Budget proposes boost for jobs, will industry oblige?

The Union budget for 2024-25 announced a host of schemes to make the country’s youth more employable and boost employment. The onus of creating jobs will be on the private sector while the government will be a facilitator.

The announcement of the three employment-linked incentive schemes, within days of the government claiming job growth was robust in recent years, is a significant acknowledgement of the crisis faced by the country’s youth in finding employment. Citing the Periodic Labour Force Survey (PLFS) and the Reserve Bank of India’s KLEMS (capital, labour, energy, materials and services) data, the government claimed that 80 million jobs were created between 2017-18 and 2021-22. Some of these were in the formal sector, as evident from the rising enrolment of subscribers with the Employee Provident Fund Organisation (EPFO) and the National Pension System. The KLEMS data also show that the largest proportion of jobs were created in agriculture, mostly informal and low-paying.

The government also said that the PLFS data showed that the unemployment rate had declined to 3.2% in 2022-23, a point disputed by economists and statisticians in the private sector. The Centre for Monitoring Indian Economy (CMIE), which runs the widely followed Consumer Pyramids Household Survey, estimated the unemployment level for that year at 7.6%, which it says rose to 8% in 2023-24 and climbed higher to 9.2% in June. The rise in unemployment level was accompanied by higher labour force participation and a fall in employment rate, according to the CMIE’s estimates.

July brought some encouraging news as well. The purchasing managers’ index, a leading indicator of changes happening in the economy, indicated a sharp uptick in manufacturing and services sector hirings in June. Among the industries that reported stronger hiring were consumer goods, transport and storage, information and communication. India’s IT companies, particularly TCS, recently reported a recovery in hiring.

Conditional support

The three employment-linked incentive schemes aim to encourage formal sector employment with incentives for employers to hire and employees to upskill. And, there is an emphasis on hiring fresh talent graduating from educational institutions. For instance, schemes A and B – First Timers and Job Creation in Manufacturing, respectively – are intended to ensure employment for those without previous work experience or who were not in formal employment.

The cash transfer or subsidy in both these schemes is conditional and can be revoked if the employee leaves the job in less than one year. The subsidy of one month’s wages (maximum of Rs 15,000) is to be given in three instalments under the First Timers scheme, subject to the fresh employee undergoing an online financial literacy course and earning less than Rs 1 lakh a month. If the employee were to leave the job within a year of recruitment, the employer is obliged to refund the subsidy. In the case of Scheme B (Job Creation in Manufacturing), the subsidy is to be paid over four years to the employee and the employer. Only entities with a three-year track record of contributing to EPFO are eligible, and they have to hire a stipulated number of new employees who were previously not enrolled with the EPFO.

The third scheme – Scheme C – envisages monthly subsidies to employers for contributing their share to a new employee’s EPFO account. The monthly subsidy of up to Rs 3,000 per employee is proposed to be paid for two years. The scheme assures greater support for enterprises hiring more than 1,000 employees.

Other major measures include support for upgrading industrial training institutes and internship programmes for youth aged 21-24 years with top companies. The burden of the internship allowance is to be shared by the government and the participating company from its CSR funds. There are schemes to provide hostel and dormitory accommodation to employees near their place of work and support medium, small and micro enterprises, all of which could lead to a rise in labour force participation and employment.

Outcome depends on execution

The schemes are all well-intentioned and have the potential to increase employment opportunities for the youth in the formal sectors of the economy. Many young people joining the workforce can expect to benefit from the schemes for first timers. The enrolment of employees with the EPFO could rise due to the subsidy for employers’ contributions.

However, hiring is not driven by incentive schemes and subsidies alone. Hiring in the manufacturing sector depends on the demand for products, the need to run additional shifts in factories and the necessity to hire more field staff for new markets. The last available Reserve Bank of India survey shows capacity utilisation steady at about 74% for nine quarters till October-December 2023. Companies in most sectors plan for expansion only when their capacity utilisation goes beyond 80%. The union government’s continued focus on capital expenditure could benefit companies in core sectors such as steel and cement.

Rural demand is expected to gather pace with a good southwest monsoon 2024 season, and that could then push capacity utilisation higher and prompt companies to plan capacity additions. A pickup in growth in the US and the European Union, two major destinations for Indian exports, will also be a determinant of hiring by companies.

In the services sector, hiring will depend on the demand environment. If IT companies are hiring now, after letting people go until a few months ago, it is because demand for software solutions is on the mend. The US is one of the largest markets for India’s IT companies and an improvement in spending budgets of clients there has lifted hiring in these companies. New recruits of these companies would be among the beneficiaries of the employment-linked incentive scheme.

The government may need to proactively and frequently interact with the industry to iron out impediments to growth and improve the ease of doing business to ensure a rise in employment.