PLI to ELI – an idea for Nirmala Sitharaman

Feudal to Federal

On January 17, the Government of India in a press release said, “The Production Linked Incentive (PLI) scheme has thus far achieved (a) Rs 1.1 lakh crore of investment (b) Rs 8.6 lakh crore of goods and services produced (c) Rs 3.2 lakh crore of exports (d) 6.8 lakh jobs created.”

Of these four claims, which do you think is the most important for the country? Most would agree that the claim about employment is perhaps the most important for a country like ours with a vast youth population looking for jobs.

Yet, the claim about jobs created through the PLI scheme is the only one of all the four claims made by the government that cannot be proven or verified. Investment, production and exports are all economic measures that can be calculated accurately and reported. But we have no way to ascertain if indeed 6.8 lakh jobs were created and if they were, who are the ones who got these jobs, at what pay, and in which geographies and sectors. This is just an estimate by the government. When taxpayer funds are used to incentivise economic activities, the expectation should rightfully be a high social return on that investment, in terms of good jobs created for a large number of people. If any, shouldn’t accurate, verifiable data of the exact number of jobs created be the most important assessment criterion of the PLI scheme?

But for that, we need to move to an Employment Linked Incentive (ELI) scheme. PLI only measures production accurately, not the number of jobs created, since it pays firms based on its output. In other words, if the incentive was tied directly to employment rather than production, then the efficacy of the use of taxpayer funds for the social purpose of boosting employment, incomes and livelihoods can be gauged more precisely. This is exactly the thought behind the ELI proposal that was outlined in the Congress party’s manifesto for the elections.

The PLI scheme was introduced in 2020 to promote manufacturing activity with funds of nearly Rs 2 lakh crore allocated over five years as incentives for corporates in 13 identified sectors to be given based on production targets. To put this in context, this amount is as much as the Union government spends on healthcare in three years combined. The belief is that spurring manufacturing activity to produce more goods will also automatically create large number of jobs.

Except, this idea does not work anymore and is past its shelf-life. Providing financial incentives to boost private investment and economic output, especially in manufacturing, to create trickle-down jobs is an old and a global idea. But that old relationship between output and jobs has broken down now, due to what economists term as the “capital-labour” imbalance.

For example, the world’s largest electronics manufacturer, Foxconn, nearly doubled its production and sales between 2010 and 2020, but its total number of workers remained roughly the same. This is due to automation and machines replacing humans, which is an inevitability that improves productivity, quality and efficiency for companies. But the fact remains that just boosting economic output does not automatically boost job creation any longer. In the decade between 1980-1990, every percentage of GDP growth in India produced two lakh formal jobs, which halved in the following decade of 1990-2000, and further halved in each of the two subsequent decades (RBI data).

The ELI scheme envisages incentivising firms based on the number of new people they employ and pay salaries to. In the modern world of Aadhaar-linked employee payroll, it is quite easy to track the number of people employed by firms and the wages they are paid. So, regardless of the output produced by companies, ELI provides financial incentives to firms based on the number of people they hire. This would then give firms the freedom to strike the right balance between automation and labour for an optimum level of productivity.

The ELI scheme should be open to all sectors rather than specific sectors identified by the government as under PLI. The labour intensity of each sector will determine the quantum of ELI pay-out for that sector. ELI is agnostic about the skill level of workers and provides the same incentive amount per worker regardless of their wage levels. Under ELI, the government does not make firm-level decisions such as capital versus labour, which sectors to participate in, and the amount of value addition. These are economic decisions best left to the private sector. ELI merely nudges and incentivises job creation rather than output, recognising that the correlation between output and employment is now weak and convoluted.

This is not unique to India. Countries across the world are adopting similar measures. The United States’ Work Opportunity Tax Credit (WOTC) encourages employers through tax credits to hire from specific target groups facing employment barriers. Australia’s JobMaker Hiring Credit provides financial incentives to firms for each additional young worker hired. Germany’s Recruitment Subsidies for Employers incentivise the hiring of long-term unemployed individuals by covering a portion of their wages for up to 12 months. The UK’s Employment Allowance reduces National Insurance contributions for businesses, effectively lowers the cost of hiring, and encourages small and medium-sized enterprises (SMEs) to expand their workforce.

The philosophy behind ELI is to move economic policy from macro-economic measures of growth and output to micro-economic issues of labour. It is no secret that India has a severe jobs crisis and it is an emergency of epic proportion. It is time for all political parties to come together and address this challenge in a bipartisan, consensual manner. I sincerely hope for the sake of hundreds of millions of our youth that the Finance Minister Nirmala Sitharaman announces ELI in the upcoming budget, regardless of whose idea it is.