NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

The Indian government has a target of training 500 million skilled people by 2022. The program’s emphasis on inclusivity to deal with divides of gender, rural / urban, organized / unorganized, employment and traditional / contemporary work place, is noble. Officials have established the National Skill Development Corporation (NSDC) with a large corpus of funding to stimulate private sector involvement in this sector. But, as with many other government-initiated programs, this too has been riddled with bureaucracy. This article explores the sector as a whole, while providing possible solutions on how to spur growth.

Background of Vocational Training in India

More than 90 percent of India’s workforce picks up skills in the workplace, and less than 3 percent of rural youth and 6 percent of urban youth go through any technical/ vocational program. Private players – ranging from elite institutions to those providing fake certifications – provide some 63 percent of all tertiary education (including technical and vocational training). The government also runs 7,500 Industrial Training Institutes (ITIs) and 1,400 polytechnic schools with a capacity of one million students, with average training periods ranging from one to two years[1].

There are significant challenges with both government and private-run vocational programs. Outdated curriculum and low-paid teachers mean many vocational institutions are simply unable to prepare the students for employability. Due to an absence of a regulatory body for the space, there has also been a flurry of fly-by-night operators, some even equipped with international certifications, but without any quality controls. Additionally, stringent eligibility criteria (e.g. passage of class 10 or higher) and longer course tenures – especially in the more elite institutions – leads to the systematic exclusion of the bottom of the pyramid, which typically has a high dropout rate in primary school.

In the past decade, however, a handful of institutions have been able to provide high quality vocational programs to the bottom of the pyramid. After undergoing three months to a year of training in courses such as construction, mobile repair, auto mechanics, retail etc., students are placed with local and national players for 30 percent to 100 percent higher salaries of $100 – $300 per month. Despite the promise of such programs, there have been many challenges hindering their ability to scale.

Challenges faced by BOP Oriented Vocational Institutes

High Capital Costs: Since most students enroll into vocational programs at a local level, vocational institutions need to set up infrastructure within multiple urban/semi-urban locations to increase their reach. These multiple units often lead to higher capital expenditures.

High Operational Costs: A big determinant of training quality is the vocational teachers themselves. Teachers need to be paid salaries between $100 and $600 per month (depending on part-time vs. full-time), while class sizes traditionally cannot be greater than 10-15 students. In such a scenario, these centers need 30-100 students / $2,000-$10,000 per month just to break-even operationally.

Lack of Financing: Lack of access to financing, both at an institutional level (for capital expenditures), and at a retail level (loans for students) continues to plague the industry. Students enrolling into vocational courses are funded by their families, and a small number receive some form of grants from state governments through vocational institutions. Very few have access to any source of alternate financing to pay for the vocational courses. Some vocational programs have tied up with microfinance institutions (MFIs) for loans, though these are still in pilot stages. Other vocational centers have tied up with employers for part reimbursement of course fees or a monthly salary deduction, which has only been possible with larger corporate players. Lack of financing continues to be a major barrier to enrolments.

Balancing Course Tenure vs. Skill Development: BOP students cite the opportunity cost of the time spent on vocational training as their single biggest reason for putting off enrollment. There is resistance from a large segment of this population even for part time enrollment for courses longer than three months, especially when jobs are not guaranteed upon completion. Thus, vocational institutions have to be careful to balance skill development with course tenure.

Attracting Enough Students: Vocational institutions have been historically ineffective and have a bad reputation amongst the masses. Thus, new institutions face a flatter growth curve initially, during which time they have to demonstrate credibility by placing students in well-paying jobs. The initial loss-making period lengthens break-even points and capital requirements.

Placements: Not all students want to, or have adequate skills to work with national higher paying corporate players. Vocational institutions have to build a network of local and national employers to offer placement opportunities to their students. Building an effective network for high placement rates requires one to two years.

Vocational Training: The Path Forward

Vocational institutions today are unproductive, costly, and ineffective across India, and riddled with red tape and bureaucracy. The sector needs transformation, and financing to invest in their crumbling infrastructure and to attract students.

However, traditional banks, cooperatives, and other financial services providers are all unlikely to provide serious financing to the sector. The space itself is characterized by smaller fly-by-night operators, and the revenue models of many of these institutions are suspect. Thus, no financial institutions make a serious effort to identify viable vocational institutions to work with.

This is a chicken-and-egg problem – even promising vocational players are not able to scale due to a lack of access to financing, while financial institutions are unwilling to dedicate portfolios to this space due to the lack of credible players, and skewed perceptions.

We can target this inertia through a three-phased approach:

1) Improve quality by tying funding to student placement: All vocational institutions should be required to release historical student placement rates and average wages. Student placements in higher paying jobs should be the single metric that should be tied to government funding; thus, institutions will need to remain nimble and relevant to the ever-changing needs of today’s markets.

2) Increase supply by encouraging private corporations to setup vocational institutions: Financial institutions must be incentivized to find ways to underwrite risk for viable players. Government funding and subsidies should be provided to large private players for setting up Greenfield operations, if they have the ability to scale and provide relevant skills needed in the marketplace.

Note: Recent initiatives incentivizing private players to take-over and run lower performing government-owned vocational institutions have seen marginal success; however, the single biggest barrier to transformation has been organizational culture, since these players do not have the ability to replace lower-qualified existing staff.

3) Increase demand by providing student loans: The only way to spur financing provided to students, is to facilitate the creation of financial services institutions (much like MFIs) that dedicate themselves towards underwriting student loans. These financial institutions would need to understand how to lend to the sector in a sustainable fashion, and be able to underwrite risks to help vocational institutions increase their geographical reach, and scale. The NSDF allotment of $200 million can be used to hasten this process, but these financial services institutions must be incentivized towards sustainability and profit. This demonstration effect would in turn help spur growth of financial institutions catering to the vocational financing space, and thus result to a greater demand and supply for vocational training.

While these steps would by no means create a world-class vocational system across India, it would break the inertia that exists in the system today, and move us incrementally towards alleviating poverty by matching the BoP to skilled jobs.

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Education

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skill development