Employment Linked Incentive Scheme
Catalysing Formal, Sustainable Job Creation
Ritesh Kumar
With over 65 percent of India’s population below the age of 35, the nation’s demographic profile embodies significant potential to catalyse sustained economic growth and societal transformation. Over the past decade, a series of policy interventions—including large-scale skill development initiatives and production linked incentive—have contributed to important advances in enhancing employability and supporting enterprise expansion. These measures have borne tangible outcomes, strengthening the capacity of both job seekers and employers. However, the persistence of structural challenges underscores the need for a more holistic and coordinated approach commensurate with the scale of India’s evolving labour market dynamics.
Despite the country’s robust economic performance, employment generation has not always been proportionate. Moreover, a substantial proportion of the workforce continues to operate within the informal sector, often in roles lacking formal contracts, income stability, or access to essential social protections. In parallel, a pronounced skills mismatch persists, wherein even educated youth frequently encounter difficulties aligning their competencies with industry requirements.
Recognising the limitations of fragmented interventions, the Government of India announced the Employment Linked Incentive Scheme on July 1, 2025, as a strategic response to bridge this policy gap. The scheme adopts an integrated framework that links public expenditure explicitly to measurable employment outcomes, thereby addressing both demand- and supply-side constraints in a synergistic manner. By systematically incentivising enterprises to formalise operations and expand their workforce, while con-currently supporting workers’ transition into secure, stable employment, the initiative aspires to consolidate earlier gains and unlock the full productive potential of India’s young population.
How the Scheme Aims to Create 3.5 Crore Jobs
Employers stand to gain a wide range of tangible and operational benefits under the scheme. First, they will receive direct monetary incentives in the form of monthly financial support for each additional employee retained in continuous employment for at least six months. The amount of this support depends on the employee’s monthly wage: for employees earning up to Rs. 10,000, the employer will receive Rs. 1,000 per month; for those earning between Rs. 10,001 and Rs. 20,000, the incentive rises to Rs. 2,000 per month; and for employees earning above Rs. 20,000 and up to Rs. 1 lakh, the amount is Rs. 3,000 per month. This financial support is available across all sectors for a duration of two years, while manufacturing employers will receive it for an extended period of four years, recognising the sector’s capacity to absorb large numbers of workers.
To qualify for the scheme, employers with fewer than 50 employees must create at least two new positions, while those employing 50 or more people must create a minimum of five additional jobs. These requirements ensure that benefits are targeted at businesses genuinely expanding their workforce rather than making nominal adjustments.
In terms of access and payment, incentives are disbursed via Direct Benefit Transfer, which means funds are electronically deposited by the government directly into the employer’s Permanent Account Number (PAN)-linked business bank account.
The scheme’s design recognises that reducing the cost of hiring will have a self-reinforcing chain of positive effects. Specifically:
• Lowering Hiring Costs: Direct financial incentives reduce the effective expense of bringing new employees on board. For small and medium-sized enterprises—especially those with limited working capital—this can make the difference between hiring and staying stagnant.
• Reducing Payroll Costs: The scheme effectively reduces payroll costs, thereby freeing up resources that employers can invest in other areas such as staff training, technological upgrades, or overall business expansion.
• Encouraging Formalisation: As the scheme requires all new jobs to be registered with the Employees’ Provident Fund Organisation (EPFO), more workers gain social security coverage. This moves India towards a more formal, protected labour market.
• Promoting Sectoral Expansion: Manufacturing firms receive extended support for up to four years. As they grow capacity and hire more workers, demand increases across their supply chains, creating additional employment in logistics, raw materials, and ancillary services.
• Building Employer Confidence: Businesses that experience the benefits of formalisation and a stable workforce are more likely to sustain hiring even after incentives end.
This virtuous cycle can, over time, embed a culture of formal employment and steady expansion across the economy.
