Towards a pro-employment macroeconomic framework: The case of India
30/09/2025 10:12 AM
For sustainable development, economies need more than growth- they need good jobs. In this article, Radhicka Kapoor, senior employment specialist at the ILO and Amit Basole, professor of Economics at Azim Premji University argue that macroeconomic policy should integrate employment goals through strategic investment and employment sensitive monetary frameworks.
In recent decades, policymakers worldwide have recognized employment policies as a vital tool to address the challenges of unemployment and lack of productive job creation. Traditionally, supply side interventions including education and skills development, and labour market institutions and regulations have been a significant component of employment policies. Equally important, however, are policies that facilitate firm expansion, thereby generating labour demand. It is therefore noteworthy that, over the past two decades, the scope of employment policies has broadened to encompass a demand-side approach, emphasizing the importance of integrating employment considerations into the design and implementation of fiscal, industrial and trade policies. Building on this broader perspective, a growing number of employment polices now highlight the importance of structural transformation, which facilitates the movement of capital and labour to higher productivity sectors and pro-employment macroeconomic frameworks.
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The role of macroeconomic (monetary and fiscal) policies is particularly crucial in facilitating structural transformation because these are powerful tools for direct and indirect job creation and for incentivising the growth of preferred sectors. India is one such country where sustained labour productivity growth, underpinned by structural transformation, is essential to advance the nation’s development ambitions. A deeper examination of the contours of a pro-employment macroeconomic framework is, therefore, warranted.
"Monetary and fiscal policies are powerful tools for direct and indirect job creation and for incentivising the growth of preferred sectors."
Fiscal policy at the central, state and local levels plays a pivotal role in driving structural transformation with both the overall magnitude and composition of spending being the critical determinants. Overall spending determines aggregate demand in the economy and thereby influences investment decisions of firms and thus the demand for labour. While constraints exist, it remains important to prioritize strategic expenditures that promote productive employment, rather than allowing fiscal targets alone to dictate the direction of policy.
At more meso and micro levels, fiscal policy entails provision of public goods and services as well as subsidies that address the employment challenge in three ways: ● by creating jobs directly (via public works) and indirectly (by stimulating demand). ● by alleviation of supply-side bottlenecks through better quality and quantity of infrastructure and logistics, and by alleviation of labour supply constraints, particularly for women through the provision of care, transport and public safety services. ● by subsidising output or employment for targeted industries.
India has implemented several such policies in recent years. These include substantial increases in funding for roads, metro lines, ports and airports through initiatives such as PM Gati Shakti, National Logistics Policy, Bharatmala, Sagarmala and UDAN as well as schemes such as the Production Linked Incentives Scheme which offer financial incentives tied to select industries for higher production and incremental sales. The recently announced Employment Linked Incentive scheme is also designed to incentivize employers to create formal jobs. While these have been significant initiatives, there remains a need for greater emphasis on employment multipliers and employment impact assessments to better target investments that yield higher decent job gains. Also worth considering is the role of local infrastructure in supporting the growth of small enterprises. Given the local nature of many firm-level constraints, it is vital to strengthen municipal finances and empower local governments to invest in infrastructure that drives growth and employment.
Monetary policy shapes structural transformation by affecting both the cost and availability of credit for investment and aggregate demand, which in turn shapes employment outcomes. In India, a diverse set of policy instruments including credit-linked schemes for enterprises and employment, financial inclusion initiatives, and targeted subsidies such as interest subvention programmes—have been adopted to advance the agenda of productive employment.
What can the Central Bank do?
Beyond credit policy, it is worth examining whether and how India’s flexible inflation targeting framework, the primary purpose of which is to ‘maintain price stability while keeping in mind the objective of growth’ can support productive employment [1]. If employment and inflation are positively correlated, the question arises: should the Reserve Bank of India (RBI) accommodate higher inflation within its 2–6% target band to support employment?
Directly including employment in RBI’s mandate may pose challenges. However, the RBI’s assessment of the growth-inflation trade-off is impacted by several factors including labour market dynamics. Incorporating the effects of such dynamics, for instance the impact of shifts in employment composition and wage/earnings growth on consumption, indebtedness and growth trajectories can strengthen the Central Bank’s assessment of the growth-inflation trade-off. Such an approach would not only help the RBI achieve its stated objectives but also address the demand and supply side constraints impeding structural transformation. Notably, structural transformation itself would enable more effective monetary policy transmission through formalisation.
Women farmers in India watering crops
The preceding approach would require a more pro-active engagement by RBI with labour market indicators. This is no easy task. In dual economies like India, labour market slack typically appears as rising self-employment, reduced hours of work or lower earnings—rather than rising unemployment, unlike in advanced economies [2]. This underscores the need for developing a set of indicators to help RBI assess labour market slack accurately and in real time. The emergence of monthly and quarterly labour data offers opportunities for such analysis.
In conclusion, macroeconomic policy in a developing country is not only about growth and macro-stability. Along with trade, industrial and labour market policies, it is a crucial component of the policy framework for enabling structural transformation and the generation of productive decent jobs. Strengthening partnerships among key macroeconomic actors whose policy choices significantly influence economic conditions and shape labour supply and demand is important for ensuring that macroeconomic instruments contribute effectively to job-rich and inclusive growth. In the case of India, initial steps might include applying employment multipliers in infrastructure investment, starting at the local level, and developing indicators to capture labour-market slack.
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