Debunking the myth of job creation

On July 1, 2025, the government approved the Employment Linked Incentive (ELI) Scheme to support employment generation, with an outlay of ₹99,446 crore. However, this raises serious concerns about the target population in a labour market where capital-labour asymmetries, the formal-informal sector divide, and the persistent mismatch between employment opportunities and employability continue to marginalise large sections of the workforce, particularly low-skilled and the informal workers.

Problems with the scheme

While being an ambitious attempt to generate employment, the ELI reflects an employer-centric approach to the labour market. By providing fiscal incentives to employers for creating employment, particularly in the manufacturing sector, the scheme overlooks the persistent mismatch between employability and actual employment opportunities. Incentivising employment generation seems to mimic subsidising capital which may consequently promote existing capital-labour asymmetries. In effect, this may further lead to the strengthening of the bargaining power of employers rather than of the workers, which may enhance the already high wage gaps. This would prove detrimental for workers, especially from the informal and low-skilled segments, who remain excluded from the benefits of the scheme.

At the heart of India’s labour market crisis lies not just a lack of jobs but a severe skill mismatch. The Economic Survey 2024-25 reveals that only 8.25% of graduates are employed in roles matching their qualifications. Worse, over 53% of graduates and 36% of postgraduates are underemployed in semi-skilled or elementary occupations. This dismal alignment is further reflected in wage outcomes: only 4.2% of graduates in specialised roles earn between ₹4 lakh-8 lakh per annum, while nearly 46% in low-skill jobs earn less than ₹1 lakh. These figures expose not just the inefficiency of India’s education-to-employment pipeline, but also the futility of employer-centric incentives in a labour market where workers lack the skills that industry demands. Only 4.9% of Indian youth (15-29 years) have received formal vocational training. In the absence of a robust skilling infrastructure, the ELI Scheme does little more than pay employers to absorb an unprepared workforce.

The scheme tends to prioritise sectors/firms that are already integrated into the formal economy, i.e., those who have already registered with the Employee’s Provident Fund Organisation. While this design may seem administratively sound, it indirectly marginalises 90% of the labour force employed in the informal sector, who are already devoid of social security, formal contracts, and stable employment protection. In doing so, it risks establishing structural inequalities rather than resolving them. This restriction and consequent exclusion may exacerbate existing dual labour market structures, where the formal sector is provided with state support and incentives, while the informal sector remains unrecognised in policy initiatives. Such a scheme may also be indirectly reinforcing inequality by channelising fiscal allocation (in other words, public resources) towards the relatively well-off enterprises, leaving behind low-wage, unregistered workers. The state’s substantial investment in the formal sector also bypasses the informal workforce which continues to absorb the bulk of new labour market entrants.

What is more worrying is that the scheme could end up normalising disguised unemployment — where people appear to be employed but are in fact not contributing to output — which is common in sectors such as agriculture and informal services. The result is low productivity and stagnant or low wages. Enterprises might resort to relabeling existing jobs as ‘new employment’ to claim the subsidy.

The scheme’s special focus on manufacturing also reveals a sectoral blind spot. While manufacturing remains critical to economic transformation, its employment elasticity in India has been steadily declining due to increased automation and capital intensity. Today, manufacturing contributes less than 13% to total employment, while agriculture and services together employ nearly 70% of the workforce. By disproportionately privileging manufacturing through extended incentives, the ELI Scheme may further marginalise large segments of the workforce, particularly women, rural youth, and informal workers, who are more likely to be employed in low-skill services or agriculture. This sectoral imbalance represents an outdated assumption that the manufacturing sector will be the primary engine of job creation.

What could be an alternative?

Although the ELI Scheme is an attempt to address India’s unemployment crisis, the policy design indicates that it will deepen structural inequalities in the labour market. It also highlights the absence of mechanisms to address skill development, improve job quality, or social security for the workers in the informal sectors. Investment in skilling and education reforms will instead benefit low-skilled workers. Further, more initiatives should be shifted from short-term employment generation to long-term sustained employment opportunities and enhanced productivity, without compromising on labour rights and bargaining power. Finally, an employment generation drive should avoid dealing with headcounts, and rather focus on being an equitable and sustainable development strategy.

Aurolipsa Das and Ubaid Mushtaq are Assistant Professors in the Department of Economics, SRM-University-AP