By Mausam Kumar
The Government of India has announced an Employment Linked Incentive (ELI) scheme in its annual budget for 2024-25, to boost employment generation and workforce training. With an outlay of Rs 2 lakh crores (US$ 23.8 billion), this program is expected to generate 41 million jobs over the next five years. India needs a coherent strategy for job creation. A recent IMF report suggests that India will have to create between 143 and 341 million jobs by 2050 to accommodate its growing workforce, given an expected population of 1.668 billion towards the middle of the 21st century. Consequently, the ELI scheme is of particular relevance.
The ELI scheme has five components, three of which are to be implemented through the Employee Provident Fund Organization (EPFO), a social security organization under the Ministry of Labor and Employment tasked with the regulation and management of provident funds. These three components include: providing a one-month wage to the limit of Rs 15,000 (US$179) in three installments to first-time employees in the formal sector who are registered with the EPFO, financial incentives for both employees and employers towards employing first time employees based on their EPFO contributions during the first four years of employment, and a reimbursement of Rs 3,000 (US$ 36) for employers for two years towards EPFO contributions of first time employees with a salary limit of Rs 1 lakh (US$ 1,191) per month. The other two components of the scheme revolve around upgrading Industrial Training Institutes (ITIs) to address the goal of workforce training and be aligned with industry needs. Additionally, the program will provide internship opportunities to 10 million youth in top 500 companies over the next five years, with an internship allowance of Rs 5000 (US$ 60) per month along with a one-time provision of Rs 6000 (US$ 71) to provide necessary business exposure to the interns.
It can be argued that there are three broad dimensions of this ELI program: financial incentives for employers and employees in the formal sector, upgradation of ITIs, and internship opportunities for the youth. The ambition of the ELI scheme to be a key driver of job creation in the economy is evident. However, there are critical design failures in its current institutional architecture which need to be addressed to ensure that the ELI scheme can facilitate employment generation across sectors in the economy. The ELI scheme must go beyond these financial incentives and establish the necessary collaboration with the employers in identifying and addressing the structural constraints in job creation in the formal sector. There are five key design issues that need to be addressed to ensure that the ELI scheme is able to fulfill its potential.
The framing of the ELI scheme as a “nudge” is not going to be sufficient to address the goal of enhanced job creation in the economy. The Finance Minister of India Nirmala Sitharaman has framed the policy as a “nudge” in a recent interview: “There is no compulsion. There is no bureaucratic intervention. I am not enshrining it as a right. As the central government, I have the convening power to nudge people towards it. Companies can optimally use their CSR (corporate social responsibility) funds and make sure that when they talk about employable skills in people who come out from, let’s say, engineering colleges, they can give opportunities to those people for apprenticeship on their shop floor.” The ELI scheme must go beyond nudging businesses. It must elicit information on the institutional and structural constraints they face when it comes to job creation in the formal sector. These constraints could be changing global economic conditions, pressures on the supply chains, shifts in sectoral investment allocations, or many others, and they will require a heavily coordinated approach among stakeholders who can navigate these constraints.
Accordingly, the ELI scheme needs to incorporate elements of industrial policy which can address the coordination and information externalities which businesses grapple with when it comes to creating jobs in the economy. One way to do this is to categorize businesses across sectors and assign dedicated bureaucrats who can act as coordination points for specific businesses and liaise with the nodal agencies in the government to establish a dynamic coordination strategy for job creation and workforce training within these specific firms. This will not only provide the necessary governmental support to businesses when it comes to procedural and implementation aspects of the scheme but also will ensure that, in Peter Evans’ terms, an embedded autonomy between the state and the non-state actors is achieved. Leveraging state capacity will be critical towards ensuring that businesses work in synergy with government institutions when it comes to the goal of employment generation and workforce training in the economy.
The Industrial Training Institutes need support which goes beyond increased funding. The government’s focus on upgrading the ITIs for workforce training is a welcome move. However, they are not working in their current form; the chronic failure of ITIs in imparting skill training and addressing the skilling needs of a growing workforce has been pointed out repeatedly by various government reports. A recent report by the Indian government's think tank NITI Aayog, titled Transforming Industrial Training Institutes also argues for the need to overhaul the institutional architecture of ITIs, in addition to significant changes in curriculum design to align with the needs of the employers. The focus on upgrading ITIs must also move away from a focus on workforce training for the manufacturing sector and incorporate a much-needed framework for training in the services sector, which is going to be critical towards generating good jobs in the economy. In the absence of such changes in policy design, the constraints which prevent the optimal utilization of ITIs will persist and lead to inefficient allocation of public finance.
Internship objectives must be realistic and concrete. The component of the scheme which provides internships in top companies runs the risk of being ambitious beyond realistic expectations. In order to create 10 million internships across 500 companies over 5 years, each business has to generate an average of 4,000 internships per year. This is simply unachievable, when a large number of these companies have workforces smaller than the number of internships that they are expected to generate. Moreover, the scheme does not outline any tangible goals of these internships or the criteria by which the internships can be evaluated on whether they have contributed towards workforce training. The architecture of the internship scheme needs to be overhauled so that realistic targets are given to businesses with parameters for quality, duration, and exposure clearly outlined to ensure that financial incentives can be duly utilized to facilitate workforce training and preparing the youth for jobs across sectors in the economy. In its current shape, this component is highly prone to misallocation of critical financial resources.
While the goal of the ELI scheme is to incentivize employment in the formal sector, it must also engage with the informal sector. Policymakers need to acknowledge that a large share of the workforce in India is in the informal sector, and steps need to be taken to incentivize the formalization of the informal enterprises in the country. The Annual Survey of Unincorporated Sector Enterprises 2022-23 shows that around 110 million workers are employed in the informal sector and steps need to be taken to facilitate their shift into the formal sector. This requires a focus on facilitating productivity gains and shifting towards a higher technological frontier with sector specific interventions. Informal enterprises must also be a part of the ELI scheme so that they can receive financial incentives contingent on them achieving the goals of productivity gain and formalization. This will not only ensure enhanced formalization of the workforce but will also ensure better implementation of regulatory norms around environmental issues, among others.
The EPFO must be strengthened if it is to be the sole institution for disbursing financial incentives. The track record of the EPFO as a key social security agency is checkered at best, and employees have often struggled with its interface and its procedural inefficiencies when it comes to financial transactions. Recent evidence shows that 28% of withdrawal claims were rejected by the EPFO in 2022-23. With a subscriber base of over 300 million, EPFO faces institutional constraints in providing the necessary services to its members. This additional responsibility of implementing the ELI scheme requires a radical overhaul of its institutional and procedural architecture, especially if the goal is to generate enhanced employment and provide the necessary assistance for a workforce transitioning from the informal sector to the formal sector.
The ELI scheme focuses heavily on allocating financial assistance, but it lacks the tools to identify and address the constraints in achieving the goals of employment generation and workforce training. Addressing the issues pointed out above will go a long way in designing a robust and functional Employment Linked Incentive Scheme which can enable job creation in the formal sector in the economy.
- Mausam Kumar served as a Postdoctoral Fellow on the Reimagining the Economy Project between 2023 and 2024. He received his PhD from the Indian Institute of Technology, Bombay.
