Context:

In a recent post-Budget interview, Finance Secretary T.V. Somanathan revealed a significant policy shift under the Modi government, the introduction of the Employment Linked Incentive (ELI) scheme that offers financial incentives to companies for each new employee hired, signalling a profound change in economic policy that moves away from traditional GDP-centric models to a more direct approach to job creation.

Historical Context of Economic Initiatives

Trickle-Down Economics

For a decade, the Modi government adhered to the Washington Consensus' trickle-down model. This approach emphasised that efficient production of goods and services would naturally lead to job creation, increased incomes, and overall prosperity. The core belief was that growing GDP would automatically result in job creation and improved living standards.

Notable Initiatives and Their Outcomes

• Make in India (2014): Aimed to boost manufacturing with the expectation of creating a significant number of jobs.
• Corporate Tax Cuts (2019): Intended to attract industry investment, thereby generating more jobs through increased economic activity.
• Production Linked Incentive (PLI) Scheme (2020): Offered ₹2 lakh crore in financial incentives to companies based on production targets, with the hope of boosting investment and job creation.

Despite these initiatives, the anticipated job creation did not materialise. Companies either retained the benefits without investing in labour or prioritised equipment over hiring, highlighting a disconnect between policy incentives and job growth.

The Employment Linked Incentive (ELI) Scheme

Overview of Scheme

The Centre is set to implement three new "employment-linked incentive" schemes under the Prime Minister's package, aimed at increasing enrolment in the Employees' Provident Fund Organisation (EPFO).

• First Scheme : This scheme will offer a one-month salary as a direct benefit transfer to individuals entering the workforce for the first time in all formal sectors. The payment, up to Rs. 15,000, will be disbursed in three instalments. To qualify, the employee must earn up to Rs. 1 lakh per month. This initiative is expected to benefit approximately 2.1 million young people.
• Second Scheme : This scheme provides a specified incentive directly to both employees and employers concerning their EPFO contributions during the first four years of employment. It aims to support 3 million new employees and their employers by reducing their EPFO contribution burden.
• Third Scheme : This scheme targets additional employment across all sectors. For every new employee hired at a salary of up to Rs. 1 lakh per month, the government will reimburse employers up to Rs. 3,000 per month for two years towards their EPFO contributions. This measure is anticipated to encourage the hiring of 5 million additional workers.

Skilling Programme

A new centrally sponsored initiative will be launched to skill 2 million youth over five years. This program will include the upgrading of 1,000 Industrial Training Institutes through a hub-and-spoke model with a focus on outcomes.

Internship in Top Companies

A comprehensive scheme will be introduced to provide internship opportunities for 100 million youth over five years in 500 top companies. The internships, lasting 12 months, will offer real-world exposure across various professions and employment opportunities. Interns will receive a monthly allowance of Rs. 5,000 and a one-time assistance of Rs. 6,000. Companies will be responsible for training costs and contribute 10% of the internship expenses from their CSR funds.

Rationale and Objectives of ELI

Direct Job Creation

The ELI scheme represents a significant departure from indirect incentives like tax cuts and production-linked incentives. Instead, it offers direct financial rewards to companies for hiring new employees. This approach aims to address the previous failures of trickle-down economics by targeting job creation more directly.

Comparative Analysis with Previous Policies

The Production Linked Incentive (PLI) scheme focused on increasing production by lowering marginal production costs. In contrast, ELI seeks to reduce marginal labor costs, thereby encouraging firms to prioritize hiring over automation. ELI complements the PLI scheme by shifting the focus from economic output to direct employment benefits.

Implications and Potential Impact of ELI

Benefits of ELI

• Potential for Job Creation: While ELI alone may not guarantee a massive increase in jobs, it could influence firm-level decisions to favor labor over machinery. If adopted broadly, this approach could lead to meaningful job creation across small, medium, and large enterprises.
• Potential for Social Stability: By generating more employment opportunities, the ELI scheme addresses the pressing issue of unemployment, contributing to social stability and harmony. It helps alleviate the negative effects of jobless growth, such as rising inequality and potential social unrest.
• Sector Independence: Unlike the Production Linked Incentive (PLI) scheme, which is tailored to specific industries, the Employment-Linked Incentive (ELI) scheme applies uniformly across all sectors. This broad applicability prevents issues related to misallocation or favoritism that can arise when incentives are concentrated in particular industries.

Criticisms and Concerns

• Undermining Productivity and Global Competitiveness: Critics argue that ELI might undermine productivity and global competitiveness by prioritising labour over technological advancements. However, the current emphasis on capital and GDP growth has not sufficiently addressed job creation and economic inequality, making a shift towards labour incentives potentially necessary.
• Impact on Employment and Political Proposals: The shortage of jobs has led to extreme measures, such as proposals to reserve jobs for locals, driven by political pressures. Merely criticizing such measures without offering concrete solutions is unproductive. Addressing the jobs deficit requires innovative ideas beyond traditional reforms.

ELI as a Policy Shift

ELI represents a tangible policy shift from trickle-down economics to direct job creation interventions. Although its effectiveness in creating jobs remains to be seen, it signifies a move towards addressing the capital-labor imbalance and jobless growth.

Conclusion

The introduction of the ELI scheme marks a critical shift in the Modi government's economic policy, recognizing the limitations of GDP-centric models and addressing the need for direct employment incentives. While ELI may not resolve all employment issues, it represents a significant departure from previous approaches and a step towards more effective job creation strategies. The decision to adopt ELI reflects a broader acknowledgment of the disconnect between economic growth and job creation, aiming to realign policy focus towards improving employment outcomes and economic equity.

Source: The Hindu