The Hindu Business Line : Correcting distortions in higher education market

There is perhaps no other market in India today that so completely marginalises the consumer and producer interest as much as that for higher education To correct the aberrations in the market, it is necessary to channelise the huge amounts spent by society on intermediary coaching classes for financing the actual end-education.

V. Kumaraswamy

The placement season of the IIMs concluded recently. With that, the mad frenzy of announcing higher salaries for the outgoing students — hefty increases every year in the start-up salaries — are bandied about as if they are indices of the quality of the institutions. How much of this is media hype and how much of it is true is difficult to tell, particularly when the data is unverifiable. But the euphoria masquerades a deep problem in the functioning of t he market for higher education.

Distorted structure

One of the requirements for ensuring that the markets function optimally is to keep the intermediation costs to the minimum. If stock brokers garner much of the market appreciation, it will neither benefit the investors who seek alternative avenues nor the companies which seek cheaper sources for raising funds.

Perhaps, there is no other market in India today that so completely marginalises the consumer and producer interest as much as that for higher education. The growth in the supply of quality professional higher education is rather sluggish compared to the demand which is growing at a rapid pace — one need not look beyond the growth of seats in IITs and IIMs, NIFTs, NIDs, IIFTs, etc and the growth in the aspirants every year. Beyond any doubt, these institutions have created a huge positive “externality” which should have largely been garnered by these institutions and the aspiring students. While the students passing out take their share, the biggest beneficiaries of the positive externality in these institutions are the intermediaries — the coaching classes..

For each seat, there are well over 200-300 aspirants in the IITs and IIMs. The students who take the entrance exams without attending the coaching classes fare poorly; so, an over-whelming majority goes to at least one coaching class and many to multiple coaching avenues to increase their chances of getting admission. Most of these coaching classes charge fees (in a shorter period) equal to or perhaps more than what the institutions charge as tuition fees during the entire term. Thus, the coaching fees collected from the potential aspirants by the universe of coaching classes may be a 100 times more than that collected by the IITs and IIMs — a ridiculous situation where the intermediation market is much larger than the final market. The distorted market structure caused by unimaginative government policies is mostly to blame for the sluggish growth in the supply of seats. Perhaps, the government assumes that with the quality of primary education it provides, despite the explosive growth in population, the number of IIT- and IIM-worthy students could not have grown over the years.

Since the revenues of these institutions are poor (due to anaemic tuition fees) they are not able to grow on their own. Since the government finances are never healthy, they are unable to fund any quick expansion. And at the frugal rate at which it pays the faculty, it is lucky to find a few who are still interested in teaching.

Correcting the aberrations

To correct the aberrations in the market, it is necessary to channelise the huge amounts spent by society on intermediary coaching classes for financing the actual end-education.

The successful candidates can be financed by the commercial banks at market rates against a lien on the degrees, passports of the borrowing student, which can be released after the full repayment. The annual average starting salaries of the outgoing graduates are about 2-3 times the annual tuition fees of these institutions. If the benefits of education are reckoned as 30 years income (ignoring the incremental accruals thereafter which may be caused by incremental experience gained in work), it must rank as the most lucrative investment. No wonder there is such a mad rush!

The students can be issued provisional certificates with the loan key numbers. There can be a centralised database of all such loans for free information and the borrowers can be given the facility to pay from anywhere, any bank in the networked world. Given the Indian repayment culture, harsh enforcement mechanism may be hardly needed. Even the institutions themselves can finance the loans based on re-finance from commercial banks. Any non-payment by the students should be verifiable and the track record therein can be the first check on the candidate’s integrity and commercial compliance.

The institutions should be allowed to charge the market rate freely; or as an intermediate step at full cost-plus. This would facilitate quick expansion of available seats rather than being constrained by government finances. Let the faculty salaries be freed from controls which will enable the institutions to attract the best brains in society.

The elitist institutions should be free to expand according to the market dictates at their will. It should be thrown open to FDI from the institutions abroad. Such free expansion of seats will sort out quite a few current distortions in the markets for higher education.

The ‘available seats to aspirant’ ratio will go up, bringing down the coaching class fees with it, and more of the fees will accrue to final end-service provider. The tension level of the students is inversely proportional to the number of available seats and, hence, is bound to go down. And they might spend more of their time in updating their subject knowledge rather than ‘multiple choice’ and ‘one word answer’ knowledge.

The quality of the IITs and IIMs remain largely untested currently since there is no meaningful competition. If the Harvards, Kellogs, MITs and the Stanfords are freely allowed to set up shop in India, the strength and quality of the institutions may get validated or competition may force them to improve their quality; who knows, there may even be an influx of foreign students seeking seats which will help commercial expansion.

Government’s Role

The government should not impose constraints on finances as to stymie the growth of higher education is inexcusable. The government should at best allow the institutions of merit to raise finances for expansion by standing guarantee, and as these institutions graduate in the credit market, the government should re-price its guarantees on commercial basis.

It should use a part of the education cess and the service tax on coaching centres for covering the defaults of the students or providing incentives for socialistic programmes such as reservations, creating facilities in remote centres and so on.

(The author is an alumnus of IIM and currently works as CFO with a large paper company. The views are strictly personal. E-mail: kumarviru61@yahoo.co.in)

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