Models to Make Vocational Training Work in India

The pursuit of establishing an effective vocational training system in India is not new. It started with the Wood’s Dispatch during the colonial era when in 1854 the Dispatch Report recommended that vocational education would prove to be “practically useful to the people of India in their different spheres of life” and shall lead to “marvelous results of the employment of labour and capital”.1 165 years later the consensus remains that vocational education is indeed useful, even necessary to support industrialization in India. 2

The challenge is that vocational training in India has not proven to guarantee employment. From an employment point of view, “only 18% of the students undergoing Vocational Education courses get jobs, of which merely 7% are formal jobs.”3 Further, only 32% of the National Skills Development Council (NSDC) certified workers were employed after 1-2 years of training.4 Clearly the efforts for promoting vocational education have had some fundamental shortcomings emanating from a gulf between the demand and supply of skilled workforce.5

The Limitations of Government Funded Skilling Initiatives

A classic case that demonstrates the limitations of the government funded skilling initiatives is the Skill Certification and Reward Scheme which provides monetary rewards to trainees who are successfully trained and the rewards range from Rs.5,000 to Rs.12,500 for fresh trainees, “with higher reward amount for manufacturing, plumbing and construction sectors”.6 While about 1.8 million people were trained under this scheme at a cost of Rs 8,319/- per trainee, the placement percentage was a mere 12.4% (2016 figures).7 The scheme was designed on the basis of demand emanating from skill gap studies” and yet it performed poorly in terms of placing trained candidates.8

The government has admitted unequivocally that no monitoring and evaluation was conducted to ascertain “whether it (the scheme) was serving the twin purposes of providing employment to youth and meeting the skill needs of the industry before launching such ambitious scheme.”9 In fact, all the ministries and departments concerned with the scheme were given targets to train people and “all of them said in one voice that the targets allocated to them were very high and without regards to any sectoral requirement”.10

Similarly, the government in the effort to let the industry take the ownership of skilling the workforce has given tax breaks to industries by “a weighted deduction of 150 per cent of expenses … incurred on skill development project” for training existing, new, and potential recruits in the manufacturing sector as per the National Manufacturing Policy (2011) through the Finance Act (2012) which added the Section 35ccd in the Income Tax Act. Despite this and years of policy effort, India has “formally trained just 4.69 percent of the total workforce (15-59 years of age) of about 487 million people in India” in the past decade.11

The Limitations of Employer Funded Skilling Initiatives

While in countries like Germany, 86% of total cost of training is met by employers, the remaining 14% coming from the government; in India nearly 99% of the investments in skill development come from the government.12 Employers in India have refrained from investing in skills because:

(a) Cost barriers: Skilling is costly, especially for small scale entrepreneurs. When the Micro, Small, and Medium Enterprise sector (MSME) employs the majority of industrial workforce,13 the small firm size puts financial restrictions on businesses to invest in skilling. Further, a number of MSME entrepreneurs lack knowledge about emerging skills and rely on learning from competitors abroad (a rare, non-institutionalized, and expensive practice) or look towards support from the government.14

(b) Poaching: One employer investing in skilling employees is at the risk of losing its talent to competitors who simply act as free riders in a weak contract enforcement regime.15 However, despite the risk, larger firms in the organized sector do tend to invest in standalone Vocational Training Partners (VTPs) in some cases. 16

Policy Alternatives

Since vocational training is seen as a necessary policy intervention and ensuring that training efforts are directed towards the skills that are actually in demand is critical for job creation, several models (out of the many available) may be worth considering for the Indian context.

1. Payroll Tax and Reimbursable Industry Contributions (RIC): This was proposed in the 12th Five Year Plan’s chapter on skill development (Planning Commission, 2013).17 63 other countries of the world have an earmarked tax on companies, which is used to reimburse the training costs of firms.18 Currently, while companies can claim reimbursements under section 35ccd of the Income Tax Act against skilling expenditures, they are not obliged to spend towards skill development in the first place i.e. if they do not invest in training, they forgo a gain from tax exemption but do not face any penalty. We know through behavioural economics research that “losses loom larger than gains”.19 The concept of “loss attention” comes into play here whereby “individuals allocate more attention to a task or situation when it involves losses than when it does not involve losses”.20   By that logic, a reimbursement after a new and dedicated tax incidence aimed at training, would nudge more firms towards investing in training and development. However, strong industrial lobbies may resist an additional tax burden on the already strained manufacturing industries. Further, administering RIC schemes may lead to increased administrative costs, inefficiencies in dispute resolutions, and even corruption.

2.Levy Exemption (train or pay): Under this policy, “firms are exempted from paying the training levy to the extent that they provide approved training to their workers”.21 Such schemes have seen success in countries like Korea and Cote d’Ivoire,22 however, in a country as vast as India, it may come with excessive inspection and administrative requirements and may even give impetus to bribery and corruption. Further, this policy can lead to increased costs for the firms thereby rendering them uncompetitive in the markets.

A government supported market for training institutions: To an extent, the government is already creating a market for establishing training institutions who then cater to the needs of the industries by providing tax breaks to training agencies.23 The advantages of this approach is that agencies can cater to specific employer needs. The cost barriers faced by firms can be overcome by creation of equity funds, industry or enterprise funds, and government funds open for competitive bidding. Creation of such funds and encouraging competition among providers has been successful in France, Chile, Cote d’Ivoire among other countries.24 The drawback of sole reliance on this approach is that the free rider problem may still kick in where companies are disincentivized to spend on training for fear of talent-poaching by others.

