Data from the National Sample Survey Office (NSSO) on unemployment (weekly status) has shown that on a quarterly basis unemployment has been in a range of 6.5% to 6.7%. We have thus had mixed signals.

In the EU budget for 2024-25, the government introduced an employment-dependent scheme (ELI), where, for two years, provision was made for payments to first-time employees in the form of wages or welfare contributions on their behalf.

The government has also started an internship scheme in top companies. But could there be a direct way to encourage companies to increase their employees?

The central and state governments provide the policies and the physical and financial infrastructure that allows the private sector to drive growth. Private companies always look at productivity and profits when planning a hiring matrix, as the salary of every person hired is seen as a fixed cost that must be incurred regardless of output.

After covid, the temptation to use more technology to replace human jobs has been great. With artificial intelligence (AI) gaining ground, there are palpable fears of a further slide in the demand for humans. The concept of having a stock of employees on the bench is outdated even in the information technology (IT) sector, where hiring now follows the principle of ‘just in time’.

A policy response could be for the government to provide financial incentives to the private sector through a job-linked incentive (JLI) scheme that mirrors its production-linked incentive (PLI) scheme, which links subsidy payments to the incremental output of the recipient firm, with the aim of encouraging it to invest and produce more.

In this way, it is a performance-dependent outlay. And while several companies have applied to participate in this scheme, which is available in around 14 business sectors, only those that meet the designated target receive the award, which is between 4% and 6% of incremental revenue.

In JLI’s case, similar benefits could be provided to employers participating in the program. Payments to recruitment companies can be made in two basic ways.

First, it could be in the form of a grant equivalent to 4-6% of incremental revenue, provided the company adds 5% to its workforce in net worth over its highest number of employees in the last three years. A qualifying bar of 5% is logical because this has been the average growth rate of the business sector in the past when conditions were normal.

In fact, a growth of 8% in the gross domestic product (GDP) in the boom has been associated with a 7-8% increase in the number of employees of the companies. So assuming GDP growth of 6-7% or more in the coming years, a bar of 5% is neither too high nor too low.

The amount owed could also be linked to the company’s turnover per employee. So when production increases, employment must keep pace for an employer to qualify for the benefit.

An alternative could be a tax offset of 5%, provided the same target is met. It can be recalled that in 2019 the government had given companies a choice between lower tax rates without tax exemptions. However, this did not quite result in higher business investment, as was hoped. Today, tax breaks linked to employment can serve an important purpose.

Therefore, there are two broad ways in which a JLI scheme can be implemented. It could be earmarked as an expenditure outlay or offered as tax breaks. A JLI program will only have tax consequences if a large number of companies meet their targets.

Either way, a JLI scheme could prove more effective than running a fixed-term apprenticeship scheme or making payments from pension funds on behalf of employers, as announced in the EU budget this year. Under a JLI structure, companies would have to make an effort to meet specific obligations in return for the benefit.

Their annual reports could be used to keep track of the number of employees, as these are official audited documents that report the number of employees per year. 31 March each year. The number varies during the year due to normal attrition and replacement of staff.

This idea can also be extended to address the issue of layoffs announced by companies. While IT service providers are known for such redundancies, it is not uncommon for redundancies to be called for in other sectors. Here, the government could consider collecting a corporation tax deduction from companies that go for layoffs.

This can be difficult to monitor, as one cannot distinguish between voluntary attrition and forced termination. That said, the cess can be used to set up a fund to support those who have been laid off. Faced with such a cess, companies may choose to reconsider their downsizing plans.

A JLI scheme would get government money to create a better job. The current emphasis on making it cheaper for companies to recruit has its merits. But directly awarding companies money to meet the targets on an ongoing basis would be a more progressive way to support employment.

The author is Chief Economist, Bank of Baroda and author of ‘Corporate Quirks: The darker side of the sun’.