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Bridging the skill gap -Santosh Mehrotra
-The Hindu

A levy on firms, resources from which are earmarked for vocational training, is what could help the country bridge the skill gap in its workforce.

Financing technical vocational education and training (VET) is costlier than general education due to its technical nature. Pre-service training requires the installation of equipment and trained instructors to train youth. This raises the cost of training, and remains a factor preventing pre-service training from expanding more rapidly. A lot of vocational education and training hence is pre-employment, and funded by the government.

There are four places where VET is imparted in India: in secondary/higher secondary schools and polytechnics; industrial training institutes (ITIs, both public and private); private vocational training providers publicly financed and incubated by National Skill Development Corporation (NSDC); and in-firm, enterprise training (either of government-funded apprentices or large firms conducting training for their own new recruits).

There are four ways in which technical vocational education and training (TVET) is financed in India at these four locations: (a) General tax revenues, used to fund public and private vocational training providers; (b) In-firm financing and provision of training by and for a firm conducting such training; (c) Corporate Social Responsibility (CSR) requirements by the government, mandating a certain proportion of CSR funds to be spent on vocational training; and (d) Levy on firms by the government, held in a special fund, resources from which are earmarked for vocational training. This is what we would propose, but is currently not the practice in India.

General tax revenues

In India, only the first two forms of financing have been used. Even the NSDC is funded with general tax revenues, just as government ITIs are, and secondary schools now offering VET in classes IX-XII. The NSDC finances (in the form of equity and debt) training by private for-profit vocational training providers. However, its scale is too small, training too short, and it is being expanded too rapidly at the cost of quality/employability of trainees.

A variant of financing VET from general tax revenues is the provision of tax deduction (of 150 per cent) of the expenses incurred on skills projects. The NSDC has been mandated to process applications and send its recommendations to income tax authorities for necessary action. There are two problems with this form of financing. India’s (Union and States combined) tax revenue-to-GDP ratio has hardly improved since the economic reforms in 1991 and remains below 17.5 per cent, the level achieved in the peak year of 2007-08. Giving a tax deduction for VET further reduces tax revenues rather than increasing it. Second, the Income Tax Act, especially corporate taxes, is regularly criticised for already being too accommodative by providing too many exemptions, reducing the effective corporate tax rate to 23 per cent. Hence, this is not an appropriate method of financing VET, and has not shown much promise.

The second form of financing was confined to merely 16 per cent of all Indian firms in 2009, and still only 39 per cent of firms in 2014, and that too only the very large ones (contrast that to 85 per cent of Chinese firms that conduct in-house training). Even the smaller of large firms, and certainly the medium and small enterprises, don’t conduct much in-house training. Hence, the problem of shortage of trained personnel continues.

One outcome of the rising need for skilled personnel on the one hand and limited financing available for skill development on the other is that the wages and salaries of skilled and highly skilled staff have been rising sharply in the past decade. In other words, firms are facing rising input costs on account of human resources. This tends to raise recurrent costs for the firm. Yet another outcome of rising skilled labour costs is that large firms decide to invest in machinery, substituting capital for labour, thus reducing the potential for increasing jobs. Thus, the current situation is neither efficient from a micro- nor from a macro-economic perspective.

CSR funds for skill development

A third form of financing for skill development has been under discussion: CSR. The policy for CSR in India is governed by Clause 135 of the Companies Act, 2013, which is applicable to companies with an annual turnover of Rs.1,000 crore or more. The Act encourages companies to spend at least 2 per cent of their average net profit in the previous three years on CSR, and a minimum of 6,000 companies will be required to undertake CSR projects to comply with the Act.

However, the provision in the Act is ‘indicative’, not mandatory. There is nothing that will ensure companies undertake such activities. Besides, putting skill development in the category of CSR activity assumes that it is not directly beneficial to the company in its core business. Many large companies are already undertaking skill development activities as they require skilled staff that no else can provide. In other words, putting skill development in the category of CSR may enable such companies to transfer the costs of normal skill development activities the firm is running in any case as CSR activities now, substituting for other equally worthwhile activities eligible for such initiatives. Moreover, the Rs.1,000-crore threshold of the Act absolves even medium-sized companies, let alone smaller ones, of conducting training.

Finally, skill development is often undertaken by a company for meeting its own requirements for skilled HR, and the training hence may be overly specialised and may leave the trainee not particularly employable if he or she were to move jobs. In sum, while CSR could be used as a means of enhancing financing for skill development, the Government of India has to be careful that it does not end up subsidising activities by the firm that it might have undertaken in any case.

Earmarked tax to finance training

Given the above concerns related to the first three forms of financing for skill development, 62 countries of the world have adopted an option that seems to have served them well. A tax is levied on companies that goes into an earmarked fund meant exclusively for TVET purposes. Firms can be reimbursed the costs of training from such a fund. A second objective such a fund would serve is to provide a stipend to students who receive TVET, given that the demand for TVET is lower than for general academic education.

Levies can provide a steady and protected source of funding for training, particularly in the context of unstable public budgets. Early training funds (e.g. Brazil) tended to be single purpose aimed at financing pre-employment training. Others focused on expanding the volume of in-service training within the enterprises. There are 17 countries in Latin America, 17 countries in Sub-Saharan Africa (including South Africa), 14 in Europe, seven in West Asia and North Africa, and seven in Asia that have such funds.

Santosh Mehrotra is Professor of Economics, JNU, and editor of India’s Skills Challenge (OUP, 2014). Email: santoshmeh@gmail.com