Empowering New Recruits with Financial and Social Security
The scheme not only incentivises enterprises to make new recruitments but also encourages new recruits to step confidently into formal employment. It is expected to directly benefit over 1.92 crore first-time workers across India by providing a combination of financial support and social security. Eligible employees will receive a one-month wage incentive of up to Rs. 15,000, paid in two instalments—half after six months of continuous service and the other half upon completing twelve months and participating in a mandatory financial literacy programme designed to build responsible saving habits. This financial cushion is particularly important for young workers who often struggle with early expenses such as relocation costs, commuting, or setting up a household. Additionally, because all jobs created under the scheme must be registered with the Employees’ Provident Fund Organisation (EPFO), employees gain access to crucial social protections, including provident fund savings,
pension entitlements, and insurance coverage in case of illness, accident, or retirement. Over time, this transition from informal, precarious work to formal employment with guaranteed rights and benefits represents a profound improvement in job quality. In this way, the Employment Linked Incentive Scheme is designed to empower millions of young Indians with the financial security, confidence, and dignity that come with formal, sustainable employment.
Focussing on Manufacturing to Power India’s Employment Engine
The manufacturing sector occupies a central place in India’s economic development strategy. As one of the largest contributors to gross domestic product and a critical driver of exports, manufacturing not only fuels economic growth but also generates employment on a large scale. Industries such as textiles, automotive, electronics, food processing, and machinery employ millions of workers, ranging from unskilled labourers to highly trained technicians and engineers. However, despite its importance, the sector has faced challenges in recent years, including fluctuations in global demand, infrastructure gaps, and limited access to affordable finance, all of which have constrained its capacity to create formal, secure jobs.
Recognising both the potential and the constraints of this sector, the Employment Linked Incentive Scheme offers extended support specifically for manufacturing employers. While incentives under the scheme are available to all sectors for a period of two years, manufacturing establishments are eligible to receive them for up to four years.
The rationale for this special focus is clear: manufacturing has a unique capacity to absorb large numbers of semi-skilled and skilled workers, including many first-time entrants to the labour market. By reducing hiring costs and encouraging formalisation, the scheme aims to help manufacturing firms expand their operations, improve productivity, and enhance their competitiveness both domestically and internationally. In doing so, it supports India’s broader industrial policy objectives of strengthening domestic production, boosting exports, and ultimately positioning India as a global manufacturing hub.
Short-Term Impact: Stimulus for Immediate Job Growth and Consumption
In the short term, the Employment Linked Incentive Scheme is expected to act as a powerful fiscal stimulus, directly encouraging employers to expand their workforce. The immediate effect will be visible in labour-intensive sectors such as textiles, electronics, food processing, and retail, where payroll costs often determine hiring decisions.
Because the scheme requires sustained employment of at least six months before employers receive incentives, it will help stabilise employment relationships rather than merely creating temporary or seasonal jobs. As over 1.92 crore first-time workers transition into formal employment, their access to provident fund savings and insurance will also improve their financial security and confidence in spending. This is critical because every rupee of income earned by lower-income workers tends to be spent quickly on consumption, creating a multiplier effect that boosts demand across the economy. In sectors like transport, hospitality, and basic consumer goods, this rise in consumption can help lift revenues and spur further hiring.
Long-Term Impact: Structural Transformation and a Culture of Formalisation
In the long term, the ELI Scheme has the potential to deliver a more profound structural transformation of India’s labour market. First, by mandating that all positions created be registered with the Employees’ Provident Fund Organisation (EPFO), the scheme directly combats persistent informality, which has historically left workers without pensions, predictable income, or legal protections. Over time, this shift will bring millions of employees under the social security net, reducing vulnerability to health shocks, job loss, or old-age poverty.
Second, the special emphasis on manufacturing— through extended incentives for up to four years—supports India’s aspiration to become a global industrial hub. Manufacturing has the unique capacity to absorb large volumes of semi-skilled workers, and as firms scale production, they create additional indirect jobs in supply chains, logistics, warehousing, and services. This sectoral expansion strengthens India’s export competitiveness, improves the balance of payments, and drives investment in infrastructure and technology.
Third, the experience of sustained, formal employment will build financial literacy and savings discipline among first-time workers, many of whom will participate in formal banking and retirement savings for the first time. Over the long run, this can increase household resilience, reduce intergenerational poverty, and expand the domestic market for financial products and services.
Finally, as businesses experience the operational and reputational benefits of compliance and a stable workforce, the scheme could embed a culture of formalisation that endures even after subsidies are phased out. Employers who invest in training, productivity improvements, and better working conditions are more likely to continue hiring formally, setting a new standard for the wider economy.
(The author is a correspondent of an international multi-media platform and covers finance and economy. Views expressed are personal)