Wednesday, June 07, 2006

Entry barriers in higher education

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.


  1. Good column with apt comparison.

    I am surprise you call the people who don't want free markets as conservatives. I am one and I think free markets are the norm, i.e. Indian economic tradition, not the exception (we all heard of and read about Tugluk). Government control over all aspects of economy, which has been the exception (for the past four decades), is the left-wing socialist idea - the opposite of conservatives. Just thought I should defend my cause for tradition. :)

  2. I found this in this education blog:

    Foreign Direct Investment allowed in education in India: Questions in the Lok Sabha

    LOK SABHA STARRED QUESTION NO 11 (answered on March 01, 2005)


    Will the Minister of HUMAN RESOURCE DEVELOPMENT be pleased to state:-

    (a) whether the Government is considering a proposal for allowing foreign investments in the field of higher education;

    (b) if so, the details thereof;

    (c) whether the Government had had a detailed consultations with all stake holders before taking any final decision in the matter; and

    (d) if so, the details thereof?



    (a) & (b): Foreign Direct Investment (FDI) in education, including higher education, is already being allowed under the automatic route, without any sectoral cap, since February, 2000, vide Order No.7(4)/2000-IP dated 11 February, 2000, issued by the Department of Industrial Policy & Promotion.

    (c) & (d): Do not arise.

    A subsequent question on the same issue - LOK SABHA STARRED QUESTION NO 11 was answered on February 21, 2006.


    Will the Minister of HUMAN RESOURCE DEVELOPMENT be pleased to state:-

    (a) whether the Government has decided to permit Foreign Direct Investment (FDI) in education sector, particularly elementary and primary education;

    (b) if so, the details thereof;

    (c) the details of the FDI proposals approved and the proposals which are at an advanced stage of approval;

    (d) whether any policy guidelines have been formulated in this regard;

    (e) if so, the details thereof; and

    (f) the extent to which FDI is likely to improve the education sector?



    (a) & (b): There is no separate sectoral policy notified for education sector. By virtue of Press Note 2(2000 Series), FDI up to 100% is allowed on automatic route in the Education Sector. In the recent review of policy notified vide Press Note 4 (2006 Series) there is no change in the policy for education sector. In addition, as indicated in the same Press Note No.2(2000 series), the investor may choose to make an application direct to the Foreign Investment Promotion Board (FIPB) without availing the automatic route.

    (c):Information is being collected and will be laid on the table of the House.

    I wonder if details of the FDI proposals approved and the proposals at an advanced stage of approval have already been laid on the table of the House. Should be interesting to see what this reveals.

    (d): No, Sir.

    (e): Does not arise.

    (f): Experience with FDI in education is recent and no serious analysis has been made of the data available.

    If we are looking at MIT, Harvard etc. to enter India, I guess the current policy (as reflected in the above answers) allows it..It is another matter that these universities may not decide to enter given the current policies wrt educational/academic autonomy..

  3. A few doubts -
    Is there sufficient incentive for the likes of Harvard/Stanford to set up campuses in India?
    In a country where the school drop-out rate is as high as 94%, the quality of aspiring engineering undergraduate students for instance is abysmal if one were to look beyond the IIT's/NIT's and a handful of other institutes. Hence, I don't think there's a large enough market for the world-class universities to establish institutes in India with large intakes.

    The supply-side constraint in higher education is not as debilitating in its adverse impact as you make it out to be. The real problem rests with inability of the govt to ensure universal primary education to all sections of society.

  4. With respect to your HMT analogy -
    When it comes to watches, private companies don't care a damn as to who buys the watches.
    In contrast, world-class private educational institutions do care about the kind of students who buy the product from them. As a result of this qualification, the size of the market they can potentially target undergoes considerable diminution.

    Hence, to suggest that the bureaucratic rigmarole is the only deterrent for private universities, is probably not accurate.

    PS : Please point out if I've got it wrong.

  5. Chandra, I define "conservative" as a person who wants the world to stay as it is. I know, there are a few alternative definitions. I apologise if it looked odd vis-a-vis yours. :-)

    FDI allowed in education: This does not take into account the control raj that's run by the Ministry of HRD.

    Shrikanth: I believe the market size with top quality students coming out of the 12th standard is huge, and here's why. At one level, of the 200,000 odd people who take the IIT entrance exam (the JEE), my guess is that atleast 50,000 of them are actually excellent students by world standards. The second aspect is CBSE and ICSE, which have pretty challenging material e.g. in mathematics. I think that anyone who gets > 75% in mathematics at CBSE or ICSE is a very very good student by the standards of high school in the US!

    The government isn't winning on elementary education. But it is getting de facto privatised. There is a mushrooming of private education: private schools + coaching classes + tutors. As long as the exams are brutally challenging, the pressure on parents and students drives them to find a good education even if the government doesn't figure out how to run schools. In contrast, this process hasn't begun with higher education, thanks to the entry barriers run by Ministry of HRD.

    On the issue of schools caring about who they recruit - while a seller of watches does not - I think this changes things but not fundamentally so. In addition to treating a student as a paying customer, a school knows that good students have an impact on reputation and peerage. This gives schools an incentive to seek out good students, going all the way to giving out tuition discounts or even scholarships to good students. The bottom line remains that in a well run country, there is brutal competition between universities - and this is what we have failed to create in India. In a well run country, universities compete for everything: they compete to attract good faculty, get good students, get donations, get research contracts, etc. Out of this competition comes quality. In India, all aspects of this competition have been killed off.

  6. Can a private player open up a higher education institute (Engg /medical) with foreign collbaration in India???

    Is it mandatory to form a trust ( Non profitable ) ???

    Can it be run Commercially !!

  7. Hi Sir,

    CBSE course material for maths is indeed very good. I was in JDH this week. Got hold of the NCERT books for standard XII and they are quite impressive. They have separate sections for use of calculus in economics and finance with a good number of solved examples and problems. Students who have solved these books are pretty much there to solve the T&F.

    I wish the Mah. Board wakes up sooner than later....and improves its curiculum. We need more than just the good old Chitale & Joshi.

  8. Ravi, most readers here don't know what the shortform "JDH" stands for :-)

    Yes, I agree: ICSE and CBSE has much better curriculum development as compared with our SSC/HSC in Maharashtra. I believe it's a big factor impeding the success of students from Maharashtra at the IIT entrance.

  9. i'm not sure about the barriers to educational entry. There are BBA/MCA colleges at almost every nukkad in north india. It does not mean this is a bad thing. However the quality of education in India leaves a lot to be desired. An indicator of that is the low rankings (if at all) from Indian universities in filing patents and research papers.


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