Job Creation in India - Challenges and Policy Imperatives

Context:

• India’s working-age population has increased significantly since 2017-18 (by about 9 crore), yet formal sector job creation has not kept pace (rose by 6 crore), leading to a deficit of 50 lakh jobs annually.
• Most new employment has emerged from informal and self-employment sectors, highlighting both quantitative and qualitative challenges in job opportunities.

The Rising Capital Intensity of Production:

• Technological progress and declining labour intensity:
  • Labour-intensive industries are increasingly adopting capital-intensive production processes.
  • AI and automation are accelerating this trend, reducing labour demand across sectors.
• Why is capital intensity increasing in a labour-abundant economy? Two key factors contribute to this shift:
  • Demand-side factors: Need for higher productivity and value addition at lower costs.
  • Supply-side factors: Shortage of skilled labour forces employers to opt for automation.
• Impact on employment and economic sectors:
  • Services sector: Highest value addition, increasing contribution to GDP.
  • Manufacturing sector: Stagnant contribution despite industrial policies.
  • Agriculture sector: Declining share in GDP, pushing surplus labour into informal jobs.

Skills Deficit and the Challenge of Employment Readiness:

• Less than 10% of India’s workforce has formal technical or vocational training.
• Many educated youths lack job-ready skills, widening the skill gap in the labour market.
• The rise of “skill-biased technological change” is making certain job roles redundant, reducing labour demand further.
• Key policy requirement: Continuous skilling and upskilling to ensure workforce adaptability to new technologies.

Government Strategies for Job Creation:

• PLI scheme:
  • The production-linked incentive (PLI) scheme aims to boost high-value production and attract investments.
  • Over 50% of the PLI budget is allocated to electronics, IT hardware, and drone manufacturing.
  • Employment mismatch:
    • High job creation in food processing & pharmaceuticals, but these sectors receive less financial support.
    • Labour-intensive industries remain underfunded despite high employment potential.
• ELI scheme:
  • The employment-linked incentive (ELI) scheme provides government cash transfers via EPFO to encourage private sector hiring.
  • Supports labour-intensive sectors by reducing initial hiring risks for employers.
  • Challenges:
    • Short subsidy period (2-3 years), raising concerns about long-term employment sustainability.
    • Requires tracking of employment outcomes to assess its effectiveness in skill development.

Policy Recommendations for Employment Generation:

• Integration of production and skilling policies:
  • Align PLI incentives with labour supply and skilling strategies to ensure job creation in relevant sectors.
  • Improve coordination between Ministries of Labour, Skill Development, and Industry.
• Reforming the ELI scheme for sustainable employment:
  • Shift from a flat incentive model to a graded structure linked to skill levels.
  • Extend ELI benefits to training institutes (e.g., ITIs) based on employment and earnings outcomes.
• Labour market reforms:
  • State governments need to ease restrictive labour laws that artificially inflate labour costs.
  • More flexible labour regulations can encourage firms to hire more workers rather than opting for capital-intensive solutions.

Conclusion:

• To realize the vision of Viksit Bharat, India must adopt a dynamic and comprehensive employment policy that simultaneously expands production capacity and enhances workforce quality.
• A future-ready workforce, backed by robust skilling and labour market reforms, is critical for sustainable job creation and economic growth.

Q1. Discuss the key reasons behind the rising capital intensity of production in India despite being a labour-abundant economy.

Ans. The shift towards capital-intensive production is driven by demand-side factors (need for higher productivity and cost efficiency) and supply-side constraints (shortage of skilled labour and falling cost of capital).

Q2. How does the skill gap in India’s workforce impact employment generation in the formal sector?

Ans. The lack of formal vocational training (less than 10% of the workforce) and inadequate job-ready skills among educated youth hinder labour absorption in technology-driven industries.

Q3. Evaluate the effectiveness of the Production-Linked Incentive (PLI) scheme in generating employment in India.

Ans. While the PLI scheme focuses on high-value production, its budget allocation favours capital-intensive sectors (electronics, IT hardware), creating a mismatch with labour-intensive industries.

Q4. What are the major limitations of the Employment-Linked Incentive (ELI) scheme in ensuring sustainable job creation?

Ans. The short subsidy period (2-3 years) and lack of tracking mechanisms for long-term skill development raise concerns about whether the scheme can create durable and meaningful employment in the formal sector.

Q5. Suggest policy measures to enhance employment generation in India while ensuring skill development.

Ans. Policymakers should integrate PLI with skilling initiatives, introduce graded incentives for skill acquisition, improve labour market flexibility, and reform technical training institutes to align with industry demands. 

Source:IE