The story so far: The Union Budget for 2024-25 made it clear that employment was a major priority of the government, with the word getting 23 mentions in the Finance Minister’s speech. With many voters expressing their disenchantment with rising unemployment in the recent election, Prime Minister Narendra Modi has lent his title to a package of schemes on employment.

What is the current state of employment?

According to the Economic Survey, India’s workforce was estimated to be nearly 56.5 crore in 2022-23, of which more than 45% is employed in agriculture, 11.4% in manufacturing, 28.9% in services, and 13% in construction. Officially, the unemployment rate was just 3.2% in that period, but economists note that these statistics do not reflect ground reality, given the large number of underemployed people in the country and the fact that many job seekers continue to work on farms or the unorganised retail sector or as casual labourers. A person is categorised as employed if he pursued any economic activity for at least 30 days in the preceding year.

Almost one in five people in the workforce (18.3%), mostly women, do not receive any wages for their labour, as they are unpaid workers in household enterprises. The urban unemployment rate for the quarter ending March 2024 stood at 6.7%, while youth unemployment stood at 10% in 2022-23. The percentage of people in regular salaried work has dropped from 22.8% in 2017-18 to 20.9% five years later, despite policy efforts to formalise the workforce; many salaried workers do not have access to contracts or social security benefits that usually define a formal worker. The government cites enrolment in the Employees Provident Fund Organisation (EPFO) as evidence of formalisation. The EPFO has 7.3 crore contributing subscribers, though total accounts are 30 crore, including inoperative accounts and multiple accounts held by individuals.

What were specific schemes in the package?

Three of the schemes provide employment-linked incentives. The first scheme is meant to support the hiring of first-time employees, with a wage subsidy of up to ₹15,000 paid to the employee, and is expected to cover one crore people. The second is aimed at the hiring of first-time employees, specifically in the manufacturing sector, with wage subsidies to be paid to both employees and employers for four years, with a maximum incentive of 24% of a ₹25,000 monthly wage. The third supports employers who hire new workers, not necessarily first-timers, by reimbursing up to ₹3,000 of their monthly EPFO contribution. In fact, all three schemes are dependent on employees being registered with the EPFO. The fourth scheme aims to upgrade Industrial Training Institutes and boost skilling efforts, with 20 lakh students expected to benefit. The final scheme, which garnered headlines partly because of its similarities to a proposal in the Congress’s manifesto, is aimed at on-the-job skilling, with an ambitious target of one crore youth to be given internships in India’s top companies with a monthly allowance of ₹5,000 for one year, with the companies bearing training costs and 10% of the allowance.

What is in the fine print?

Economists and small industrialists say the conditions and procedures built into these schemes may create obstacles for effective implementation. For instance, the incentive scheme for first-time employees, which offers a ₹15,000 subsidy is paid out in three instalments; the second instalment is only payable if the employee undergoes a compulsory online financial literacy course. “This is impractical. Why should employees in every unrelated sector be expected to do this? And why should this be a condition for this incentive?” asks Himanshu, who teaches at Centre for Economic Studies and Planning, Jawaharlal Nehru University (JNU).

More worrying is the clause stating that the subsidy is “to be refunded by the employer if the employment to the first timer ends within 12 months of recruitment.” If the employee switches jobs in 10 months, he has already received the benefit of the scheme, but the employer is required to bear the costs; labour experts say few small employers will be willing to take that risk. The scheme for creating jobs in manufacturing has a minimum requirement of hiring 50 people or 25% of their existing strength, which is a significant number of people to be hired at one go for any firm in return for marginal benefits.

How effective are these schemes likely to be?

These schemes essentially attempt to encourage hiring by reducing the cost of new hires. However, economists note that this is not the main constraint preventing employers from hiring new workers. Anamitra Roychowdhury, a labour economist at JNU, notes that India is already a low wage economy, with real monthly incomes falling over the last five years for the majority of the workforce. “Wage costs are a redundant constraint,” he says, adding that while skilling is certainly needed, it is not the central issue preventing hiring either.

