Employment – A Major Priority in the Union Budget 2024-25

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Context

• The Union Budget for 2024-25 made it clear that employment was a major priority of the government, with the word getting 23 mentions in the Finance Minister’s speech.

Current State of Employment

Workforce Composition

• According to the Economic Survey, India’s workforce was estimated to be nearly 56.5 crore in 2022-23. The distribution across sectors is as follows:
• Agriculture: More than 45%
• Manufacturing: 11.4%
• Services: 28.9%
• Construction: 13%

Unemployment Rate

• Officially, the unemployment rate was just 3.2% in that period. However, economists note that these statistics do not reflect the ground reality, given the large number of underemployed people in the country.
• Many job seekers continue to work on farms, in the unorganised retail sector, or as casual labourers. A person is categorised as employed if they pursued any economic activity for at least 30 days in the preceding year.

Unpaid Labour and Urban Unemployment

• Almost one in five people in the workforce (18.3%), mostly women, do not receive any wages for their labour, as they are unpaid workers in household enterprises.
• The urban unemployment rate for the quarter ending March 2024 stood at 6.7%, while youth unemployment stood at 10% in 2022-23.

Regular Salaried Work

• The percentage of people in regular salaried work has dropped from 22.8% in 2017-18 to 20.9% five years later, despite policy efforts to formalise the workforce.
• Many salaried workers do not have access to contracts or social security benefits that usually define a formal worker.

Formalisation of Workforce

• The government cites enrolment in the Employees Provident Fund Organisation (EPFO) as evidence of formalisation.
• The EPFO has 7.3 crore contributing subscribers, though total accounts are 30 crore, including inoperative accounts and multiple accounts held by individuals.

Specific Schemes in the Employment Package

Employment-Linked Incentives

1. First-Time Employee Hiring Support:
• Incentive: Wage subsidy of up to ₹15,000 paid directly to the employee.
• Coverage: Expected to cover one crore people.
2. Manufacturing Sector Employee Hiring:
• Incentive: Wage subsidies to both employees and employers for four years.
• Maximum Incentive: 24% of a ₹25,000 monthly wage.
• Focus: Specifically aimed at first-time employees in the manufacturing sector.
3. New Worker Hiring Support:
• Incentive: Reimbursement of up to ₹3,000 of the employer's monthly EPFO contribution.
• Eligibility: Applies to employers hiring new workers, not necessarily first-timers.

Skilling and Training Schemes

1. Industrial Training Institute Upgradation:
• Focus: Boosting skilling efforts.
• Beneficiaries: Expected to benefit 20 lakh students.
2. On-the-Job Skilling Initiative:
• Objective: Provide internships in India’s top companies.
• Target: One crore youth.
• Allowance: Monthly allowance of ₹5,000 for one year.
• Cost Sharing: Companies to bear training costs and 10% of the allowance.

Registration Requirement

• EPFO Registration: All three employment-linked incentive schemes require employees to be registered with the Employees Provident Fund Organisation (EPFO).

What is in the Fine Print?

Economists and small industrialists note that the conditions and procedures built into these schemes may create obstacles for effective implementation. Here are some of the critical points:

First-Time Employee Hiring Support Scheme

• Subsidy Instalments: The ₹15,000 subsidy is paid out in three instalments. The second instalment is only payable if the employee undergoes a compulsory online financial literacy course.
• Refund Clause: If the employment of the first-timer ends within 12 months of recruitment, the subsidy is to be refunded by the employer.
• Concerns: If an employee switches jobs within 10 months, they have already benefited from the scheme, but the employer is required to bear the costs. Labour experts argue that few small employers will be willing to take this risk.

Manufacturing Sector Employee Hiring Scheme

• Minimum Hiring Requirement: The scheme has a minimum requirement of hiring 50 people or 25% of their existing strength.
• Challenges: Hiring such a significant number of people at one go for any firm, especially small or medium-sized enterprises, for marginal benefits, can be a substantial challenge.

General Issues

• Complicated Procedures: The procedures and conditions tied to these schemes are viewed as potential deterrents for small businesses. The need for compulsory courses and refund clauses could discourage participation.
• Risk Aversion: Small employers may be reluctant to engage with these schemes due to the financial risks associated with the conditions, particularly the refund clause if employment ends prematurely.

