Distribution: weekly

Why in the News?

The government has recently approved the Employment Linked Incentive (ELI) Scheme as one of the largest fiscal commitments towards employment generation in recent years. The scale of underemployment in India is striking, over 53% of graduates are working in semi-skilled jobs and 46% of low-skill workers earn less than ₹1 lakh a year raising questions about whether such a scheme can genuinely address unemployment or will deepen structural inequalities.

Significance of ELI Scheme:

1. Government Approval: Cleared on July 1, 2025, with ₹99,446 crore outlay.
2. Primary Aim: Provide fiscal incentives to employers for job creation, especially in manufacturing.
3. Significance: Represents one of the largest government-led employment incentive packages in India.

Issues with the ELI Scheme’s design:

1. Employer-Centric Approach: Focuses on incentivising employers rather than directly empowering workers.
2. Capital-Labour Asymmetry: Risks strengthening employer bargaining power while leaving workers vulnerable.
3. Exclusion of Informal Sector: 90% of India’s workforce, largely informal, is excluded as the scheme prioritises EPFO-registered firms.
4. Underprepared Workforce: Only 4.9% of youth have received formal vocational training, creating a mismatch between jobs and skills.

Skill Mismatch and Underemployment Trends in India:

1. Low Skill Utilisation: Only 8.25% of graduates work in jobs matching their qualifications.
2. High Underemployment: 53% of graduates and 36% of postgraduates in semi-skilled or elementary roles.
3. Wage Disparity: 46% of low-skilled workers earn < ₹1 lakh/year, while only 4.2% of specialised graduates earn ₹4–8 lakh/year.
4. Inefficient Education-to-Employment Pipeline: Shows systemic disconnect between education system and industry needs.

Sectoral Imbalance and Employment Implications:

1. Manufacturing Bias: Targets manufacturing despite its declining employment elasticity.
2. Employment Share: Manufacturing employs <13% of total workforce, while agriculture and services employ ~70%.
3. Potential Marginalisation: Rural youth, women, and informal workers, largely in low-skill services/agriculture, risk being left out.
4. Automation Pressure: Capital-intensive manufacturing growth reduces labour absorption.

Risks to Job Quality and Employment Sustainability:

1. Disguised Unemployment: May encourage enterprises to relabel old jobs as new to claim subsidies.
2. Structural Inequality: Channels fiscal benefits to already formalised enterprises.
3. Bypassing Informal Workforce: Misses the majority of new labour market entrants in the informal sector.
4. Stagnant Productivity: Without skill investment, job creation may remain low-quality.

Policy Alternatives for Equitable Employment Generation:

1. Investment in Skilling: Strengthen vocational training to prepare low-skilled workers
2. Education Reforms: Align curricula with industry demands
3. Social Security Inclusion: Extend benefits to informal workers for equity
4. Shift to Long-Term Strategy: Focus on productivity, job quality, and labour rights rather than short-term headcount increases.

Conclusion

The ELI Scheme reflects a high-investment, employer-focused strategy that risks deepening existing inequalities in India’s labour market. Without addressing the skill mismatch, informal sector exclusion, and sectoral imbalances, the scheme may generate headcount without creating sustainable livelihoods. A shift towards worker-centric, skill-driven, and socially inclusive employment policies is essential to ensure equitable economic growth.

Value Addition

Economic Survey 2024–25 Key Insight: Reveals that only 8.25% of graduates are in jobs matching their qualifications, with 53% of graduates underemployed in semi-skilled or elementary roles. Relevance: Strengthens arguments on the education–employment disconnect and the urgent need for targeted skilling reforms. Application: Can be quoted in answers on unemployment, skill development, or human capital formation. Dual Labour Market Theory Concept: The labour market is split into two segments, formal (primary) with stable jobs, better wages, and benefits; and informal (secondary) with insecure, low-paid work and no social protection. Relevance to ELI Scheme: The scheme’s EPFO-based targeting inherently supports the formal sector while neglecting the 90% informal workforce, deepening this divide. Application: Useful in analysing structural inequality in employment policies. Employment Elasticity Definition: The responsiveness of employment growth to GDP growth. India’s Case: Manufacturing’s employment elasticity is declining due to automation and capital-intensive processes. Relevance to ELI Scheme: Explains why heavy focus on manufacturing may not yield proportional employment gains. Application: Adds depth when evaluating sectoral choices in employment policy. ILO’s “Decent Work” Agenda Framework: Promotes productive employment, rights at work, social protection, and social dialogue. Relevance: The ELI Scheme lacks strong components on worker rights, social protection for informal workers, or job quality improvement — thereby falling short of ILO’s standards. Application: Ideal for international comparison in labour policy answers. Disguised Unemployment Definition: A situation where more workers are employed than necessary, resulting in negligible or zero marginal productivity. Indian Context: Common in agriculture and informal services. Relevance to ELI Scheme: Risk of enterprises relabeling existing jobs as new to claim subsidies, creating apparent employment without productivity gains. Application: Can be linked to inefficiencies in job creation schemes and low productivity traps.

Mapping Microthemes:

GS Paper	Theme	Micro Theme	Example from Article
GS Paper III	Economy	Employment generation policies	₹99,446 crore ELI Scheme
GS Paper III	Economy	Formal–informal sector divide	90% informal workforce excluded
GS Paper III	Economy	Skill mismatch & underemployment	8.25% graduates in matching jobs
GS Paper III	Economy	Sectoral imbalance	Manufacturing bias despite low share in jobs
GS Paper II	Governance	Policy design flaws	Employer-centric incentives

Practice Mains Question

1. Critically evaluate the Employment Linked Incentive (ELI) Scheme in the context of India’s structural labour market challenges. Suggest policy measures to ensure equitable and sustainable employment growth. (250 words)

PYQ Linkage:

[UPSC 2014] “While we flaunt India’s demographic dividend, we ignore the dropping rates of employability.” What are we missing while doing so? Where will the jobs that India desperately needs come from? Explain. Linkage: Address the role of skilling in tackling unemployment, evaluate gaps in current initiatives, and connect with how ELI Scheme mirrors or misses these elements. The PMKVY question emphasises the necessity of industry-relevant skills for employment generation. The ELI Scheme, while aiming at job creation, lacks a robust skilling component, risking the same shortcomings seen in earlier programmes like PMKVY.