“There is a bigger structural reason why the economy is not able to create jobs, and that is due to insufficient demand, caused by low consumption… and the lack of private investment. And if that comes up, then these costs won’t matter,” notes Amit Basole, professor at Azim Premji University. He adds that these schemes need to be pitched to the niche group of employers for whom such costs do matter, usually small firms with small margins. In fact, Finance Secretary T.V. Somanathan indicated in an interview with The Hindu that this may have been the government’s intention behind the scheme, noting that “fiscal incentives have a role at the margin”.

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With regard to formalisation of the workforce, Mr. Basole points out that apart from new people entering the workforce, there are also large numbers seeking to leave agriculture, petty trade, unorganised retail and domestic service. The need is to create formal jobs to keep up with the pace of the supply, which is not happening, as evidenced by the fact that the proportion of salaried workers has actually dropped slightly over the last five years.

What else is needed to create jobs?

“When we think of where we need to create jobs, it should not be in the top 500 companies which are largely capital intensive, but in the MSME (micro, small and medium enterprises) sector, in labour intensive sectors, in small towns. The need is to raise wages there, infuse money into MSMEs, which will have a multiplier effect,” says Mr. Himanshu, recommending a bottoms-up approach. If the urgent requirement is to stimulate demand by increasing consumption, another step could be to raise wages in MGNREGA, the rural jobs scheme, and create a similar employment guarantee scheme for urban workers, says Mr. Roychowdhury. “This would be the more direct approach to kickstart consumption,” he says, noting that the Centre has instead curbed MGNREGA funding.

Congress leader Jairam Ramesh. File
| Photo Credit: ANI

This year’s Union Budget will be judged by what it does to revive and rejuvenate India’s Micro, Small and Medium Enterprises (MSMEs), the Congress said on July 16.

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In a statement, Congress general secretary Jairam Ramesh said that through a “combination of deliberate policy and wilful neglect”, the Narendra Modi-led government has systematically bludgeoned the MSME sector that accounts for 30% of India’s GDP, about 45% of its exports, and employs 12 crore people. Demonetisation, the “botched” implementation of GST, the COVID-19 lockdown, “rampant oligopolisation”, and cheap Chinese imports have all contributed to the near destruction of the sector, he said.

“Consequently, MSMEs are faced with high tax rates, severe credit crunch, high input prices, and widespread closures. Unsurprisingly, their contribution to GDP today is the lowest it has been in decades,” Mr. Ramesh said. 

GST 2.0 needed

The party’s wishlist of measures to revive the sector includes the extension of the non-performing assets (NPA) classification period for loans to MSMEs from 90 days to 180 days. The Congress called for GST 2.0 with a single, moderate rate, and relief for small taxpayers like MSMEs. The party also wants dedicated funds to create MSME export capacity, and enhanced funding for start-ups.

“The self-anointed non-biological Prime Minister and his government must revisit their economic agenda, shed their cronyism, and end their whimsical policymaking. This Budget will be judged by what it does to revive and rejuvenate India’s MSMEs,” Mr. Ramesh said.

Tackling risk: As traditional internal combustion engine manufacturers transition to EVs, a significant share of MSMEs could be at risk of losing business. Image for representation only
| Photo Credit: KVS Giri

Tamil Nadu is gearing up to be a global electric vehicle (EV) manufacturing hub, with the government seeking to attract ₹50,000 crore in investments and envisioning 1.5 lakh new jobs in the EV sector in the next five years. Investments worth almost ₹40,000 crore is already underway, and as per recent data, Tamil Nadu is one of the largest EV manufacturing states in India, producing more than 40% of all registered EVs and 46% of electric two-wheelers.

Yet, Micro, Small, and Medium Enterprises (MSMEs) hold the key to unlocking the potential of these investments and future growth.

