Will ELI scheme fix India's jobs crisis? A comprehensive rethink needed

The proposed employment incentive scheme is a commendable start, but it risks worsening India's employment problem

India is grappling with a stark economic paradox: While gross domestic product (GDP) growth remains robust, job creation lags woefully behind. Despite the economy expanding by 8.2 per cent in FY24, there has been a persistent decline in the labour force participation rate (50.2 per cent in Q1 FY24, as reported by the Periodic Labour Force Survey) and a rise in the unemployment rate (9.2 per cent in June 2024, according to the Centre for Monitoring Indian Economy). This disconnect between India’s booming economy and its stagnant job market poses a significant structural challenge that could derail the nation’s long-term economic aspirations.

India’s demographic dividend, often touted as a critical driver of future growth, risks turning into a demographic liability if the country fails to generate sufficient employment opportunities. The socio-economic stakes are high — a large, youthful population with unmet job expectations could exacerbate rising inequality, social unrest, and potentially lead to an economic downturn. Employment is the cornerstone of sustainable economic growth — a robust job market drives consumption, boosts aggregate demand, and creates a virtuous cycle of economic expansion.

Recognising the crisis, the Indian government has recently announced the employment-linked incentive (ELI) scheme, a policy initiative designed to incentivise businesses to hire more workers. Though belated, the move marks a small but significant step towards addressing the nation’s employment challenges. The ELI scheme introduces a range of financial incentives, including wage subsidies for new hires and bonuses for companies that significantly expand their workforce. For instance, companies that employ first-time workers with monthly salaries up to Rs 1 lakh are eligible for wage subsidies of up to Rs 15,000 per employee, paid in instalments. The scheme explicitly targets the manufacturing sector, offering further incentives to companies that increase their employees’ provident fund organisation-registered workforce.

Given the challenging employment scenario, the ELI scheme appears to be a meaningful policy intervention. By lowering the cost of labour, it seeks to make hiring more attractive, particularly in sectors like manufacturing, which has consistently been a key focus of the government’s economic strategy. The sector, which currently employs about 12 per cent of the workforce, will likely play a crucial role in absorbing a large segment of India’s labour force. The ELI scheme’s targeted incentives could catalyse the dual objectives of industrial expansion and employment generation.

However, the ELI scheme is unlikely to fully address the structural issues contributing to jobless growth. The scheme’s reliance on wage subsidies raises concerns about the sustainability and quality of jobs. Data from the National Sample Survey Office (NSSO) indicates that nearly 80 per cent of jobs in India are informal, lacking the stability and benefits associated with formal employment. There is a real risk that the ELI scheme could worsen this trend, encouraging companies to create low-wage, temporary positions rather than investing in long-term, stable employment. Furthermore, wage subsidies alone may not be enough to compel businesses to invest in the kind of job creation that aligns with the evolving demands of the global economy.

The scheme’s narrow focus on manufacturing ignores how the global labour market is shifting towards technology-driven and service-oriented industries. To effectively tackle the problem of jobless growth, the ELI scheme must be reimagined as part of a more comprehensive, forward-looking strategy. Policymakers should consider expanding the scheme to include sectors such as technology, healthcare, and renewable energy — industries that not only promise significant job creation but are also aligned with future economic megatrends. For example, the healthcare sector, which employs around 4.7 million people and is growing at a compound annual growth rate of 22 per cent since 2016, is poised for further expansion due to an ageing population and increasing healthcare needs. By extending ELI incentives to this sector, the government could address both employment concerns and the growing demand for healthcare services.

Continuous skills development must also be integrated into the ELI framework. The World Economic Forum (WEF) projects that by 2025, automation and technological advancements will require reskilling nearly half of all global employees. To remain competitive, India must prioritise upskilling. Policymakers should forge tri-sector partnerships among the government, industry, and academia to develop targeted upskilling programmes aligned with evolving industry needs. This approach would not only boost job creation but also ensure the sustainability and quality of employment opportunities, positioning India’s workforce for future economic challenges.

Finally, the implementation of the ELI scheme must be underpinned by a robust monitoring and evaluation mechanism. Data-driven insights should guide the scheme’s evolution, allowing for real-time adjustments that respond to changing labour market dynamics. Regular assessments of job quality, sustainability, and the distribution of jobs will be crucial to ensuring the scheme’s long-term success.

While the ELI scheme is a commendable start, addressing jobless growth requires bolder, more innovative policies. To avoid creating temporary, low-quality jobs, policymakers must pivot toward high-growth, future-ready sectors and integrate continuous skills development into the national strategy. The future of India’s workforce —and, indeed, its economy —depends not on the speed of its growth but on the breadth and depth of its benefits. To avert a demographic disaster and capitalise on its vast human potential, policymakers must ensure that the nation’s growth story is one of shared prosperity, where every citizen gets the opportunity to contribute meaningfully to its economic progress and thrive in an evolving global economy.

The writer is an assistant professor at the Indian Institute of Management, Ranchi. amarendu@iimranchi.ac.in.