Employment Incentive Scheme Faces Limits Of Supply-Side Approach

India’s new ₹1 trillion Employment Linked Incentive Scheme is the latest attempt to address the country’s deepening employment crisis, particularly in urban areas and the manufacturing sector. The government aims to create over 35 million jobs between August 2025 and July 2027 by providing income support to first-time employees and offering subsidies to firms that hire additional workers.

This announcement underscores the urgency of India’s urban livelihood problem. Recent consumer surveys reveal persistent pessimism: employment sentiment remains weak, incomes are stagnant, and inflation pressures are widespread. Urban discontent is politically salient, and unlike rural income-support measures and food distribution programmes, this scheme explicitly targets the organised workforce.

At its core, the policy relies on supply-side incentives. The government assumes that companies are unwilling to hire because of high labour costs, so it will subsidise new hiring. Part of the allocation offers small cash incentives to first-time workers to improve their employability and encourage savings. The bulk, however, will subsidise employer wage bills for new hires over two years, with manufacturing firms receiving support for even longer.

This approach is familiar. Over the past decade, supply-side strategies such as corporate tax cuts, sector-specific production incentives, and bad loan resolutions have all aimed to unlock private sector investment and hiring. Yet company balance sheets reveal a different story: firms have reduced debt, boosted cash reserves, and increased net worth, but have invested only modestly in new fixed assets. Private capital expenditure has been slower to revive than policymakers hoped.

There are also real risks of misuse. Firms might claim subsidies for lateral hires poached from other companies or affiliates without creating net new employment. Verifying genuine job creation in India’s vast and varied labour market will be an operational challenge.

Beyond concerns about efficacy and fraud, the fundamental question is whether subsidising hiring costs alone can fix the employment problem. Evidence suggests that formal-sector employment in India tends to lag sales growth. The relationship runs from demand to jobs and wages, not the reverse. Without stronger consumption demand, companies will have little incentive to expand production or payrolls sustainably, even with subsidies.

Structural forces complicate the picture further. For decades, India has experienced capital deepening, with technology adoption and automation accelerating especially since the mid-2000s. Employment elasticity in the formal sector has declined steadily. Manufacturing has not absorbed labour at the needed scale, pushing workers back into agriculture and informal services, where incomes remain low and uncertain.

Addressing these dynamics will require a more demand-focused strategy. Improving household disposable incomes directly would have a broader impact than narrowly targeted hiring subsidies. While measures like expanding the zero-tax slab to ₹1.2 million help at the margin, the benefit remains limited to a small segment. Meanwhile, indirect tax burdens remain high. Analyses of goods and services tax collections suggest excess extraction that has eroded household purchasing power. Reducing these burdens, restoring subsidies where needed, and passing through lower global crude prices to consumers could provide meaningful relief and spur demand.

In this light, expectations that the Employment Linked Incentive Scheme will transform India’s labour market or revive broad consumption demand appear overstated. It is a politically astute move to signal action on urban unemployment. But without more serious, demand-focused reforms, the structural problems holding back job creation and wage growth will likely persist.