One of the biggest challenges facing the economy is sluggish consumption. Consumption, in turn, depends on people's ability to spend money. After adjusting for inflation, the core of the problem lies in the fact that people have more income in their pockets to spend, which is ultimately determined by employment in the country. Increasing employment depends on the overall performance of the economy. With the economy slowing from 8.2% growth in FY24 to less than 7%, the ability of businesses to create jobs is limited. Employment only increases when companies see value in hiring. They are not willing to keep employees on the bench and drag down their profit and loss account.
Direct action is good
The government has started taking direct action to create employment, a step that deserves appreciation. While the government has focused on filling vacancies in the public administration, it has also taken steps to encourage the private sector to hire more people. A recent example is the decision of insurance giant Life Insurance Corporation of India (LIC) to hire “Bima Sakhis”. The scheme, which mainly targets women between the ages of 18 and 70 years who have completed at least the 10th grade, offers a three-year training program with stipends of Rs 7,000, Rs 6,000 and Rs 5,000 per month respectively over these years . . The aim is to empower women and equip them with the skills they need to gain gainful employment, especially as LIC agents who help customers obtain insurance products. This initiative is a progressive step by the government in collaboration with the LIC. Depending on the success of the scheme, the government may consider similar partnerships with other insurance companies, including general insurers. In a way, this mirrors the banking correspondent model used for financial inclusion.
In addition, the FY25 budget announced two programs to boost employment by providing incentives to employers. One scheme ensures that the government offers a contribution of one month's salary for starters. Another provides a benefit to both employers and employees through government contributions to employees' provident funds. Like the Bima Sakhi initiative, the budget also introduced an internship program targeting youth of Rs 1 crore over a period of five years. The government will provide a stipend of Rs 5,000 per month to these interns, who will receive on-the-job training at the country's top 500 companies, potentially leading to full-time employment. It will certainly help them become more employable.
An incomplete approach
These are commendable steps by the government to help India Inc. to encourage hiring more people and to tackle the problem of job creation. Two ideas emerge from these initiatives: first, such programs could be replicated across sectors, and second, state governments could take the lead in implementing them in their regions. But is this the only approach to creating jobs?
The challenge lies in the fact that companies are driven by the need to maximize profits for their shareholders. This is achieved by growing the business and reducing costs. Personnel costs make up a significant portion of any company's expenses, so there is hesitation to employ more people than are necessary to run the business. This has resulted in periodic layoffs, even in profitable companies, leading to temporary unemployment among highly skilled workers. Often those laid off have to accept jobs that pay less than their previous job.
While the government's initiatives are a positive start, such measures cannot be sustained indefinitely as significant financial efforts are required to keep people in the private sector employed. Alternatives should be explored to create employment in non-governmental sectors. One possible solution is to encourage companies to hire more workers. This could take the form of tax incentives for companies that show a growth rate in the permanent workforce that is higher than the average of the past three years. Similarly, the PLI (Production Linked Incentive) scheme could be linked to employment targets, allowing companies to claim subsidies from the government if they employ more people.
A carrot and stick policy
By linking tax benefits to employment growth, companies can be encouraged to hire more staff. This is especially important as many industries increasingly adopt AI technologies, which may not fit as well in a labor-surplus economy like India's. To counter this, the government could consider imposing higher taxes on AI technologies to discourage their use. In addition, a 'severance tax' could be considered for companies that resign despite being financially healthy. Admittedly, this would be difficult to achieve, as laid-off employees are often forced to resign.
While the government has taken the right steps to increase private sector employment, these measures could be costly in light of other budgetary commitments. The approach should be extended to other levels of government. More importantly, a 'carrot and stick' policy should be adopted to ensure that the private sector contributes to the process of nation building, especially in the area of employment.
(The writer is Chief Economist of Bank of Baroda and author of Corporate Quirks: The Darker Side of the Sun)
Disclaimer: These are the personal opinions of the author
