After independence, India prioritized professional higher education for a tiny section of the population over mass primary, secondary and vocational education. The Indian Institutes of Technology (IITs) were created but since the economy remained strangulated by state control, India could not absorb such technical talent. Large numbers of IITians emigrated, contributing to the growth of freer economies such as the US. This certainly had spillover benefits for India, but it remains questionable if the prioritization away from mass education was a wise decision.

But the present situation is somewhat different. In a knowledge economy, growth is highly dependent on the incremental availability and quality of human capital. Whether it be skilled workers for an increasingly automated manufacturing sector or entry-level white collar jobs for the services sector, substantial gaps in human resources hold back the transformation of India from an agrarian and informal services-based economy to one focused on manufacturing and value-added services.

Moreover, as the world has become less autarkic and immigration increases—despite all the rhetoric against it—there is no such concept as “over-supply" of skills, at least at the more basic skill set level, anymore. Human capital can be developed on roughly two axes of education and experience. In some developed countries, investment in formal education by itself may have hit diminishing returns as substantial enhancement of human capital happens more through on-the-job learning.

But India is still far from exhausting the growth possibilities that accompany having a citizenry that is at least functionally skilled with specific technical and communication capabilities—to get onto the job learning ladder, one has to get a formal job first. As China becomes a middle-income country and its working age population contracts along with that of Europe and Japan, India has a unique opportunity to leverage its young population. It is a tired cliché by now, but is nonetheless true—if we do not capitalize on our demographic dividend, it may end up becoming an unmitigated disaster.

We need better skilled leather workers, beauticians, loom operators, plumbers, machine operators and factory workers trained in a standardized set of industry-linked capabilities. Also, more uniform training increases worker mobility, decreases training costs for corporates and allows industries to scale up faster.

The UPA government to its credit had launched the Student Training and Assessment Reward (STAR) scheme to achieve this goal under the aegis of the National Skill Development Corporation (NSDC) in 2013. However, ground reports suggest that the scheme never really took off. But the NDA government has streamlined, revamped the scheme and launched it as the Pradhan Mantri Kaushal Vikas Yojana (PMKVY).

Rajiv Pratap Rudy, the minister of skill development and entrepreneurship, has been talking up the scheme, and the Prime Minister himself addressed the issue more broadly in a speech on 15 July, saying that “If the 20th century saw India’s foremost technical institutes—the IITs—make a name for themselves globally, the 21st century require that India’s ITIs (Industrial Training Institutes) acquire global recognition for producing quality, skilled manpower."

PMKVY goes beyond ITIs. However, it takes a completely different approach to skilling and educating India that is bottom-up and designed to adjust dynamically to market demand.

The idea is simple and conceptually very elegant—PMKVY will reimburse anybody who develops a certain skill certified by a relevant “assessment agency" (one of three key pillars of the programme). If an individual already has a skill and only gets assessed and certified, they are reimbursed less—around 2,000. If an individual undergoes training, too, they are reimbursed more, an average of 8,000 (actual payments are on a graded scale depending on the sector and type of the specific skill). The training needs to be done at an approved training partner (the second key pillar), and the pedagogy along with skills trained or refunded for are decided by the Sector Skill Councils (the third key pillar), thus ensuring that because of industry-government coordination, training for only in-demand skills get subsidized.

Imagine then if you are already an experienced plumber—you will actually be given some money to get your skills validated and certified (if you come up short, you can take a subsidized course as well). It will remove the information asymmetry and transaction costs and when the next employer evaluates you, you may even get a raise (maybe even at the current one—or from your customers if you are a freelancer). If the well-heeled can have their infotech and accounting certifications, why cannot the less privileged also employ this proven and effective signalling mechanism?

More broadly, the government’s effort to plug leakage and wastage of subsidies through direct benefit transfer (DBT) has received attention. Prime Minister Narendra Modi has built on the work done by previous administrations, and this work now forms the basis of the DBT/Jandhan-Aadhaar-Mobile (JAM) framework.

However, free of the ideological baggage of the leftist National Advisory Council (NAC) which bizarrely saw conditional cash transfers (CCTs) as a hand-out but did not see the National Rural Employment Guarantee Scheme (NREGS) as one, the Modi government can push for radically restructuring welfare spending in a way that the previous government could not. NREGS required the poor to do hard labour for the sake of it when a machine could have achieved the same end far more cheaply (and the remaining money could have been used for above-mentioned CCTs)

Finally, PMKVY is also self-selecting like NREGS—investment bankers are not going to sign up to learn how to become certified auto mechanics—but in a much more humane way. By requiring hard labour from those who signed up, NREGS essentially shut out many genuinely poor people who may have needed the money but were just not physically or health-wise capable. Similarly, all the flagship UPA schemes emphasized outlays, not outcomes. Moreover, not only was NREGS wasteful and inefficient, it also engendered corruption—a recent study by the National Institute of Public Finance and Policy, based on secondary survey data, found that 50% of NREGS beneficiaries paid bribes to ensure payment of wages.

If Prime Minister Modi can make PMKVY his flagship welfare scheme, it would be a potentially transformational shift towards a “smart welfare" approach. What exactly is smart welfare? Such an approach separates the political question of “how much help" from the economic one of “how to help". It focuses on who should be helped and to what extent separately from how they should be helped to get efficient results for every tax rupee that is spent.

Mr Rudy is on-the-money conceptually when he says that “12 years of education may not make you employable but 12 weeks of skill training will...It will also bring about a paradigm shift from input-based to outcome-based skill training in the country." With an outlay of 1,500 crore, and a first year target of covering 2.4 million individuals, this programme could make a much bigger splash in the years ahead, as the implementation machinery and process is refined and improved.

PMKVY also gets the small details right. The monetary reward will be transferred directly to the individual’s bank account on completion of the training. Private sector companies offering skill development courses will be offered a level playing ground with government bodies, and the same standards will supposedly be applied to those wanting to partner with the state to deliver training (hence, there will be no crowding out of the private sector from this public-private partnership social scheme).

India has gargantuan needs for education and skill development—some 10 million youth enter the workforce every year, and will continue to do so at this rate for more than a decade. Providing job opportunities to this huge population represents the single largest challenge for the government, not just to deliver economic growth but to maintain social stability. We need smart welfare for skilling, but also to be a shock absorber (or “automatic stabilizer" in macroeconomic jargon) that protects the lowest strata of society from changes in the economy which are inevitable with liberalization.

The supply of manpower with basic and vocational education creates its own demand, and the market is no longer national or regional but global. With a population decline imminent in many advanced economies, the Indian government should invest more—and invest smartly—in education and skill development. There is no better way to spend a tax rupee, and initiatives such as PMKVY are steps in the right direction.

Rajeev Mantri and Harsh Gupta are co-founders of the India Enterprise Council.

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