Hire for money, how many?

In her latest budget, Nirmala Sitharaman highlighted the need for creating more jobs in the formal sectors through employment-linked incentives (ELI). She sought to do this through three schemes based upon EPFO enrolment. The focus was on financially supporting first-time employees and their employers. In a nutshell, these were:

First-time employees
To provide one month's wage to all persons newly entering the workforce in all formal sectors. Such employees, earning a salary of up to ₹1 lakh a month, and only if registered in EPFO, will get a direct benefit transfer of one-month salary in three instalments up to a limit of ₹15k. According to the budget, this scheme is expected to benefit 21 mn young people.


Incentivising job creation in manufacturing
Linked to employment of first-time employees, an incentive will be provided directly to both employee and employer vis-a-vis their EPFO contribution during the first four years of employment. The scheme is expected to benefit 30 lakh young people entering employment, and their employers.

Support to employers
This scheme will cover additional employment in all sectors. All additional employment up to a salary of ₹1 lakh a month will be counted. GoI will reimburse employers up to ₹3k a month for two years towards their EPFO contribution for each additional employee they hire. The scheme is expected to incentivise additional employment of 50 lakh persons.

These are well-meaning schemes. Moreover, GoI needs to be commended for finally focusing on what is undoubtedly India's greatest economic problem over the next decade - that of a vast number of young people joining the potential workforce each year without there being enough jobs to go around.

The numbers are truly enormous. While the estimates vary, these coalesce in the region of an additional 8-10 mn young people each year, for the next 10 years.

As against this, every reliable bit of evidence shows that the employment intensity is steadily declining across every major sector of the economy. Simply put, the percentage of additional people employed for a percentage increase in income across any sector is less than before. This reduction is not new. Just to give some facts:

India's employment elasticity was close to unity in the days of protection in the 1970s. It then dropped to 0.4 with the coming of liberalisation in the 1990s and 2000s. Now, it's close to zero. For every 1 percentage point increase in GDP, jobs have been growing by only 0.1%.

Why is this so? For one, the advent of technology, and I'm not referring to AI or anything super-smart. It is simply this: machines are better than before and need fewer workers to man them. Here's an example. Up to the 1980s, loom-sheds in textile mills consisted of relatively primitive looms that needed frequent attention. Hence, there was one weaver dealing with four looms.

With better semi-automatic and then fully automatic high-speed air-jet and water-jet looms, the ratio became either one worker for 8 or 16 looms. This has been the same everywhere: foundries, forgings, wire drawings, chemicals, paints, pharmaceuticals, automobile components, car and 2-wheeler assembly lines, and evermore. Any factory you go to will demonstrate that the worker-to-output ratio has steadily reduced over time.

For another, factory owners across all sectors have preferred machines and shop floor designs that involve higher productivity with lower workers. These increase throughput, value added and revenue, and simultaneously reduce the myriad managerial and legal hassles of dealing with a rising tide of workers. Every listed manufacturing entity has reduced the ratio of value added to workers - not only by raising the numerator but also by cutting back on the number of workers, typically by not replacing those that retire.

In such a milieu, should we expect the FM's well-intentioned measures to work as she expects? I think not. Ask yourself the simple question as an entrepreneur: will you really employ additional full-time workers solely to avail of the FM's incentives? The answer seems to be obvious. You will do so only if it is needed for the business. But you will certainly not lock yourself up with extra workforce and all its attendant costs just to take advantage of these incentives.

Entrepreneurs have publicly praised these incentives. They have to. But don't take that for the truth. People hire when they need to hire. At the margin, this need has been reducing over time. One-off incentives such as these don't make hiring any more attractive over the lifetime of such a hire. And that is why, despite all the public hosannahs, don't expect these measures to bear fruit.

We certainly need to deal with this job crisis. But probably not the way FM has suggested. Unfortunately, her hands are tied. Because a budget can only do so much.