ELIgant signalling, but job creator?

GoI's plan to subsidise employment of inexperienced workers has theoretical and empirical justification. Subsidising employment of disadvantaged workers provides social security and connects the target group to unsubsidised employment, improving their long-term job prospects. It has been used by governments for decades to provide work experience and income support. There is evidence the earnings benefits of employment subsidies last longer than duration of the programme. The spillover benefits on expansion of small enterprises and support to consumption demand make a compelling argument for this subsidy. In the Indian context, it addresses the skilling gap entry-level workers face as a hurdle to employment.

Objections to the scheme lie not in its design but in the assumptions about job creation. The programme is meant to benefit 1 crore new workers annually. But all these jobs will have to be created in the formal part of the non-farm economy for the subsidy to deliver the expected outcomes. Official estimates set the economy-wide job creation rate at around 2 crore annually. Formal employment makes up around a tenth of the overall employment. This would have a bearing on the outcome of the programme. Besides, the business cycle may not be adequately supportive. Private investment has been sluggish on slowing consumption. This has a direct bearing on job creation. To gain traction, duration of the employment subsidy scheme may have to be extended.

That brings up the question whether more permanent solutions should be sought, given the country's demographics. The public sector has ramped up capacity in line with GoI's capex push. But this has not been particularly employment-generating. An unemployment subsidy for urban workers may have a more direct impact than an employment subsidy of similar scale, which is linked to growth of manufacturing and services, as also to the rate of formalisation of the economy. Subsidy to rural workers is shrinking slower than anticipated, which also established a marker for job creation overall.