce participation. Neumark and Grijalva (2017) support the notion that such incentives can lead to increased job creation and reduce informal employment, fostering a more structured labour market. Reducing labour market friction can enhance labour mobility and match efficiency, crucial for dynamic economic environments.
Incentivising Job Creation
Scheme B focuses on incentivising job creation in the manufacturing sector by linking benefits to the employment of first-time employees. The government will provide incentives related to EPFO contributions to both employees and employers over the first four years of employment. This scheme aims to support 30 lakh youth and their employers. The theoretical foundation here is akin to targeted employment subsidies, which posits that financial incentives for hiring can stimulate labour demand, particularly in sectors with high growth potential. Cahuc and Carcillo (2011) have shown that such incentives can enhance productivity and foster industrial growth, leading to sustained economic benefits. The lowering of the marginal cost of labour through the scheme can induce firms to expand their workforce.
Helping Employers
Scheme C is designed to support employers across all sectors by reimbursing up to ₹3,000 per month for two years towards EPFO contributions for each additional employee earning up to ₹1 lakh per month. This scheme aims to incentivise the employment of an additional 50 lakh persons. From a theoretical standpoint, this approach aligns with the concept of employer subsidies to offset the costs of expanding the workforce. By reducing the financial burden on employers, the scheme can lead to higher employment levels and increased investment in human capital. Blanchard and Katz (1992) have demonstrated that such employer-focused incentives can result in significant job creation and economic diversification. The anticipated labour market tightening can lead to upward pressure on wages. This will, in turn, improve household incomes and consumption patterns, further stimulating economic activity.
The budget also emphasises enhancing women's workforce participation through the establishment of working women hostels, creches, and women-specific skilling programmes. This initiative is based on the recognition that improving gender inclusivity in the workforce can yield substantial economic benefits. Klasen and Pieters (2015) have shown that higher female labour force participation can contribute to economic growth and productivity. The proposed skilling programme, which includes the upgrade of 1,000 Industrial Training Institutes and the introduction of industry-aligned courses, aims to skill 20 lakh youth over five years. The alignment of course content with industry needs and the introduction of new courses for emerging skills reflect an adaptive approach to workforce development, supported by research indicating that skill development programmes tailored to market demands can significantly enhance employability and economic outcomes.
Bridging The Skill Gap
Furthermore, the Model Skill Loan Scheme, revised to facilitate loans up to ₹7.5 lakh with a government-guaranteed fund, is expected to help 25,000 students annually. This financial support aims to reduce the credit constraints faced by individuals seeking vocational training, thereby enhancing human capital formation. Similarly, the provision of financial support for loans up to ₹10 lakh for higher education, with e-vouchers for interest subvention, addresses liquidity constraints in accessing higher education, fostering long-term human capital development and economic growth.
Next, in order to reduce the skill gap, the budget has also proposed a comprehensive scheme for providing internship opportunities in 500 top companies to 1 crore youth in five years. Interns will gain critical exposure to diverse professions and real-world business environments through 12-month internships, supported by a ₹5,000 monthly allowance and a one-time ₹6,000 assistance. Companies will bear training costs and contribute 10% of internship expenses from CSR funds, ensuring private sector involvement in workforce development. This strategic collaboration aims to equip interns with industry-relevant skills, enhance employability, and drive economic growth.
Thus, the budget has hit the bull's eye on employment. Initiatives like the Employment Linked Incentive (ELI) programme and the comprehensive internship scheme aim to create quality formal employment that even Keynes would tip his hat to.
(Bibek Debroy is Chairman, Economic Advisory Council to the Prime Minister, and Aditya Sinha is OSD, Research, Economic Advisory Council to the Prime Minister)
Disclaimer: These are the personal opinions of the authors