While the Union Budget for 2024-25 emphasizes employment and introduces several schemes to boost job creation, the fine print reveals potential obstacles that could hinder the effective implementation of these initiatives. The success of these schemes will depend on how well the government addresses these concerns and simplifies the procedures to make them more accessible and practical for employers, especially small and medium-sized enterprises.

How Effective Are These Schemes Likely to Be?

• These schemes aim to encourage hiring by reducing the cost of new hires.
• However, economists suggest that this is not the primary constraint preventing employers from hiring new workers.

Wage Costs as a Constraint

• India is already a low-wage economy, with real monthly incomes falling over the last five years for the majority of the workforce. Wage costs are a redundant constraint. While skilling is essential, it is not the central issue preventing hiring.

Structural Issues in the Economy

• There are bigger structural reasons why the economy is not creating jobs, primarily due to insufficient demand caused by low consumption and the lack of private investment.
• And if that comes up, then these costs won’t matter.
• These schemes need to be targeted at the niche group of employers for whom such costs do matter, typically small firms with small margins.

Government's Perspective

• The government's intention behind the scheme might be to provide fiscal incentives that have a role at the margin.
• This suggests that the schemes are designed to support small businesses that might benefit from reduced hiring costs.

Effectiveness

• Limited Impact on Large Employers: For large employers, who are less constrained by wage costs, these schemes may have limited impact.
• Potential Benefits for Small Firms: Small firms with small margins might benefit from the reduced hiring costs, making the schemes more effective for them.
• Demand and Investment: The broader issue of insufficient demand and lack of private investment remains a significant barrier to job creation. Without addressing these structural issues, the overall effectiveness of the schemes may be limited.

While the employment schemes introduced in the Union Budget 2024-25 offer incentives to reduce hiring costs, their effectiveness is likely to be limited by broader structural issues in the economy. The schemes may provide some relief to small businesses, but addressing low demand and encouraging private investment will be crucial for substantial job creation.

Formalisation of the Workforce

Workforce Transition

• Apart from new entrants, large numbers of people are seeking to leave agriculture, petty trade, unorganised retail, and domestic service.
• The need is to create formal jobs to keep pace with this supply. However, the current situation reflects a drop in the proportion of salaried workers over the last five years, indicating that formal job creation is not happening at the required scale.

What Else is Needed to Create Jobs?

Focus on MSMEs and Labour-Intensive Sectors

• Job creation should not be focused on the top 500 companies, which are largely capital-intensive, but rather on the MSME (Micro, Small and Medium Enterprises) sector and labour-intensive sectors in small towns.
• Need of the hour: A bottoms-up approach:
• Raise Wages: Increasing wages in the MSME sector.
• Infuse Money into MSMEs: Providing financial support to MSMEs, which will have a multiplier effect on the economy.

Stimulating Demand through Wage Increases

Stimulating demand by increasing consumption is crucial.

• Raising Wages in MGNREGA: Enhancing wages in the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) scheme to boost rural consumption.

• Creating an Urban Employment Guarantee Scheme: Establishing a similar employment guarantee scheme for urban workers to ensure job creation and increase urban consumption.

Government Policy Adjustments

• The Centre has instead curbed MGNREGA funding, which is counterproductive to stimulating demand.
• Adjustments in government policies to increase funding and support for such employment guarantee schemes could directly boost consumption and, in turn, drive job creation.

Conclusion

To create jobs effectively, a multi-faceted approach is required:

1. Focus on MSMEs and Labour-Intensive Sectors: Support and financial infusion into MSMEs and raising wages in these sectors.
2. Stimulate Demand: Increase wages in rural job schemes like MGNREGA and create urban employment guarantee schemes to boost consumption.
3. Policy Adjustments: Government policies need to align with these goals by increasing funding and support for employment guarantee schemes.

Addressing these areas can help create formal jobs and ensure that the workforce transition from informal to formal sectors keeps pace with the growing supply of job seekers.

PRACTICE QUESTION Q. Evaluate the necessity of prioritizing employment in government policies. Suggest measures for sustainable job creation and workforce formalization.

SOURCE: THE HINDU