India faces a major challenge in terms of skill development. The rapid growth of the economy, especially in industry and service sector, has created skill shortages. The skill gap might grow further as at least 5–7 million persons might join the labour force annually between 2012 and 2022, while the current skill training capacity in the country is well below that number (5 million per annum) (Mehrotra et al., 2014). This gap can keep growing, since the number of persons already in the labour force that need training is very large. We estimate a total capacity requirement of 20 million per year, while the system's current capacity is only 5 million per year. Vocational education and training (VET) finance will have to increase correspondingly. General tax revenues and, to some extent, bank loans for technical education are available but will not suffice. The quantum leap in both the quantity and quality of skill training currently available can only happen if new sources of assured funds for VET can be found. The ‘Make in India’ slogan of the new government and the objective of 100 million new jobs in manufacturing by 2025 is doomed to failure if skilled workers are not available.

Hence this chapter makes the case for India initiating a national training or skill development fund, dedicated to meet the challenge. It is notable that in over 60 countries world wide, payroll levies have been implemented and are the main source of financing skills training in specialised training institutions. Such levies have encouraged enterprise training without totally relying on general tax revenues and India can learn from the experience of such countries.

The chapter is organised as follows. Section 6.1 discusses the nature of India's skill challenge empirically, but then spells out in theoretical terms why the challenge is difficult to meet without additional sources of financing. Section 6.2 introduces the various vocational training funds that exist globally. Section 6.3 discusses the experience with them in other countries and the types of funds that originate from these sources. Section 6.4 draws some preliminary lessons for India based on the preceding discussion.