Government looking at incentive-linked scheme to spur jobs with focus on MSMEs

Plans to come up with a scheme targeted towards job creation comes at a time when many political analysts attributed unemployment as a factor behind a weaker mandate for the Bharatiya Janata Party in the 2024 elections

The government is working on an employment-linked incentive scheme focusing on medium, small and micro enterprises (MSMEs), one of the biggest job generators in the country, a senior government official has said.

The finance ministry and the government think tank NITI Aayog have opened discussions on the plan's design that aims to target grassroots workers, the official, who is part of the talks, told Moneycontrol on condition of anonymity.

"Discussions on such a scheme are in the early stages. Instead of larger companies, one way is to incentivise MSMEs, which are highly employment driven as they create jobs at the grass-root level, which is the focus," the official said.

The idea is to draw a programme that benefits those who fall in the lower income bracket, the reason why MSMEs are seen as an effective pick.

The plan will be aimed at the MSME sector, which has been struggling to make a comeback since the pandemic and has often complained that the production-linked incentive (PLI) scheme is targeted towards big industry.

The Federation of Indian Micro and Small & Medium Enterprises (FISME) is said to have urged Finance Minister Nirmala Sitharaman to introduce in the Budget 2024 a sector-agnostic PLI scheme tailored specifically for smaller firms with a focus on employment generation.

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The official said the flagship PLI scheme is an effective model to emulate for a potential job-creation plan.

The finance ministry did not respond to an email seeking comments.

Jobs debate

The development comes at a time when many political analysts have attributed unemployment as one of the reasons for the BJP’s lower-than-expected tally in the just concluded general elections.

While provisional data released by the Reserve Bank of India on July 8 showed that India added 2.5 times more jobs in FY24 compared to the previous year, the highest since 1981-82, private research firm Centre for Monitoring Indian Economy (CMIE) figures revealed unemployment rate rose to 9.2 percent in June from 7 percent in May.

CMIE also said India's unemployment rate rose to 8 percent in FY24 from 7.5 percent and 7.7 percent in the previous two years.

The RBI's report on the state of employment followed a Citibank report that said a growth of close to 7 percent would only create 8 to 9 million jobs in India, short of the 11 to 12 million needed.

"Even 7 percent GDP growth might not be able to fulfil the job requirement over the next decade," Citi's chief India economist Samiran Chakraborty wrote in the note.

The fact that MSMEs generate more jobs than most sectors has also made it the focal point for a proposed employment-linked scheme, the official  said.

According to data from the Udyam registration portal, the total employment reported by registered MSMEs crossed the 20-crore mark, up by 66 percent from 12.1 crore jobs in July last year.

"The main issue for the government is the creation of jobs, which is becoming a big challenge, especially in the government, most new employment opportunities are technology driven. There are around 4-5 crore MSMEs that are capable of generating more employment," the official added.

Challenges abound

Coming up with a job-creation scheme around MSMEs will not be easy, given the lack of a universal data point to measure formal and informal employment generation in the country.

"It is very difficult to measure jobs, one measure is the payroll data numbers from EPFO. That again has its own compliance burden issues," the official said.

Though the Employees Provident Fund Organisation (EPFO) payroll figures provide a consolidated number on formal sector employment, experts have in the past flagged the limitations around this data set, saying it is less of an indicator for the number of new jobs added to the economy and more of a pointer to formalisation of existing ones.

There are also hurdles around identifying the sectors under MSMEs that should be covered under the proposed scheme as the government plans to focus on more labour-intensive areas.

Though the government has started discussing the framework, the official said more consultations are required given the complexity of the task.