There has been a great deal of discussion about the efforts by the UPA at extending quotas for a bigger slice of the population in universities. I have an article in Business Standard today titled Don't play Arjun Singh's game where I make an analogy with industrial licensing.
My analogy is wrist watches made by HMT. The government made fairly-good watches at HMT. The quantity was pitiful, and they were in short supply. The government would neither move up to top quality nor would they let you start a factory to make watches. The only saving grace in that situation was that there was no SC/ST or OBC quota for watches.
The same is going on with higher education. The government makes a few seats of fairly-good (though not top quality) education at some IITs. The quantity is pitiful and the seats are in short supply. The State will neither move up to top quality, nor produce adequate quantity, nor will they let entry take place.
Once industrial licensing was abolished, entry took place; the quality of watches went up; the shortages went away. In similar fashion, I think the single most important problem with Indian higher education is the entry barriers, where the State essentially prohibits anyone from starting universities. I am aware of efforts by top names like Stanford at setting up operations in India, but these have run afoul of the existing rules.
If the government has political goals, these can be achieved without distorting production. E.g. the government is free to buy watches - from a competitive and efficient watch industry - and gift one to each SC/ST. Similarly, political goals like obtaining OBC votes for the UPA can be achieved by setting up a voucher program for them on-budget, where OBC voters gain access to top quality education produced by top quality campuses in India. We are doing something singularly wrong by allowing political goals to distort higher education itself.
When we look at the funding stream of top US universities, this is made up of roughly 40% tuition fees, 30% endowment fund and 30% research contracts (a lot of which come from the government). In India, the cost of production of higher education is lower since it's labour intensive. Students are willing to pay high tuition fees. Some research contracts from the private sector are feasible. If research contracts given out by the defence, atomic energy and space establishments are done on a competitive and meritocratic basis - for these agencies care for results and not for the ownership structure of the university - then new universities could plan on these also. In my mind, in such an environment, it is now possible to start top quality universities in India without grants from the State. The two key elements of public policy which need to be sorted out are (a) Entry barriers and (b) Shifting research contracts by defence, atomic energy and space into a meritocratic framework.