The Hindu Business Line : Little economic sense in tinkering with IIM fees

With the burgeoning demand for higher education in India, a fresh crop of private engineering and management institutes come up every year, providing courses for sums possibly much higher than what the IIMs charge. The HRD Ministry should make an effort to enhance the quality of such institutions rather than trying to drag down the few world-class institutions,

THE IIM fees imbroglio is occupying much media attention. At one remove, the views expressed revolve around the need for world-class institutes, such as the India Institutes of Management, the India Institutes of Technology and other institutes in technology, the sciences and social sciences areas to exercise autonomy over all aspects of their activities. That includes the freedom not only to develop courses and curricula, but also to design and implement a pricing strategy for such offerings. The leaden hand of bureaucracy is unwanted. That is a perfectly acceptable view.

At another remove, there is a concern that the IIMs and the IITs, particularly the former, cater to an exclusive class of person: An anglicised, upper middle-class individual who has the family financial resources to pay the fees for an IIM education and thereafter embark on the corporate career gravy train that is waiting after the IIM phase is over.

In fact, there might be a snob effect, with the ability to bear the level of fees charged construed as a signal of some unobservable capability of the individual or his or her family. The IIMs, and other institutions that perhaps also charge high fees, are just too expensive for the vast mass of people that makes up India. This, too, is, seemingly, an unrefutable proposition.

To cap it all, the Committee headed by Dr U. R. Rao has concluded that an IIM education is just too expensive vis-à-vis the per capita income of a country such as India.

The benchmark is a year's university education in the US, because, after all, it is the US that is now our point of comparison, and not any African country, as would have been the case in the 1980s and even up to the mid-1990s. Yet, even in the US, an average middle-class family would spend up to $30,000 per annum to put a child through a decent undergraduate university education. If that child were to then be put through a graduate (post-graduate in Indian parlance) course of the highest quality, in business administration or law, or through a medical degree course, that family could quite easily find itself looking at an expenditure of $200,000 to $250,000 for a child over a six/eight-year period.

That, by whatever yardstick evaluated, is a very large sum of money for an average middle-class family in the US. If a family has four children, then there is a $1 million commitment to be made on education. Thus, the US scene is equally expensive.

We are left with no answers to the conundrums that beset the pricing of higher education, whether in the UK, where the issue of university tuition fees has been extraordinarily emotive and also badly handled; the US, where every university has had to bite the bullet from time to time and raise fees; or in India where the Human Resource Development Minister, himself a former university professor, has opened a Pandora's Box!

Yet, in the UK, the recent top-up fees Bill was passed, and every parent in the US recognises the cost of children's university education and does not begrudge the financial outlays necessary. Why?

Charging a level of fees that is reasonable so as to generate the financial resources to attract quality faculty — those that impart high-class knowledge and generate that knowledge content — is fundamental to any institution that aspires to be of world-class status.

It is an aspiration that many Indian institutions seem to have today. If that means the level of fees has to be high compared to the country's per capita income, so be it!

The quality of faculty recruitment is directly related to the quantity of money on offer for that faculty member. Just as India's management graduates occupy positions in global corporations, so too there is a market for global higher education talent today that includes Indians as major players. There is always an open ticket in the pockets of these Indian faculty members. The idea being expressed is really a rather straightforward expression of the broad concept of efficiency wages, articulated by individuals such as George Akerlof, Harvey Leibenstein, Dipak Mazumdar and Joseph Stiglitz.

In other words, not only does a person expect to be paid what he is worth but the employer also makes sure that he or she pays an employee what is perceived to be a fair sum equivalent to the value that will be delivered. Otherwise, the disincentives to be productive are enormous.

Therefore, a parent in the US is quite willing to pay, say, $30,000 per annum as tuition fees for a child at an Ivy League university because that child will receive the benefits of being taught by a high quality faculty member who is rewarded well for his research and teaching accomplishments. You pay for what you get.

But how does that Ivy League or, for that matter, any other institution generate the funds to reward superior faculty quality? It is, to a very large extent via the tuition fees route, and if the fees do increase from time to time, or are relatively higher than those at another institution, then the inference is clear. There are higher quality faculty members at that Ivy League institution.

But what does the presence of higher quality faculty members at any particular institution imply? Simply that the worth, in terms of future productivity and earning potential, of graduates from that institution is relatively higher, perhaps very much higher, than that of graduates from other institutions.

That, in turn, generates a cycle of brand leadership, which then generates further demand for that institution's graduates, and further contributions by those graduates into the economic and social spheres.

In other words, the quality of the guru that you study with, that you have taken diksha from, directly affects the quality of received shiksha.

Gurus need to be nurtured and taken care of. Hence, getting the IIMs to lower their fees is wrong strategy; forget the quality of execution of that strategy. Lowering fees directly affects the quality of an IIM education. Not only does it hit the financial bottomline in a substantial way by reducing the funds available to reward faculty, it immediately affects the quality of intellectual output by sending all the wrong signals to the faculty.

The clear and direct implication is that their work is not now worth what it was once. Their work and contribution is conceived and construed to be less valuable. This is an intensely dysfunctional situation, directly affecting, as it does, the motivation of the key resource in a human capital rich institution: the faculty.

This dynamic then translates into a potential decline in the quality of education that IIM students receive, with spiralling consequences on the quality of their own future output. The implication is clear. Future employers will be wary.

The decision to reduce IIM fees is inappropriate in a knowledge-based era where the quality of national growth is a direct function of the quality of intellectual input, and where foreign companies are seeking out the quality and quantity of human resource pool.

Instead, the Minister should be worrying himself about how to enhance incentives so that more faculty members join the higher educational institutions in India. India needs an explosion in the number of these entities and in the number of faculty members within these entities. If the state fully funds higher education and research, as in Germany and Japan, the question of the level of tuition fees is moot. If the state provides only partial funding, as in the US, then market forces rule where fee levels are concerned. Where the state only provides partial funding and then tinkers with fee levels so that they are lowered, as is happening in India, this is an absurdity.

As it is, there is such a level of pent-up demand for higher education in India that there are any number, possibly running into the thousands, of recently-opened engineering and management institutes providing courses for sums possibly much higher than what the IIMs charge. Add capitation fees, the total cost of being at these institutions is enormous. The less said about the quality of education that many of these institutions, which I collectively label the "Potboilerpur Arthaniti Academies, provide, the better.The HRD Ministry's time would be much better spent trying to enhance the quality of such institutions that litter the Indian educational landscape, rather than trying to drag down the few world class institutions, such as the IIMs, the IITs, and a handful of other institutes in the fields of management, sciences and social sciences.

Not only are there extremely sound behavioural and economic reasons for not tinkering with the IIMs' fees, and of other institutions, but there are many more pressing problems at hand. The critical ones are to do with enhancing the quality of human resource development, the number of world-class institutes and the quantity of high quality manpower. More "Potboilerpur Arthaniti Academies" are emphatically not what is required in India!

(The author is Professor, Technology Strategy, University of Texas, Dallas. He can be contacted at majumdar@utdallas.edu.)