Bridging the skill gap
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.
Source | http://www.thehindu.com/opinion/op-ed/vocational-training-bridging-the-skill-gap/article8934038.ece
Regards
Pralhad
Jadhav
Senior
Manager @ Library
Khaitan
& Co
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