Analysis, discussion and unresolved questions

Given the advantages and disadvantages, the RIC model and a market model (alternatives 1 and 3) in combination seem to suit well for India. The RIC model would ensure that all firms are investing in training and the government is able to cover some of the costs. In combination, the market model would ensure that people are trained for the skills that are really in demand by the industries. One way to make this model work could be a system based on “skill vouchers” where the government gives out the voucher upon collecting the tax and a company can avail services through that voucher from certified and listed institutions in the market.

It must be noted that in India, as in most countries a combination of the models discussed in addition to other unique and hybrid models are already at play. Moreover, a deeper analysis is needed regarding whether investing in vocational education for the manufacturing sector (where there is a reduction in job growth) is strategically sound for India or would investing in the service sector (where there is job growth) would be more worthwhile?25 Finally, in the face of challenges such as robotics and artificial intelligence displacing jobs in the future, there is a greater need to focus on learnability and teaching transferable skills as well as higher order skills that will increase long term livelihood resilience for people.

1. J. P Naik Syed Nururllah, History Of Education In India During The British Rule, n.d.,http://archive.org/details/HistoryOfEducationInIndiaDuringTheBritishRule
2. “National Skill Development Corporation (NSDC),” accessed January 5, 2020, https://www.nsdcindia.org/.
3. “Vocational Education: Vocational Education Mostly Ineffective in India: Survey - The Economic Times,” accessed January 5, 2020, https://economictimes.indiatimes.com/industry/services/education/vocational-education-mostly-ineffective-in-india-survey/articleshow/63098719.cms?from=mdr.
4. World Bank, 2015 quoted in “Skilling India No Time To Lose”, National Council of Applied Economic Research (2018), accessed January 5, 2020, http://www.ncaer.org/uploads/photo-gallery/files/1540982625NCAER%20Skilling%20India%20Oct%2030%20Program%20draft% 2027102018.pdf
5. Committee for Rationalization & Optimization of the Functioning of the Sector Skill Councils (2016)
6. “Skill India – Annual Report” (2015-16), accessed January 5, 2020, https://www.msde.gov.in/assets/images/annual%20report/Annual%20Report%202015-16%20eng.pdf
7. “Report Of The Committee For Rationalization & Optimization Of The Functioning Of The Sector Skill Councils” (20 16), accessed January 5, 2020, https://www.msde.gov.in/assets/images/ssc-reports/SSC%20Vol%20I.pdf
8. Ibid.
9. Ibid
10. Ibid.
11. Ibid.
12. As per the Comptroller and Auditor General’s ‘Compliance Audit on National Skill Development Fund and National Skill Development Corporation’.
13. https://economictimes.indiatimes.com/small-biz/policy-trends/smes-employ-close-to-40-of-indias-workforce-but-contribute-only-17-to-gdp/articleshow/20496337.cms.
14. Based on my interviews with members of the Firozabad Chamber of Commerce (Glass Industry) and Handicrafts entrepreneurs from Moradabad and Aligarh.
15. Richard Johanson, “A Review Of National Training Funds”, World Bank (2009), accessed January 5, 2020, http://siteresources.worldbank.org/SOCIALPROTECTION/Resources/SP-Discussion-papers/Labor-Market-DP/0922.pdf
16. “Skill India Now Has a Single Regulator. Will It Succeed Where Other Bodies Have Failed?,” The Wire, accessed January 5, 2020,https://thewire.in/government/skill-india-regulator-nsda-ncvet-ncvt.
17. M. M. Sury and Vibha Mathur, Five Year Plans of India: First Five Year Plan (1951-52 to 1955-56) to Twelfth Five Year Plan (2012-13 to 2016-17) (New Century Publications, 2013).
18. Ibid.
19. Richard H. Thaler and Cass R. Sunstein, Nudge: Improving Decisions About Health, Wealth and Happiness (Penguin UK, 2012).
20. Eldad Yechiam and Guy Hochman, “Losses as Modulators of Attention: Review and Analysis of the Unique Effects of Losses over Gains.,” Psychological Bulletin 139, no. 2 (2013): 497–518, https://doi.org/10.1037/a0029383.
21. Richard Johanson, “A Review Of National Training Funds”, World Bank (2009), accessed January 5, 2020, http://siteresources.worldbank.org/SOCIALPROTECTION/Resources/SP-Discussion-papers/Labor-Market-DP/0922.pdf
22. Ibid.
23. “Financing Technical and Vocational Education: Modalities and Experiences”, International Project on Technical and Vocational Education (UNEVOC), accessed January 5, 2020, https://unevoc.unesco.org/fileadmin/user_upload/pubs/iug006e.pdf
24. Richard Johanson, “A Review Of National Training Funds”, World Bank (2009), accessed January 5, 2020, http://siteresources.worldbank.org/SOCIALPROTECTION/Resources/SP-Discussion-papers/Labor-Market-DP/0922.pdf
25. “Skilling India No Time To Lose”, National Council of Applied Economic Research (2018), accessed January 5, 2020, http://www.ncaer.org/uploads/photo-gallery/files/1540982625NCAER%20Skilling%20India%20Oct%2030%20Program%20draft %2027102018.pdf