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It is an important theme of the budget. In my last Mint column (30 August 2024), I underlined the importance of the finance minister recognizing the need for an employment linked incentive (ELI) scheme and making allocations for it.
However, I also noted that the problem of tardy employment growth cannot be solved by allocating money for schemes, unless these are based on a clear understanding of the nature of the problem, which is actually quite complex.
This column discusses the complex structure of India’s segmented labour market and the interventions required to make growth more employment-intensive in the short-term and over the long haul.
An economy can be segmented in different ways. The standard distinction is among the three major production sectors: agriculture, industry and services.
Another frequent segmentation is between the organized sector, also called the formal or modern sector, and the unorganized, informal or traditional sector.
In India, the organized sector broadly comprises all government institutions (including autonomous ones), all public enterprises, all private enterprises registered with the ministry of corporate affairs or under the Factories Act or Shops and Establishments Acts in the states, and cooperatives. All other enterprises, including farm households and non-farm household enterprises, constitute the unorganized sector.
Another way of segmenting the economy is through the lens of employment. The India Employment Report, 2024, indicates that the country’s formal sector employs about 20% of the workforce, with 80% employed in the informal sector.
However, only half the formal sector employment, about 10%, features employees who are formally employed with written contracts, regular wages and other benefits.
The other half of employment even in the formal sector is actually informal employment (as in casual wage labour). Thus, 90% of total employment in the country is informal employment.
Employment can also be segmented by quality into three broad segments. The best is regular wage employment at an average monthly remuneration of ₹20,702, which accounts for about 22% of employment as per the 2023-24 Periodic Labour Force Survey.
The worst is daily-wage casual employment at an estimated monthly income (21 days) of ₹8,962 per month, which accounts for 20% of employment. Self-employment, at an average monthly income of ₹10,032, accounts for India’s largest share of employment at 58%.
Designing employment promoting schemes for this complex structure is very challenging. Clearly, the goal is to maximize well-paid, high-productivity formal employment. However, with 90% of current employment being informal, that goal is still decades away.
Meanwhile, it is urgent to maximize employment growth, even if it is not the best quality of employment, in labour-intensive, large-employment sectors.
Outside agriculture, which employs nearly half the workforce but at very low productivity, there are 21 labour-intensive sectors, employing at least 20 persons per ₹1 crore of output, according to a 2022 NCAER study by Bhandari, Kumar and Sahu.
Of these, 10 broad sectors are of special interest, as they are already large employers with growing demand: construction; trade; land transport; education and research; textiles and garments; food and beverages; hotels and restaurants; other services; and paper products, printing, publishing and miscellaneous manufacturing.
In the short-term, an ELI scheme which links incentive grants to additional employment can be targeted at a few sub-sectors of these 10 broad sectors. Cost reduction through ELI provisions would further push their growth.
Since informal employment accounts for 90% of all employment at present, an ELI scheme for hard-to-reach groups will not be possible without an Aadhaar-like platform for aggregating these groups.
This would be a hugely ambitious programme. However, if it could be done for Aadhaar, it can be done again. Indeed, it can now piggyback on the Aadhaar data base.
Alongside the ELI scheme, a parallel initiative is required to gradually shift the structure of employment from low-paid, low-productivity informal employment towards high-skill, high-productivity, well-paid formal employment.
Modern, complex manufacturing industries with strong backward and forward linkages should be the focus of this programme, and an effective skilling scheme should be the key to this initiative.
Hardly 4% of India’s workforce has any certified skills, compared to over 70% in most European countries and over 90% in some East Asian economies.
Numerous skilling programmes launched over the years have had little impact on actual employment because potential employers, who know what skill gaps need to be filled, have not been involved at the core of these efforts.
A new programme announced in the budget that will subsidize apprenticeship in large companies in the organized sector sounds promising. Whether these companies will register with the government to participate in this programme, however, remains to be seen.
Finally, this forward-looking programme should focus on preparing India’s workforce for the three fundamental technological revolutions that will shape the emerging global economy: the energy transformation, bio-technology revolution and the Artificial Intelligence (AI) revolution. It is encouraging as I write these lines that an apprenticeship programme for AI has just been launched.
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