Subsidies for employment given in the budget 2024-25 are aimed at helping companies defray the costs of skilling fresh employees and their lower productivity during their training period, said the union Finance Secretary, Dr T V Somanathan today.

In a conversation with Raghuvir Srinivasan, Editor, Business Line newspaper, at a post-budget discussion organized by the newspaper, Somanathan was asked if he thought that companies would employ people just because the government would pay the first month’s salary (up to ₹15,000). “Absolutely not,” Somanathan replied.

He said that the idea behind the subsidy was just to nudge employers to take in fresh employees when they were faced with options of either recruiting an experienced person, or choose people over automation and artificial intelligence.

In certain cases, the subsidy would help the employer in meeting the cost of training a new recruit, he said. Somanathan drew a parallel with the incentives for R&D, pointing out that no company would invest in R&D just because there were tax sops for R&D--yet the sops help.

Somanathan said that paying the first month salary of a new employee was only one of the measures taken for generating more employment. There were other measures such as the government meeting 72 per cent of the cost of wages over four years, if the employer recruited at least 50 people together or increased his workforce by 25 per cent.

These measures, Somanathan said, were taken only after extensive consultations with employer bodies before the budget.

He emphasized the critical importance of experience in the recruitment market, noting the universal challenge that individuals face in securing employment without prior experience. These individuals typically have a longer learning curve.

“We’re saying that if you hire a first-time worker, we will provide you with a subsidy. If you have to choose between someone with experience and a first-timer, the government will subsidize the hiring of the first-timer to a certain extent. This subsidy is targeted more at the lower end of the wage spectrum,” he explained.

The rationale behind the subsidy is that companies hiring first-timers often need to invest in training and skilling them.

Since addressing gaps in the education and skilling systems cannot happen overnight, this short-term plan encourages companies to spend on training unskilled, first-time employees, with the government providing financial support.

He said the government had extensive consultations with industry leaders, employers, outsourcing firms, and recruitment agencies, all of whom indicated that subsidies help in recruitment.

“This scheme is also intended to encourage companies to recruit first-timers. We expect Scheme A to benefit about 210,000 people, with an outlay of ₹23,000 crore. The total allocation for employment and skilling-related programmes announced in the budget is about ₹2 lakh crore spread over a five-year period,” he added.

After explaining the rationale behind the other two parts of the employee-linked incentive, Somanathan said: We want people to get social security in this country. We don’t want people to be outside the social security system.

N Mahalingam, former CFO of Tata Consultancy Services, mentioned the delay in the income tax simplification process, emphasizing that such simplification would be ineffective without reforming tax administration.

Somanathan acknowledged the need for significant improvements in tax administration for both direct and indirect taxes. “We share these concerns and are exploring potential solutions, though these are challenging issues due to the complex legal structures involved,” he said.

He further explained, “While we need to continue collecting taxes, we face two major challenges. Firstly, genuine taxpayers who are perhaps getting harassed.. Secondly, there is widespread tax evasion, with India ranking high in this regard. Addressing these twin problems requires finding the right balance, which we sometimes struggle to achieve.”

In response to a question from A R Unnikrishnan, Managing Director (Glass & Glass Solutions Business) of Saint-Gobain India, regarding the “unfavourable FTA that India has with ASEAN” and related concerns, T V Somanathan acknowledged that such FTAs are challenging to amend. He noted that a review is currently underway, but it cannot be conducted unilaterally.

“It has to be a consensual review with both sides. What we have learnt from this FTA is to be more cautious when signing future FTAs. This is the biggest lesson we have taken away, and it is one of the reasons we have not signed some of the subsequent FTAs,” he said.

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