Why Growth Matters (22 page)

Perhaps even more important, the enrollment ratio in higher education in India is low and rising at a snail's pace. The gross enrollment ratio, which measures the proportion of those in college to college-age population, was 8 percent in China and 10 percent in India in 2000. By 2007, the ratio had shot up to 23 percent in China but crept up to only 13 percent in India. Apparently many students are unable to proceed to higher education, not just due to lack of finances but also due to a shortage of space in colleges and universities.

The comparison with China along both quality and quantity dimensions is especially disturbing since Mao Zedong almost entirely decimated China's higher education system during the Cultural Revolution of 1966–1968. In contrast, India has had an uninterrupted history of modern universities for more than 150 years. The universities of Calcutta, Bombay, and Madras were founded as early as 1857. While the university system in India was considerably strengthened in the early postindependence era, it has languished during the past three decades, precisely the period during which the Chinese have rebuilt theirs.

The problems with India's higher education are many. However, a central problem is an antiquated administrative structure that imparts virtual monopoly to the University Grants Commission (UGC), a statutory body since 1956 at the apex of the system. The UGC determines curricula at various levels, degrees to be awarded, and fees and (indirectly) faculty salaries. Most important of all, it acts as the gatekeeper for the emergence of all universities. Without its approval, no new universities can be started.

There are only two ways that new universities can be started in India: either the UGC deems an existing academic institution, such as a college or research institute, to be a university or the central or a state government passes legislation to establish a new university provided the UGC approves it.

Private colleges are allowed to exist but they must affiliate themselves with a public university to award degrees. Entry of private universities is very difficult and, when they do manage to enter, they must remain unitary: they cannot affiliate colleges to award degrees. Nor are they
allowed to open satellite campuses in other states without UGC approval, which involves complex procedures.

This tight control has been maintained in the name of ensuring high standards of education, notwithstanding the fact that the quality of education in public universities leaves much to be desired and is continuously declining.

In contrast, in areas of management and chartered accountancy, which fall outside the purview of the UGC because they award diplomas and certificates and degrees, private institutions have thrived and served the students and the country well. Even in undergraduate engineering institutions, where private entry has been relatively liberal, private institutions have broadly managed to maintain the flow of engineers of adequate quality in sufficiently large numbers to keep India's growth going. It is anybody's guess as to what would have happened to Indian growth had the private engineering colleges and management institutes not expanded at the rapid pace they did to supply the market with qualified engineers and managers.

The same expansion has failed to take place in medical education except in a handful of states, such as Karnataka and Maharashtra, due to the tight control by the Indian Medical Council (IMC), a powerful institution that threatens almost at the drop of a hat to shut down colleges that have existed for decades. The monopolistic working of the IMC, which has an interest in reducing the supply of new doctors, is predictable: the same phenomenon has characterized the American Medical Association, which has long been understood as practicing entry-prevention tactics in several ways. These medical associations can get away with murder, no pun intended, because they can always pretend that if they are not allowed to restrict entry of new doctors through tight regulations, patients will suffer serious consequences. But a developing country like India can ill afford to indulge the IMC.

These issues are particularly salient at the moment in India because, with a demographic transition under way, massive numbers of young Indians are expected to pass through college-going age in the next two decades. The United Nations Population Division estimates that between
2010 and 2025 alone, the population in the twenty- to forty-nine-year-old age group will rise by 131 million in India. The government is short of financial resources to expand universities and colleges at the pace necessary to accommodate this burgeoning young population. Therefore, while it should do as much as it can to expand public-sector higher education, the government needs to drop the pretense that it can serve the country's young men and women well without massive participation of the private sector.

The only educational policy choice before the government, therefore, is for it to end the de facto license-permit raj in this sector and let both for-profit and nonprofit institutions of domestic as well as foreign origin enter the market with ease. The UGC may lay down a set of criteria that private institutions must satisfy, but beyond this, its current gatekeeper role must end.

Again, under the current system, another important problem arises because a committee headed by a retired High Court judge determines the tuition fees even in the private institutions that are allowed to operate. The committee presumably arrives at the fee through cost estimates that include the assumption that the teachers will be given salaries prevailing in similar institutions. Such a fee naturally limits the institution's financial capacity to pay teacher salaries that would be required to attract the best teachers. In effect, the cap on the fees set by the committee also caps the salary the institution can pay its teachers, thereby limiting its ability to get the best teachers. Given the current scarcity of good teachers, it is important that private colleges and universities have the flexibility to attract talented young Indians getting education abroad. But this is not feasible without flexibility in the salaries they can pay. Lifting its control over tuition fees in both public and private universities therefore seems to be a policy change that the UGC must consider.

The common argument that high fees would increase the gap between haves and have-nots is a non sequitur. Good education yields high private returns to the recipient and, unlike primary education, has no obvious externalities. Therefore, there is a good efficiency-based economic case for market-based tuition fees. The equity issue should be
separately dealt with through the provision of loans for those qualified for admission to any given institution.

In this regard, excellent analysis and policy proposals, worthy of India's attention, can be found in the recent report by the independent panel on higher education appointed by Great Britain under the chairmanship of Lord Browne.
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Although Britain abolished its University Grants Committee (after which India's UGC was partially patterned) in 1989, its universities have continued to decline in relation to US universities. Aware of this fact, the country has been actively reforming its higher education system in the past fifteen years. The Browne panel was the latest step in this direction. Its charge was to come up with recommendations to increase investment in education, ensure that the quality of teaching is world-class, and make higher education accessible to anyone with the talent for it.

