Back to basics: Fixing India’s lack of a skilled workforce

By Indroneel Das

The Modi government is exploring the Reimbursable Industry Contribution (RIC) Model as a novel way of addressing one of modern India’s biggest problems: the dearth of well-trained and skilled individuals in the workforce. Such people are needed to carry the weight of the fastest growing economy in the world on their shoulders. This problem stems from the lack of well-designed and well-funded training and skill development programmes. 

The common problem is the lack of the basic skill-sets. While there are government training and skill development initiatives in place to create a skilled and efficient workforce, it is no secret that the planning and implementation of these initiatives are haphazard and lacklustre. At the heart of this issue is a critical lack of funds and a well-thought-out funding structure to fuel the operations of these government initiatives.

How can the RIC model help?

The RIC is essentially a Public-Private Partnership (PPP) that aims to align the interests of all key stakeholders in the skill development and training domain. The RIC model is not an innovation; in fact, it is already successfully in use in more than 60 countries all over the globe. It is especially relevant for India considering that a rather small fraction of the Indian companies actually imparts in-house training compared to other major economies. There is tremendous potential in the model for harnessing the infrastructure and knowledge base of the private players.

The RIC model aims to raise funds for its effective implementation by levying additional taxes on corporates or mandating corporate social responsibility (CSR) contributions from private firms. Under this initiative, the government will match the contributions of the private players to make it sustainable and fair for all. Private firms will have to get their annual requirements for training and have their skill development plans approved in order to receive this reimbursement.

What makes this plan potentially more effective is that the reimbursement will not be based on the absolute level of training imparted but the incremental improvement from previous levels. Further, the training and skill development need not be provided strictly ‘in-house’ by the private players but can also be outsourced to accredited partners.

Balancing costs and benefits 

There is no doubt about the potential of the RIC model as a solution to the severe drought of essential skills and lack of a proper training mechanism in India. The reason is simple— the best way to ensure quality training and meaningful skill development is to make those who need the skilled employees (i.e. the private companies) teach the skills. The government will also meet its fiduciary obligations by paying the private parties for their initiatives once they are in place and meeting their objectives. Hence the concept of a ‘reimbursable’ model, rather than an upfront investment based model.

This is a win-win, considering that the corporates which are in the best position to do the training will do so. The members of the target workforce who need it most will receive the training and skill development and both the government and private companies will benefit from it. Therefore, it seems only fair that both the beneficiaries should collectively take the onus of funding the initiative.

A tale of two strategies for greater output

The RIC is not an experiment, and therefore there are fewer inhibitions regarding its implementation and effectiveness. In a purely economic sense, there are essentially two ways of ensuring increasing output. The first is increasing capital with what are known as ‘capital deepening’ investments. These investments essentially occur in the form of increased spending on physical capital to improve productivity and output. While these investments can further growth objectives, there is a phenomenon known as ‘diminishing marginal productivity of capital’. This means that in the long run, capital investments alone will be increasingly ineffective as agents of economic growth. 

Therefore, for sustained growth, one has to look at the second option: improvement in ‘total factor productivity’. An increase in ‘total factor productivity’ basically refers to improvements in non-physical factors that further growth through network effects. These then generate economy-wide efficiencies and further growth. Skill development and training fall into the category of ‘non-physical factors’. The RIC has the potential to be a game-changer in this regard.

Lingering questions

There are a few questions that the RIC is still unable to answer. Firstly, India is a country where a significant number of private players don’t even meet the current mandated CSR contribution needs. Will the RIC really motivate all private companies enough to take the government’s ideas seriously and play along? Further, even if the private companies do successfully provide quality training and impart necessary skills, they face the risk of large-scale migration of the workforce they trained. Once employees are equipped with these skills, talent could simply be poached away. By then, the training and skill development costs borne would be non-recoverable sunk costs. There is no real solution yet to combat this problem.

Thus, considering the inherent risks, is the RIC model providing enough incentive to the private players? Or is there a need for more attractive incentives such as significantly weighted income tax deductions for corporates to lure the private players into the system? There’s just one way to find out— implement the promising RIC model and improve it as it rolls.

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