MSMEs are Backbone of TN’s Economy  

Contributing significantly to the State’s as well as the country’s GDP, MSMEs are financially vulnerable, dependent on fossil-based energy, and in need of significant technological upgradation and efficiency improvements. Tamil Nadu manufactures 35% of India’s automotive components – a sector that is largely driven by MSMEs and contributes to 8% of the State’s GDP. Not only does this make MSMEs the backbone of the State’s economy but also crucial in the growth of Tamil Nadu’s emerging EV industry.

Most EV components are currently imported but the EV component market is projected to grow at a CAGR of 22% until the end of the decade. This presents MSMEs with a huge opportunity as EV manufacturers are keen to localise their component base to bring greater flexibility, customisation and quality control while reducing costs, import dependence, and potential supply chain disruptions (as experienced during Covid). It also means significant new investments and manufacturing capabilities can be built in newer components such as motors and controllers, battery management systems, chargers and charging stations, amongst others. From the State’s perspective, EV-ready MSMEs have the potential to create new and greener jobs, especially for women in a sector that has traditionally been male dominated. 

However, a transition to EVs will also need to ensure that existing Internal Combustion Engine (ICE) component manufacturers, especially those at the risk of losing business as certain components become obsolete, are able to diversify to EV component manufacturing or allied sectors.

Therefore, building MSME capabilities and sustenance needs to be in sync with the investments being made by auto companies to support Tamil Nadu’s transformation to a global EV manufacturing hub.

Upskilling and Just Transitions

Building future-ready MSME’s would require skilling and upskilling: as traditional ICE component manufacturers transition to EVs, a significant share of MSMEs and their workforce could be at risk of losing business and livelihoods. To ensure a just transition, such businesses will need awareness on evolving market trends and opportunities in EV component manufacturing. Additionally, they will need hand-holding and support with go-to-market strategies, innovative and hands-on skilling programs catering to existing workforce – both white and blue collar, and incentives to undertake skilling of workers.

Upgrading Curriculum in Technical Institutes

This needs to be complemented with upgradation of curriculum in technical institutes, providing short-term trainings and apprenticeships for fresh graduates, including women, to create a green workforce for the future. Moreover, as a new and evolving sector, manufacturing EV components will also need significant investments in R&D, testing centres, and common facility centres to support design and innovation as well as to ensure high standards of quality. Tamil Nadu has taken a lead in this direction through its decision to establish E-mobility centres in state-owned polytechnic colleges, initiating redesign of curriculum and establishing common facility centres to meet the burgeoning EV industry requirements.

Decarbonising MSMEs

MSMEs will also need to become greener over time as global and Indian auto brands undertake climate targets requiring suppliers, mostly MSMEs, to report and manage their carbon emissions and energy use. Staying competitive in an increasingly decarbonising world will require MSMEs to undertake interventions to manage their environmental impact by understanding their emissions sources and reduction options. Such actions have the potential to bring in efficiencies and reduce operating costs. While MSMEs currently lack the capacity to undertake such initiatives, significant awareness building, trainings and concessional finance will enhance their ability to undertake climate action and stay competitive.

Becoming Climate Resilient

Climate-related extreme events such as heatwaves and floods are already impacting life, livelihoods and productivity in India. International Labour Organisation’s 2019 report suggests that by 2030 India may account for 34 million of the projected 80 million global job losses from heat stress-associated productivity decline. To ensure that Tamil Nadu’s MSMEs are better equipped to manage these challenges, it is important to understand their current and future climate vulnerabilities. Sharing knowledge about such impacts, and the institutional and individual actions needed to build resilience and safeguard health and business, will greatly aid MSMEs towards a resilient future.

Tamil Nadu’s updated EV policy outlines a range of measures to enhance skilling, finance and manufacturing capabilities of MSMEs. Private and non-profit-led initiatives must support the state in operationalizing such policies in ways that address current and future needs of MSMEs. With a thriving and future-ready MSME sector coupled with a skilled workforce, Tamil Nadu can demonstrate how becoming a global EV manufacturing hub can be achieved while ensuring a just and inclusive transition.

(Ashwini Hingne is Associate Program Director at WRI India. Views are the author’s own)