Treading on fire

By Sowmya Dhanaraj & Vidya Mahambare

Consider the following job advertisement. ‘A four-year job contract with an opportunity to serve the country in one of the most honourable occupations. A 1 in 4 chance of getting permanent employment, more than twice the monthly in-hand starting salary compared to the average wages of workers of similar age, is guaranteed increment over the next three years. For those who do not receive a permanent contract, a tax-free lump sum, a preference given for joining similar jobs, near-guaranteed access to bank loans to start a business, and a high-school qualification certificate without having to pass the examination.’ At first glance, it would seem too good to be true. This is the Indian armed forces’ Agnipath scheme under which 46,000 youth aged between 17.5 and 23 years are to be inducted into the defense services. Its unveiling, however, has led to protests in many states.

This is a classic example of what economists call ‘initial conditions matter’. Until now, everyone recruited into the armed forces had a job guarantee to serve in a high-status job until the retirement age if they wished to do so and were fit to serve. The job also came with a lifetime pension and a retirement gratuity after 15 years of service. These initial conditions have been in place for the past several decades and serve as a reference for potential army candidates.

Second, this is a classic example of another fundamental economic concept—’decision making is more often about relative choices and not absolute’. What are the likely job alternatives for Indian youth between the ages of 18-23 years if they do not opt for an army job, or alternatively, what kind of jobs would they get around 22-27 years when they leave the armed forces after four years of service? We use data on Indian men from two National Sample Surveys on employment for 2004-05 and 2011-12 and three annual Periodic Labour Surveys for 2017-18 to 2019-20 to answer these questions. We restrict the sample to men since they form a vast majority of army applicants.

First, the unemployment rates for young adults have seen a marked jump during the last decade, with more than doubling of the unemployment rates up until the ages of around 27-28 years (see graphic), the age by which three-quarters of the army recruits under the Agnipath scheme would see their job contract end. Second, the unemployment rate peaks around the age of 23-24 years, after which it steadily declines with less than 5% unemployment around the age of 30 years with virtually no unemployment post 35 years of age among Indian men.

Data reveals that by the age of 30, more than four out of five Indian men are married. However, male employment in the formal sector, characterised by a written job contract and social security benefits, saturates around the ages of 27-28 years. A vast majority of army candidates would be aware that their chances of getting a formal sector job when their four-year army contract expires are very low. Even for those who were in regular-wage employment, the average salary was around Rs 11,000 per month at age 27-28 years in 2019-20, compared to the monthly take-home starting salary of Rs 21,000 under the Agnipath scheme at a much younger age. The loss of employment after four years would take these men back to a much lower level of monthly income. Finally, all the above indicators are likely to be worse in the laggard states, which are at the centre of the current backlash against the Agnipath scheme.

The above arguments provide the logical underpinnings for the ongoing protests and in no way justify violence or damage to public property. This evidence is not a case against the reforms of the public sector employment practices in general and in the armed forces, which are needed for the sustainability of government finances as well as the flexibility of the labour market. It is, however, a lesson that policymakers need to better anticipate the reaction to the reforms, through a holistic understanding of a situation that confronts the citizens, and are better prepared to handle a backlash. It is also a lesson in the sequencing of reforms—unless good-quality job creation in the private sector is encouraged via the expansion of large firms, enabling cost efficiency through world-class infrastructure, and low administrative and regulatory compliance burden, reforms in the recruitment practices of the public sector are unlikely to find support.

Respectively, senior research fellow, Good Business Lab, and professor of economics, Great Lakes Institute of Management, Chennai

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