Debating India

Quotas are not the issue

Tuesday 30 May 2006, by DEBROY*Bibek

Everyone flags or rather flogs India’s demographic dividend now. Populations in developed countries are aging. China is also graying. Where in the world will you get a population with a median age of 24? The dependency ratio will drop by another five percentage points in the next few years. Even if India’s savings (and investment) rates are below East Asian levels, this human capital will propel India into the 8 per cent-plus growth trajectory. In some countries in East Asia, this demographic transition added two incremental percentage points to GDP growth. Why can’t India replicate this? However, for this demographic dividend not to turn into a demographic deficit, we need literacy, skills and lower levels of morbidity and mortality. We need health and education, the kinds of targets set out in the Millennium Development Goals (MDGs). In addition, most of this demographic dividend will accrue in the Hindi heartland, where present health and education indicators are the worst. Forget health for the moment and let us focus on education, in all its three variants - school, vocational and higher, with an emphasis on the higher segment.

Is higher education desirable? Of course it is, although not everyone gets into higher education, provided a sensible exit point exists at the vocational and school-leaving stage. Returns to higher education are considerable, in the 20 per cent-plus range. Based on enrolment ratios in some countries in East Asia, the targeted official enrolment figure in higher education seems to be 10 per cent and we are at 8 per cent now, up from 6 per cent at the beginning of the Tenth Plan (2002-07).

First ask, is there a shortage of seats in higher education? The temptation is to believe there is a shortage, since at this time of the year there is a scramble for seats. But in a macro sense, there is no shortage, there is excess supply. Ignoring polytechnics and other institutions that award diplomas and certificates, there are 217 universities, 74 deemed universities, 13 institutions of national importance, 85 research institutes, 9,427 general colleges, 1,068 engineering, technical and architecture colleges, 783 medical colleges, 900 teacher training colleges and 1,991 other colleges. The enrolment in higher education is 10 million. Assume any reasonable figure for capacity in these institutions of higher education and work backwards. You will find that we can easily handle an enrolment of 15 million, without adding a single institution of higher education or a single seat. Obvious points are often missed and so is this one. Because most of these institutions offer junk, there is no demand for seats there. And there is excess demand for a few that offer quality. That’s where the scramble is.

Most producers produce services that have no demand. And there is a shortage of producers for services the market wants. Didn’t we confront a similar problem for manufacturing before 1991? Didn’t we have a shortage economy then, thanks to licensing, resulting in lack of competition, bad quality, high costs and inferior service? Traditionally, the response to shortages was to impose price controls, quotas and rationing. This deterred fresh investments and reinforced shortages and the vicious cycle went on. The world of manufacturing has changed since then. When we think of higher education, we must recognise that more than 80,000 Indian students have headed for the US and many more elsewhere. For obvious reasons, these students come from richer sections of society. We can’t insist that US embassies have an OBC quota for student visas. Indian institutions are setting up shop abroad and not all of them require permission from HRD ministry. We can’t insist they have an OBC quota when they function in Dubai. In calendar year 2005, FDI out of India exceeded FDI into India and this was largely because of higher transaction costs of doing business in India. Indian institutions of higher education have a comparative advantage. Do we want them to set up shop abroad instead of in India? Through WTO negotiations, higher education will eventually be opened up. Don’t we want domestic providers to be equipped to handle the competition?

This isn’t quite a digression. The point is that whenever we think of higher education, we tend to think of it as a public good that must be provided by the state, because there are market failures. Economists have a technical definition of a public good. By no stretch of the imagination is higher education a public good. Nor is this sector one where there is market failure, with private sector entry and provisioning impossible. The problem lies in licensing restrictions that constrain private sector entry through HRD ministry, UGC, AICTE, Medical Council, Bar Council and so on, barring a few areas. Given asymmetry of information, one does need regulation, but licensing is not the same as regulation. If one is interested in broadening access, improving quality and providing services linked to what the market wants, the appropriate policy response is to trigger supply-side responses, instead of presuming the public sector has to deliver higher education. Expenditure on education may very well need to be 6 per cent of GDP, and that on higher education 3 per cent, but who has said this has to be public expenditure? Even if higher education is a merit good that warrants subsidies for the poor, the private sector, in India and elsewhere, does offer cross-subsidies. And there are better ways of routing public subsidies also. In this entire quota debate, we are not attempting to solve the root of the problem.

Consider, for example, data on entry into IITs, which shouldn’t be too difficult to process, since it already exists. Let us look at cross-classification of entrants based on their caste backgrounds and as functions of whether their schooling was in government or in private schools. I am prepared to bet that deprivation and inequity of access will be higher for government schools. If we are rational, that should tell us something not only about correlates of backwardness but also about how public policy should be formulated. Instead, we will be preoccupied with quotas in public institutions of higher education and eventually, when we realise this hasn’t worked, we will want to extend such quotas to private institutions.

The writer is secretary-general, PHDCCI

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