India’s Manufacturing Drive Struggles to Overcome Skills Gap

India’s Manufacturing Drive Struggles to Overcome Skills Gap

India’s labor challenges in the coming generation are considerable. With a workforce projected to grow to over 1 billion people by 2050, the world’s second most populous country (which is likely to outpace China as the most populous within a decade) has to create a lot of good jobs to prevent a mass unemployment crisis. Prime Minister Narendra Modi’s “Make in India” initiative is meant to help create a more solid foundation for India’s economy by investing heavily in its high-end manufacturing sector, but as Santanu Choudhury describes in the Wall Street Journal, the initiative is running up against the limited skills of the Indian workforce, requiring a massive effort to retrain and upskill workers by the millions:

More than 80% of engineers in India are “unemployable,” Aspiring Minds, an Indian employability assessment firm, said in a January report after a study of about 150,000 engineering students in around 650 engineering colleges in the country. A lack of specialized courses mean companies have to train their own people from scratch. … “India doesn’t have a labor shortage—it has a skilled labor shortage,” said Tom Captain, global aerospace and defense industry leader at Deloitte Touche Tohmatsu.

To help remedy India’s skills crunch, Mr. Modi’s government announced two skill development plans in July involving a total spending of 220 billion rupees ($3.29 billion) to train 15 million people by 2020. Western companies, seeing the need for training, are stepping up with their own investments. Boeing completed training its first batch of 30 recruits in the basics of aircraft assembly this year, in partnership with India’s National Skill Development Corp. …

While India has thousands of engineering and vocational schools, they aren’t producing the caliber of worker required, said Bharat Salhotra, managing director for Alstom India & South Asia. “The quality of the manpower when they come out of engineering colleges is not A-grade,” he said.

India’s skills gap is not unique to its manufacturing sector. As Roshni Majumdar and Charles Riley discussed at CNN Money in April, skills training is in short supply across a range of technical fields:

Currently only 2% of India’s workers have received formal skills training, according to Ernst & Young. That compares with 68% in the U.K., 75% in Germany and 96% in South Korea. It’s a problem spread across industries. The Royal Institution of Chartered Surveyors estimates that in 2010, India needed nearly 4 million civil engineers, but only 509,000 professionals had the right skills for the jobs. By 2020, India will have only 778,000 civil engineers for 4.6 million slots.

There is a similar gap among architects. India will have only 17% of the 427,000 professionals it needs in 2020. The problem? The RICS found that India’s education and professional development system has not kept pace with economic growth and is in “dire need for reform.”

What India seems to be suffering from is a shortage of specifically-skilled labor—in other words, a mismatch between the skills it has and those it needs. India has long been a prime destination for outsourcing jobs in fields like IT because of the robust availability of talent with specialized training in those fields, but an engineering student is not necessarily the most suited for labor-intensive manufacturing. The problem is one of talent inequality: India’s untrained population is unable to take up skilled manufacturing positions, while its STEM-trained population is “overqualified” for those positions and prefer higher-paying STEM positions. Without training the “middle,” India will lose out to its Southeast Asian neighbors that are absorbing businesses moving out of China as wages in that country rise and the economy moves up the value chain.

One means by which India encourages organizations to invest in technical and vocational training is to cast those activities as corporate social responsibility initiatives, allowing them to fulfill a mandate established in the 2013 amendments to the Companies Act that large enterprises spend 2 percent of their net profit on CSR. In an op-ed at the Hindu, however, economics professor Santosh Mehrotra doubts that this is an appropriate way to finance the massive amount of workforce development India needs:

[T]he 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.