1. Why skill development in India must grow from being supply-driven to demand-driven

Why skill development in India must grow from being supply-driven to demand-driven

India’s requirements for skilled workers are huge, but the current capacity to train has grown very slowly.

By: | Updated: July 22, 2016 7:05 AM
The exact allocation share of the organised and unorganised segments will need to be worked out through a process of consultation of stakeholders, so that organised sector enterprises have a stake in the system, while equity considerations also determine disbursement. (Reuters)

The exact allocation share of the organised and unorganised segments will need to be worked out through a process of consultation of stakeholders, so that organised sector enterprises have a stake in the system, while equity considerations also determine disbursement. (Reuters)

India’s requirements for skilled workers are huge, but the current capacity to train has grown very slowly. On requirements, whether one believes the National Skill Development Mission 2015 number (400 million) or the more realistic number of 200 million (Mehrotra et al, 2013) by 2022, the fact remains that the country still trains only 5 million per annum in total. So, we have to scale up efforts. Yet, the funding for skill development remains limited in India, mainly to general tax revenue. There is very little by way of skill development from corporate social responsibility. In addition, enterprise-based training, confined to 39% of all firms, is conducted mainly by large firms.

The ministry of skill development and entrepreneurship is new, and although it has received a World Bank loan for developing skills, given the Union government’s ambition for Skill India, much larger funding has to be found. Financing for skill development in countries where it has been successful is mostly private-sector driven; it ensures industry ownership of the system. If not, skill development tends to remain supply-driven—as opposed to industry-led and demand-driven—which is a recipe for failure. Even the NSDC-funded private vocational training providers remain supply-driven. The result is poor quality training, as industry involvement, despite the Sector Skills Councils, remains limited. The government has to think of a new model of financing skill development.

For example, a tax could be levied on companies, which goes into an earmarked fund meant exclusively for developing skills. Firms can be reimbursed the costs of training from such a fund. Today, as many as 62 countries have chosen this option—17 in Latin America (including Brazil), 17 in Sub-Saharan Africa (including South Africa), 14 in Europe, seven in Middle East and North Africa, and seven in Asia that have such funds.

So, why create a national training fund in India now?

First, as we noted, the current capacity for developing skills is limited.

Second, although skill development became a priority some time in the middle of the last decade, the expansion of capacity to provide technical vocational education and training (TVET) has grown very slowly. The growth in the number of private ITIs and NSDC-financed vocational training providers has brought the numbers being trained to 5 million per annum. However, at this rate, our goal of ‘Make in India’ will not be realised, youth power will remain underutilised, and the country may miss the demographic dividend.

Third, there is a limit to general tax revenues that can be mobilised for skill development, since the fiscal deficit should remain controlled, and the multiple other important drafts on resources from health, education and infrastructure investments must remain the primary responsibility of the state.

Fourth, globally, the source of financing for skill development has been the private sector, since it is the direct beneficiary, even though the state may play a facilitating role. Clearly, the private sector needs to step up to the task.
Hence, a national training fund is needed soon. However, what could be the possible design for such a fund?

Collect levies from the organised sector and medium and large enterprises: The share of the unorganised sector in manufacturing output is 22%, but its share in employment is 85%. The levy in India should be, to start with, only on organised sector enterprises, and only on medium and large ones. It may be difficult to collect taxes from the smallest enterprises and may elicit much resistance from them.

Beneficiaries should include both organised and unorganised enterprises: Most employees in the unorganised sector acquired their skills informally (on the job), hence at least some proportion of funds must be reserved to train them. However, since large and medium organised enterprises will be the dominant contributors to the training fund, they should benefit significantly. The current apprenticeship programme (Act of 1961) could be incorporated into this mechanism. The exact allocation share of the organised and unorganised segments will need to be worked out through a process of consultation of stakeholders, so that organised sector enterprises have a stake in the system, while equity considerations also determine disbursement. This will also release general tax revenues for skill development for unorganised enterprises.

Demand-side financing of training through payment of stipend: Training provision in India has been historically supply-driven, while the demand for skills has been neglected. There is a very strong case for using training levy funds for financing poor students who are unable to bear the opportunity cost of first undertaking training before entering the labour market. Poor students must earn in order to survive, and cannot ‘afford’ to be trained. If trainees are provided a stipend, it would partially offset the opportunity cost of not working and the financial cost of training itself. The current scale of Pradhan Mantri Kaushal Vikas Yojana’s one-time grant is on too small to be seen as effective.

China has incentivised vocational education financially for students very effectively. Half of all children graduating from nine years of compulsory academic schooling enter senior secondary schools that offer vocational education. An important reason is that, since 2005, vocational education at that level has become free, and covers the entire country and all students—rural and urban. All poor rural children coming to urban senior secondary vocational schools receive additional financial help to meet accommodation costs in urban areas (of nearly yuan 500).
At the same time, there are counter-arguments against a new tax to finance the national training fund.
w The economy has slowed down and investment has declined in the last few years. Adding another tax would reduce the investible surplus with firms, and thus would be opposed by firms. There is already a cess for elementary education, and now a cess for higher education! Yet another cess would be opposed by industry.
But these arguments ignore some realities. Companies have already been paying for shortage of skilled persons as salary rises for skilled persons have been much larger than justified by productivity increase, putting an upward pressure on prices of goods and services, thus contributing to inflation. But there is now a case, after 12 years, of a cess for elementary education to be removed altogether. Elementary education must be funded from general tax revenues in any case, rather than specialised earmarked funding.

Government-controlled funds are poorly managed and the private sector does not find worthwhile the time and effort to access such funds meant for skill development.

This is a very important concern. However, it can be addressed by the private sector being in complete control of the allocation of funds from the national training fund. Sectoral national training funds (as in Brazil) would enable industry to completely manage the funding. Some government control can be maintained by having government specialists on the boards of such funds.

The author is professor of Economics, Jawaharlal Nehru University, and editor of India’s Skills Challenge

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