India’s Skilling Challenge: Moving Ahead

It is widely believed that India stands to reap the benefits of a demographic dividend; since 1991, the proportion of the country’s working-age population has been increasing, and along with a declining dependency ratio, there are new additions to the workforce each year.  Such demographic changes, however, would be wasted, unless accompanied by a simultaneous creation of jobs and skilling for these new workers.

Against this backdrop, Brookings India held a discussion on India’s Skilling Challenges, featuring Mr. S. Ramadorai, Chairman of the National Skill Development Agency and Vice-Chairman of Tata consultancy Services; Dr. Ajit Ranade, Chief Economist of the Aditya Birla Group; Mr. Arun Maira, Former Member of the Planning Commission; and Dr. Shamika Ravi, Fellow at Brookings India.

The discussion focussed on two key challenges: the creation of new jobs and enterprises to employ India’s youth, and the creation of mechanisms to skill them. Panelists concluded that skilling must be seen as a key priority for the new government as it tries to create more jobs.  While there are many challenges to skill creation and employment in a fragmented employment system, learning from past experiences and from those of other countries should enable India to tackle these challenges.  The overall emphasis should extend beyond the creation of jobs, to the creation of enterprises, which may be achieved through improving access to infrastructure and reducing the cost of doing business.

Constraints to Job Creation

While India has experienced a decade of high output growth, this growth has not translated into a corresponding increase in employment. The employment elasticity of output growth in India has been low, declining considerably over the past few years. The planning process in India too, has focused much more on output growth, than employment and entrepreneurship. A common point raised by the panellists was that skilling by itself is insufficient; it needs to be backed by creation of employment through the development and expansion of enterprises.

Rigidity of labor laws:

Labor laws pose a significant constraint to job creation. This is illustrated by the response of different states to the positive demand shock stemming from the Multilateral Trade Agreement – states with more flexible labour laws were able to generate greater employment than others.

In urban areas, excessive regulations – in the form of caps on the number of part-time workers or interns – for hiring short-term employees, makes labor laws inflexible. Convergence of masses towards certain careers also creates a capacity constraint, and a mismatch between the demand and supply of jobs of a particular nature.

Casualization of labor:

Another challenge India faces is the massive casualization of labor, which has exacerbated in rural areas owing to the NREGA. In a study conducted by Morduch, Ravi, and Bauchet, randomized controlled trials over three years were run for ultra-poor households in South India, wherein each household was given an asset in order for them to set up a micro-enterprise. However, 60% of these households sold off their assets and joined the labour force as casual workers, owing to rising rural wages and wage floors. In rural areas, this phenomenon has stifled micro-entrepreneurship and promoted casualization of labour. While casual labor allows workers flexibility, it doesn’t provide the job security, benefits, and the protection that labor laws may provide.

Rising rural wages and wage floors – a consequence of the National Rural Employment Guarantee Act (NREGA) – together with cumbersome labour laws have led to technology displacing labour, as labour becomes relatively more expensive than capital.

Declining participation of women:

Declining labor force participation rates for women over the past 20 years is another disturbing trend, which needs further research and understanding. Different hypotheses have been proposed to explain this phenomenon, including an increase in years of schooling of women. These hypotheses, however, are unable to explain the magnitude of the decline in women’s labor force participation. One factor that is strongly correlated with this decline is the growth in crime against women in India, but causal links still need to be established.

Growth of Enterprises:

It is clear that there is a need to shift the emphasis from job creation alone, to encouraging enterprise growth. Given the sheer scale of employment growth required in India, job creation alone is unlikely to make any giant strides. Creation and growth of enterprises, on the other hand, has a direct and a far more profound impact on job creation, as it expands the supply side to a far greater degree and is also a better predictor of demand factors.

However, creation, sustenance, and growth of enterprises in India face several challenges. The biggest challenge for small and medium enterprises is the lack of working capital and finance, and the difficulty in access to infrastructure. On the other hand, large enterprises face institutional bottlenecks like inefficient government procedures such as slow clearances, which lead to projects and resources getting tied up. These have collectively reduced India’s ranking on the ease of doing business index.

