ELI Scheme: Debunking the Myth of Job Creation

General Studies Paper-3

Context

• Recently, the Union Government approved the Employment Linked Incentive (ELI) Scheme to support employment generation. However, it raises concerns regarding its design, target population, and its potential to reinforce, rather than reduce, existing labour market inequalities.

Brief About Employment Linked Incentive (ELI) Scheme

• Target: Creation of over 3.5 crore jobs across sectors, with a special focus on manufacturing.
• Total Outlay: ₹99,446 crore;
  • It is part of a broader ₹2 lakh crore package announced in the Union Budget 2024–25 to support employment, skilling, and entrepreneurship for over 4.1 crore youth.
  • It is administered by the Ministry of Labour & Employment and coordinated with EPFO for tracking and disbursement.
• Objectives of the ELI Scheme:
  • Boost employment generation across all sectors;
  • Enhance employability of youth;
  • Extend social security coverage;
  • Incentivize formal job creation, especially in manufacturing;

Structure of the ELI Scheme

• Part A: Incentives for First-Time Employees:
• Eligibility: First-time employees registered with EPFO;
• Benefit: One month’s EPF wage (up to ₹15,000), paid in two installments:
  • 1st installment after 6 months of service;
  • 2nd installment after 12 months and completion of a financial literacy program;
• Savings Component: A portion of the incentive will be deposited in a savings instrument, accessible after a fixed period;
• Target Beneficiaries:92 crore youth entering the workforce for the first time.
• Part B: Incentives for Employers:
• Eligibility: Employers hiring additional employees with salaries up to ₹1 lakh;
• Benefit: Up to ₹3,000 per month per employee for 2 years;
• Extended Incentives: For the manufacturing sector, benefits continue for 3rd and 4th years;
• Condition: Employment must be sustained for at least 6 months;

Expected Outcome

• Formalization of Workforce: Encourages EPFO registration and social security coverage;
• Youth Empowerment: Supports financial literacy and savings habits;
• Sectoral Growth: Prioritizes manufacturing to stimulate industrial employment

Key Criticisms / Problems in ELI Scheme

• Employer-Centric Approach: ELI Scheme channels fiscal incentives to employers — particularly in manufacturing — without adequately addressing the skill mismatch between available workers and industry demands.
  • It risks strengthening employer bargaining power and widening wage gaps, especially for low-skilled and informal workers.
• Capital-Labour Asymmetry: ELI scheme may reinforce existing capital-labour imbalances, prioritising firm-level growth over equitable labour market outcomes, by mimicking capital subsidies.
• Skill Mismatch: India’s labour market problem extends beyond job scarcity to acute employability gaps:
  • Only 8.25% of graduates work in jobs matching their qualifications.
  • Over 53% of graduates and 36% of postgraduates are underemployed.
  • Only 4.9% of youth (15–29 years) have formal vocational training.
• Wage Disparities:
  • Just 4.2% of graduates in specialized roles earn ₹4–8 lakh annually.
  • Nearly 46% in low-skill jobs earn less than ₹1 lakh per year.
• Exclusion of the Informal Sector: The scheme favours firms registered with the EPFO, thereby excluding 90% of the workforce employed in the informal sector.
  • It sidelines the majority of workers from benefits and risks deepening the formal-informal divide.
• Risk of Disguised Unemployment: The subsidy design may incentivise enterprises to reclassify existing jobs as ‘new’ to claim benefits, fostering disguised unemployment and low productivity—particularly in agriculture and informal services.
• Sectoral Blind Spots: Manufacturing receives disproportionate focus, despite its declining employment elasticity due to automation and capital intensity.
  • With manufacturing contributing less than 13% of total employment, this bias neglects the 70% of workers in agriculture and services — sectors where women, rural youth, and informal workers are concentrated.

Way Forward

• Strengthen Skills and Education: Investment in vocational training, education reform, and industry-relevant skilling is essential to bridge the employability gap and improve job quality.
• Inclusive Policy Design: Employment incentives must extend to informal sector workers, with mechanisms for social security, formal contracts, and rights protection.
• Focus on Sustainable Employment: Policies should shift from short-term job headcounts to long-term strategies that enhance productivity, preserve labour rights, and reduce inequalities.

Conclusion

• The ELI Scheme, while well-intentioned, risks entrenching structural labour market inequalities if it continues to privilege employers and formal sector firms without addressing skill deficits, sectoral realities, and the informal economy’s needs.
• A balanced, inclusive, and skill-focused strategy is critical for genuine and sustainable employment generation in India.