Can the budget unlock labour market potential?
Despite a surge in corporate profits, wage growth has been negligible, resulting in stagnant real wages in both rural and urban India.
India’s labour market has made notable strides in recent years, bolstered by a strong post-pandemic recovery and increased formalisation of employment. The Periodic Labour Force Survey (PLFS) shows a steady decline in the unemployment rate, with higher labour force participation and an improved worker-population ratio. However, several challenges persist, undermining the sustainability of these gains. One of the primary concerns is the stagnation of salaried employment, which suggests weaker demand for skilled labour or slower expansion in the industrial and service sectors, both essential for long-term economic growth. Agriculture continues to dominate the employment landscape, with its share actually rising over the last six years, while the shares of industry and services have declined. Despite a surge in corporate profits, wage growth has been negligible, resulting in stagnant real wages in both rural and urban India. This indicates that the growth in employment has not translated into substantial income gains for the workforce.
Additionally, skill mismatch between education and occupation remains a major barrier to labour market efficiency (according to the Economic Survey 2024-25, a staggering 53% of graduate workers and 36% of postgraduate workers are underemployed). While the digital economy expands rapidly, gig and platform workers still lack adequate social security protections. The rise of Artificial Intelligence (AI) also poses a threat to jobs across sectors, with the risk of displacement increasingly likely. Many of these issues are deeply ingrained in India’s structural weaknesses, exacerbated by rapid technological change and economic uncertainties. Without targeted interventions, India may get trapped in a cycle of slow wage growth, underemployment, and an overburdened agricultural sector.
The Budget proposes significant steps to address these concerns. It outlines measures to support domestic manufacturing and services, with a special focus on MSMEs, which are crucial for employment. A key reform is the revision of MSME classification criteria, raising investment and turnover limits by 2.5 and 2 times, respectively. Access to credit will also improve with an enhanced credit guarantee cover. For micro-enterprises, the introduction of customised credit cards with a ₹5 lakh limit will provide essential financial flexibility.
To address the vulnerabilities of gig workers, the budget proposes registration with e-Shram and access to health care under the PM Jan Arogya Yojana for nearly 1 crore workers. This is a crucial step in providing social security for the growing segment of the workforce outside traditional employment structures. In response to the rise in farm employment and rural underemployment, the budget plans to launch a comprehensive Rural Prosperity and Resilience Programme, focusing on skilling, investment, and technology-driven interventions to create non-farm jobs and invigorate rural economies.
The budget envisages the establishment of National Centres of Excellence for Skilling, to prepare workers for future-ready jobs. A new scheme will support first-time entrepreneurs from disadvantaged sections, providing term loans and online capacity-building programmes for entrepreneurship and managerial skills. Targeted policies will promote employment and entrepreneurship in labour-intensive sectors such as footwear, toys, and food processing.
Anticipating the transformative impact of AI on the economy, the budget proposes the establishment of a Centre of Excellence in AI for Education with an outlay of ₹500 crore. This forward-thinking initiative, part of the India AI Mission, is spearheaded by the IT ministry to strengthen India’s AI ecosystem, drive innovation, and equip the workforce with future-ready skills. The substantial ₹38,000 crore allocation to the ministry of labour and skill development — an 80% increase over the previous budget — combined with tax cuts to boost disposable income, could stimulate job creation and drive consumption demand. This could generate employment opportunities.
However, certain areas remain under-addressed. While the budget’s focus on stimulating domestic investment and corporate growth is expected to boost corporate profits, the persistent gap between soaring profits and stagnant wage growth needs more attention. The introduction of a mandatory profit-sharing mechanism or the expansion of Employee Stock Ownership Plans (ESOPs) could help ensure that employees benefit from corporate success. Additionally, tax incentives for firms allocating more revenue to wages or imposing levies on excessive corporate reserves might encourage companies to reinvest in their workforce. While the budget lays out an ambitious plan for employment generation and skill development, its success hinges on effective implementation. The coming months will determine whether these measures lead to labour market improvements or if deeper structural reforms are required to create a truly inclusive and resilient workforce.
Punarjit Roychowdhury is associate professor and head, department of economics, Shiv NadarUniversity. The views expressed are personal
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