India’s Skilling Challenges

Job creation becomes costlier when it is not backed by labor that is skilled to perform these jobs. For this, a widespread and effective system of training and skilling employees is required, which takes into account spatial-, temporal-, and specification-matching considerations.

Where should training take place?

Spatial and temporal matching problems arise when workers with a specific skill set are unable to use these skills to secure employment at a given location or in a given frame of time. Migration of workers is a consequence of spatial mismatches. Faster training through digitalization of the learning process may help deal with the temporal matching of skills. A specification problem arises when prospective employees do not have the specified skills needed for employment. Countries like Sweden, Germany, and Japan deal with this through on-the-job-training programs whereas countries like the US and UK depend on the educational process to take care of such skills, and prefer hiring already specialized individuals. Panelists recommended that India should emulate the former examples and focus on-the-job training – given the surplus of higher education graduates who lack the skills necessary to make them employable – while simultaneously working towards improving the quality of education.

Addressing divergences in the returns to education:

An important factor to consider while discussing where skilling should take place, is the benefits generated by – or returns to – the education process. Unlike developed countries (including the United States), where returns on experience have been found to outweigh those on education, studies on India suggest that the returns to education are always increasing. However, there are divergences in the amount of benefits different demographic groups derive from education – women, for instance, tend to receive fewer returns compared to men. Similarly, marginalized groups such as SCs, STs and, OBCs, suffer in relation to non-marginalized groups. In light of this, there is a need for both skilling efforts undertaken by firms, and the broader education apparatus to focus on such marginalized groups.

Attrition:

In regard to the discussion on on-the-job training, attrition emerged as one of the biggest concerns among employers. In the BPO and retail sectors, the attrition levels are as high as 100 percent, acting as a disincentive for employers to invest in skilling programs. Germany employs a model of skilling that utilizes government funding for apprenticeships, while companies provide skill training and job experience for a given period of time, following which interns are awarded a nationally-accredited certificate. If a similar program were to be introduced in India, factors such as proficiency and screening of apprentices would need to be addressed.

Cluster groups may provide a somewhat effective solution to these problems, as they are able to take advantage of economies of scale by combining training programs that help expand skilling and reduce costs, instead of having firms undertake skilling programs individually.

Management and administration:

In addition to imparting the necessary skills, training facilities should also focus on improving measurement systems and implementation on the ground-level. There should be an increased focus on engaging various stakeholders in the process – for instance, getting school boards to adopt vocational training within the school curricula from early on – and collaboration between various ministries and departments. Panelists also pointed out the importance of managerial skills for the growth and competitiveness of enterprises, which in turn would generate jobs. Given that coordination with/within the government, and implementation are some of the primary constraints to growth, they urged that managerial skills in government be made a national priority.

*Interns Ramit Chutani and Gagandeep Sachdeva contributed to this report

Like all products of the Center, this report is intended to contribute to discussion and stimulate debate on important issues. Brookings India does not hold an institutional view on any subject.

Image Source: Gates Foundation

Brookings India hosted Shri S. Ramadorai to discuss India’s skilling challenge.

Key Issues

• Rigidity of labor laws in India poses a significant constraint to job creation
• India faces a massive casualization of labor, leading to a more flexible workforce who may not receive the benefits that labor laws could provide
• Creation and growth of enterprises is of paramount importance given the sheer scale of employment growth required in India
• On-the-job training programs with a simultaneous move towards improving the quality of education would result in better equipping the labor force with the necessary skills required to undertake jobs
• India faces a divergence in the returns to education by different demographic groups in the country; these need to be addressed by both firms as well as the broader education apparatus
• Attrition is a significant concern among employers, with BPO and retail facing almost 100% attrition levels; apprenticeship programs and combined training programs by firms could address this problem