The Browne report recommended that Britain eliminate the existing tuition fee cap of £3,000 altogether with two key provisions to ensure access. First, students should have to pay no upfront fees, with the government paying to the university up to £6,000 per student. Institutions charging more than £6,000 should be required to pay a progressively rising tax on the margin. The tax should then be used to finance grants to students from low-income backgrounds to meet the living expenses. Second, after graduation, students should be required to begin paying back the costs paid by the government once their income reaches a threshold, recommended at £21,000.

The Browne report argues, correctly in our view, that this package will force greater competition among universities since they can expect higher fees for better education. At the same time, with no fees to pay upfront, it will also give students greater choice and access. The proposed system would give them freedom to join the institution at which they expect the highest net returns. It would also stimulate much-needed investment in higher education.

Consider next the role of foreign universities in raising the quality and supply of higher education in India. The recent effort by Human Resource Development Minister Kapil Sibal to grant entry to foreign
universities is to be applauded even as it has led to controversy.
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A popular objection to the proposal to let foreign universities into India is that, with their deeper pockets, foreign universities will drain distinguished Indian institutions, such as the Indian Institutes of Technology and Indian Institutes of Management, of their best faculty. This, however, is not a persuasive objection.

First, the best researchers want other best researchers around them. Therefore, moving the faculty from established institutions of excellence is not going to be a cakewalk for foreign universities. This is illustrated by the experience of the Indian School of Business (ISB), an institution that comes the closest to being a world-class foreign educational institution in India. Only four out of approximately thirty of its resident faculty members came from the well-established Indian Institutes of Management.

Second, the key source of faculty for foreign universities will surely be Indian scholars abroad. Of the thirty resident faculty members at the ISB, approximately twenty are recent foreign graduates. An impressive 71,000 Indian graduate students were enrolled during the 2009–2010 academic year in the United States alone and potentially could be tapped to fill faculty positions in India. Likewise, modest incentives can bring many existing senior faculty members at universities abroad to teach on Indian campuses on a part-time basis. The ISB and Indian Institutes of Technology list several world-class Indian scholars abroad among their nonresident faculty.

Third, even if some faculty members leave Indian institutions of excellence to join a foreign university located in India, does it constitute a net loss? After all, they will still be serving Indian students. And the competition that such movement will generate might, on balance, benefit rather than harm the country as a whole. Also, the notion that the loss of some will undermine the productivity of the rest reflects the earlier “brain drain” model: today faculty mostly work with faculty of similar specialization in other institutions by e-mail, telephone, and occasional visits and conferences where personal interaction is important. As the economist Frances Cairncross wrote some time ago, we are witnessing the “death of distance”; or, since working in the same area has been
called “geography” by the economist Paul Krugman, we might say that geography is history now.

It is anyway highly unlikely that the proposed Foreign Universities Bill will lead to a flood of foreign universities in India. With the large number of safeguards contained in the bill, many are likely to find entry unattractive. For instance, one of the provisions would limit foreign universities to the same fee regulations as domestic unaided private universities. This would automatically limit their ability to pay high faculty salaries, for instance. In all likelihood, the present bill, even if passed without changes, will not bring very many foreign universities to Indian shores and will eventually require amendment.

O
ur discussion has been confined to several of the most important areas where measures still must be undertaken to broaden and deepen the Track I reforms that were systematically begun in 1991. But there are other areas where further reforms would have a payoff. Among them are reforms in international trade, foreign investment, and agriculture.
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Trade liberalization in India, while on course in a slow but sure process, has come to a standstill since the UPA government came to power. Although India is now largely quite open to trade in industrial goods and services, further scope for liberalization in these areas remains. The top industrial tariff rate, not counting a number of peak tariffs, remains at 10 percent. Because of several rather high peak tariffs, however, the simple average of industrial tariffs is approximately 12 percent. This is still high by today's standards; there clearly remains room to bring these tariffs down further.

Turning to services, India has been wise to finally open multi-brand retail to foreign direct investment. Given that domestic companies have been active in this sector for more than five years, we have seen that the feared injury to small mom-and-pop shops is minuscule: the small and large happily coexist because they address different needs. At the same time, the upside potential in terms of developing supply chains and the expansion of exports through foreign retailers such as Walmart and Pepsico is high.
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Agriculture in India also remains highly protected. Fears that opening to trade might hurt Indian farmers are grossly exaggerated, as was the case prior to 1991 with respect to manufactures. Just as liberalization in manufactures strengthened rather than weakening them, India should benefit from progressive liberalization in agriculture.

But India also needs to move ahead with reforms in agriculture more generally. Several key reforms are necessary both to bring prosperity sooner to the many who continue to be employed in agriculture and to speed up the outward movement of the workforce into industry and services.

First, it is essential to introduce much greater competition in the market for agricultural produce. Somewhat surprisingly, while market reforms have gone a long way in manufacturing and services, progress in agriculture has been limited. Under the original Agricultural Produce Marketing Committees (APMC) Act, the government has had a monopoly over farmers' produce, which it buys from them and sells to wholesalers and retailers. This has proved to be highly inefficient and detrimental to farmers' interests. Reform of the APMC Act has been under way since 2003 but progress has been slow and uneven across states. In particular, some major states such as Uttar Pradesh and West Bengal have yet to introduce it and others such as Punjab, Haryana, and Delhi have introduced only partial reforms. A full-fledged reform would allow farmers to sell their produce directly to whomever they please, including consumers; allow private firms to purchase produce from farmers; and permit farmers to contract to sell their produce directly to contract farming sponsors. If India is to take full advantage of the entry of multiproduct foreign retailers and facilitate the growth of modern agricultural produce supply chains, APMC reform is essential.