Bangalore: Come June every year and Infosys Technologies Ltd, India’s second biggest software services exporter, turns trainer for the nearly 30,000 students it recruits from engineering colleges every year.

Competitive edge: The Infosys campus in Bangalore. New recruits at the firm spend up to six months honing their skills as Infosys attempts to fill the gaps left by inadequate college education. Madhu Kapparath/Mint

Goldman Sachs counts the lack of quality education as one of the 10 factors holding India back from rapid economic growth. Analysts say it raises costs, including salaries as firms vie for the best information technology (IT) recruits and reduces firms’ competitive edge.

“Ideally, education should happen in colleges, it should not be happening on company campuses," said Srikantan Moorthy, head of education and research at Infosys, whose Campus Connect programme in 430 colleges is aimed at “industry-ready" recruits. “But a gap does exist and we can’t wait for the government to put in place an education system that addresses our needs."

There are growing cries to revamp India’s education system which focuses on learning by rote. The calls for reforms include opening up primary and secondary education to private investment, easier entry of foreign universities seeking to establish campuses in India and better monitoring and evaluation systems.

Nasdaq-listed Infosys, which develops software applications, spent $175 million (Rs838.25 crore) on training and education in the year to March at a time when the economic downturn crimped margins.

It is not the only one. Rival Tata Consultancy Services Ltd has a faculty development programme in 150 engineering colleges, while Wipro Ltd’s founder Azim Premji has set aside some of his personal wealth for primary education, and Anil Agarwal, chief of Vedanta Resources Plc., has committed $1 billion to a university.

The Tata group and Aditya Birla Group set up colleges years ago as acts of social responsibility. Now, multinationals such as SAP AG, International Business Machines Corp. (IBM) and Cisco Systems, Inc. are designing curriculum and training faculty to meet their needs.

“The talent gap is compromising their growth big time," said Janmejaya Sinha, managing director of Boston Consulting Group (BCG), which estimates there was a 30% rise in IT salaries from 2004 to 2006 because of a war for talent between firms. “It is one of the biggest operational risks they face."

At least half of India’s billion-plus population is below the age of 25, a section referred to as its demographic dividend. But about 40% of its workforce of about 400 million people is illiterate and another 40% comprises school dropouts, said BCG in a recent report.

Demand for graduates over the next five years is likely to be 13.8 million. But with only 13.2 million students graduating over the same period, India will face a shortfall of 600,000 graduates.

About 1.3 million unskilled and unqualified workers will also weigh on the economy over the same period, BCG estimates. “More than one million people lacking the ability to participate in the workforce have the makings of a potential demographic disaster," Sinha said. “We will have an army of young people left behind and increasingly frustrated with their lot. They not only have the potential to derail India’s growth prospects, but also challenge the basic fibre of our society."

With a literacy rate of 61%, India scores poorly compared with other Bric nations—Brazil, Russia, India, China—in terms of average number of years in secondary education. Rival China already produces more than three times the number of PhDs every year.

Home to one of the world’s oldest universities, now only 10% of the roughly 20 million who enrol in the first grade every year finish high school. Female participation is abysmal.

With the education sector deemed “not for profit" and limits on private investment in primary and secondary education, there is a thriving cottage industry of coaching centres and tutors.

Hundreds of private tertiary colleges charge high fees. Yet, according to critics, many students graduating from these expensive colleges are practically unemployable. The best colleges, including the Indian Institutes of Technology and Indian Institutes of Management, were set up at least 50 years ago.

“Without hundreds of millions of Indians receiving a better basic education, it will be virtually impossible for India to achieve its ‘dream’ potential," the Goldman Sachs report said.

For the new Congress party-led government, education is a priority: Sarva Shiksha Abhiyan (universal education programme) helped bring 20 million children into school. It also plans to quadruple the number of universities to 1,500 in 10 years.

A Right to Education Bill, passed by Parliament this month, provides children aged 6-14 the right to free and compulsory education in a neighbourhood school. These are vital but inadequate measures, companies say.

“Of all the big issues challenging corporates, education is the starting point," said Dilep Rajnekar, chief executive of Azim Premji Foundation, which plans to set up a university. “If we manage to get the education bit right, then a lot of things can go right in this country."