To generate jobs, India should consider a jobs-linked incentive scheme

National Sample Survey Office (NSSO) data on unemployment (weekly status) has shown that joblessness on a quarterly basis has been in a range of 6.5 % to 6.7%. We have thus had mixed signals.

In the Union budget for 2024-25, the government introduced an employment-linked scheme (ELI) under which allocations were made for payments to first-time employees in the form of wages or provident fund contributions on their behalf for two years.

The government has also begun an internship scheme in top companies. But could there be a direct way of incentivizing companies to increase their headcount?

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The central and state governments provide the policies and physical and financial infrastructure that let the private sector drive growth. Private companies always look at productivity and profit when planning an employment matrix, as the salary of any person taken on the rolls is seen as a fixed cost, to be borne regardless of output.

After covid, the temptation to employ more technology to substitute human jobs has been high. With artificial intelligence (AI) gaining currency, there is palpable fear of a further slide in demand for human beings. The concept of having a stock of employees on the bench is outdated even in the information technology (IT) sector, where hiring now follows the tenet of ‘just in time.’

A policy response could be for the government to provide financial incentives to the private sector through a jobs-linked incentive (JLI) scheme that mirrors its production-linked incentive (PLI) scheme, which links subsidy payouts to the beneficiary firm’s incremental output, with the aim of encouraging it to invest and produce more.

In this way, it is a performance-linked outlay. And while several companies have applied for participation in this scheme available in around 14 business sectors, only those which meet the designated target are given the award, which ranges between 4% and 6% of the incremental turnover.

In JLI’s case, similar benefits could be given to employers participating in the programme. Payouts for recruiting companies can be designed in two basic ways.

First, it could be in the form of a subsidy, with a similar amount of 4-6% of incremental turnover awarded, provided the firm adds 5% to its labour force in net terms over its peak headcount of the last three years. A qualifying bar of 5% is logical because this has been the average growth rate for the corporate sector in the past when conditions were normal.

In fact, in boom times, 8% growth in gross domestic product (GDP) has been associated with a 7-8% rise in corporate headcount. So, assuming GDP growth of 6-7% or more in the years ahead, a 5% bar is neither too high nor too low.

The amount payable could also be linked with the company’s turnover per employee. So, when output increases, employment must keep pace for an employer to qualify for the benefit.

An alternative can be a tax set-off of 5%, provided the same target is met. It may be recalled that in 2019, the government had given corporates a choice of lower tax rates without tax exemptions . This, however, did not quite result in higher corporate investment, as was hoped. Today, tax concessions linked with employment could serve an important purpose.

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Hence, there are two broad ways a JLI scheme could be implemented. It could be earmarked as an expenditure outlay or offered as tax relief. A JLI programme would have fiscal implications only if a large number of companies meet their targets.

Either way, a JLI scheme may prove more effective than running a time-bound internship programme or making provident fund payments on behalf of employers, as announced in the Union budget this year. Under a JLI structure, companies would have to put in the effort to meet specific commitments in return for the benefit.

Their annual reports could be used for the purpose of keeping track of headcounts, as these are official audited documents that report workforce numbers as of 31 March each year. The number varies during the course of a year on account of normal attrition and replacement of staff.

This idea can also be extended to address the issue of layoffs being announced by companies. While IT service providers are known for such layoffs, it is not uncommon for resignations to be demanded in other sectors. Here, the government could consider levying a corporate-tax cess on companies that go for layoffs.

This can be hard to monitor as one cannot distinguish between voluntary attrition and forced resignations. That said, the cess can be used for creating a fund to support those who have been laid off. Faced with such a cess, companies may opt to rethink their retrenchment plans.

A JLI scheme would make the government’s money do a better job of generating jobs. The current emphasis on making it cheaper for companies to recruit does have its merits. But directly awarding companies money for meeting targets on a sustained basis would be a more progressive way to support employment.

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The author is chief economist, Bank of Baroda, and author of ‘Corporate Quirks: The darker side of the sun’.