The art of education is never easy. To surmount its difficulties, especially those of elementary education, is a task worthy of the highest genius … [But] when one considers … the importance of this question of the education of a nation’s young, the broken lives, the defeated hopes, the national failures, which result from the frivolous inertia with which it is treated, it is difficult to restrain within oneself a savage rage. In the conditions of modern life the rule is absolute, … [a country] that does not value trained intelligence is doomed.

Alfred North Whitehead (1861-1947)

British mathematician and philosopher

India’s Costliest Failure

India’s position in the emerging world of globally interconnected economies will doubtlessly be dictated by how successful it is in overcoming the severe limitation of its education system. A sound education system is the foundation of sustained growth. Yet, nowhere is the failure to produce a set of economic rules more evident than in the Indian education system. India’s literacy rate of around 60 percent places it in the company of countries such as Uganda, Rwanda, Malawi, Sudan, Burundi and Ghana.

With an estimated 360 million of its citizens in the school-going age—a third of its entire population—it has an unmatched potential of becoming a major economic powerhouse. It has an opportunity to shape not only its own future but the future of the world at large. The challenges it faces in realizing that potential are many but the most formidable of them are those that are in a sense “self-inflicted.”

The greatest hurdle in India’s path to the future is the near-monopoly government control of the education system.

The Numbers

A quick review of the numbers illuminates the challenges and opportunities. Of the total 360 million who should be in the K-12 system, around 140 million children are not in school. It is not just a private loss—they will never have the opportunity to participate fully in the global economy—it is a loss to society because they will never be able to fully contribute to it.

Yet the spending for education is large. The Indian government has allocated around US$ 8.6 billion for FY2009 for education; private spending annually on K-12 tuition is an additional US$ 20 billion; tutoring adds another US$ 5 billion a year; private professional education is another US$ 7 billion. From a total of around $40 billion in FY2009, the education sector is expected to grow to around US$ 70 billion by 2012. Compare that to the US$ 45 billion spending for power, telecom, and transportation infrastructure in the 11th Plan.

A Nation of Illiterates

Broadly speaking, India accounts for 50 percent of the world’s illiterates even though India accounts for around 17 percent of the world’s population. The failure of India’s primary education is predictably reflected in the higher education level: gross enrollment ratio is a mere six percent. Furthermore, the quality of Indian college graduates is poor to the extent that only about a quarter of them are employable.

Regulations allow only non-profit trusts to run educational institutions. The results are disappointing and point to a failed public education system. The private sector schools do deliver much more than the public sector schools and do so comparatively more efficiently. Private schools account for only 7 percent of around 1 million K-12 schools and yet they accommodate 40 percent of the total enrolled. Studies show that public sector schools are plagued by teacher absenteeism, lack of basic infrastructure, and poor performance. India urgently needs to remedy the shortage of quality private schools.

The situation in tertiary education is not very good either. Published figures show India graduates 350,000 engineers and IT professionals a year, compared to China’s 600,000, and the United States’ 130,000. The quantity appears reasonable until one recalls that only about one out of four engineers is employable. This creates the paradoxical situation of vast numbers of unemployed engineers on the one hand, and on the other employers desperately seeking skilled engineers.

Compared to China

Comparison with another comparably large developing country—namely China—is instructive. By 2005, China was graduating around 12,000 PhDs a year, about seven times what it did in 1995; India maintained an average of 700 PhDs every year during the same period.

The education system is supply-constrained. Around 400,000 compete in the IIT-Joint Entrance Examination for 10,000 seats in the few Indian Institutes of Technology, for instance. Another 240,000 took the common admissions test for the Indian Institutes of Management. On aggregate, over 2 million students take entrance tests for seats in the 1,200 private and 400 public professional schools. Test preparation is a huge market but ultimately the spending is directly unproductive and only serves as a means of rationing the limited quantity of supply relative to demand.

Profiting from Education

Unable to find the opportunity domestically, Indians spend an estimated US$ 10 billion every year for higher education abroad. This lends support to the claim that if the education sector were to be liberalized—that is, if for-profit domestic and foreign private sector entities were allowed entry—then the capacity constraint will be released. Furthermore, market competition would ensure that the quality of the education would also improve.

The private sector is essentially denied the opportunity to fully participate in the education sector. Resistance against commercialization of education is held with what approaches religious conviction. Profit from education is anathema to Indian policymakers. The Supreme Court of India in a 1993 decision wrote:

“Imparting of education has never been treated as a trade or business in this country since time immemorial. It has been treated as a religious duty. It has been treated as a charitable activity. But never as a trade or business... The Unni Krishnan Decision does not imply that private schools cannot exist but states that they should not ‘commercialise education’ and impart education with the motivation to profit from it.”

It is impressive that tradition holds that education should not be commercialized. But if that hallowed tradition which served the different needs of a different age were to lead us to a dead end today, would it still be wise to adhere to it? Time and circumstances have changed.

Education in India is heavily controlled by the government both at the state and federal levels. Government agencies and regulations dictate every aspect of education, sometimes to the smallest details: who can run educational systems (generally only non-for-profit trusts can), who teaches, what is taught, who learns, what the fees and salaries should be, and so on. Most unfortunately, the entry barriers that the government imposes on the sector lead to such effects as high costs, low quality, and rampant corruption.

Entry Barriers

The market for educational services is like any other market. By putting barriers to entry to the market, it increases competition for the market which leads to decreased competition within the market. This has two unfortunate effects.

First, corruption is made endemic in the system. Persons in charge of government agencies with discretionary powers to grant entry into the market are susceptible to bribes. Education providers compete for the market by paying immense bribes to obtain licenses. Later these amounts have to be recovered from the students in the form of huge capitation fees and other coercive measures.

All this is possible because the entry barriers reduce supply so that economic rents can be extracted. In effect, this is a process that transfers wealth from those wishing to get an education to those who have control of the entire sector, with the education providers acting as intermediaries in the process.

The second effect is that the quantity supplied cannot meet the demand and the quality of the education service is poor. The entry barriers prevent normal supply response and limit the necessary competition within the market to improve quality. The incumbents continue to remain in business despite shoddy service.

Necessary Reforms

The argument for liberalizing the education system is simple enough to state. Globalization, which is essentially the free movement of capital in pursuit of profits, is an established fact. It means that global capital will continue to move differentially to those parts of the world where it most profitably complements the human capital available.

Even though motivated by profit, global capital has the capacity to contribute directly to rapid economic growth, as evidenced by the growth stories of the East Asian economies in the past and of China more recently. Only those economies that have the human capital to absorb global capital will benefit from globalization.

Manufacturing Needs

Modern manufacturing is the basis for any large modern economy. It requires skilled manpower and therefore the emphasis on education and training. Currently India does have a small but significant position in the skilled services sector of business process outsourcing and information technology enabled services. But the news there is that shortage of skilled manpower is becoming a reality.

The education sector urgently demands reform. What follows is a short list of needed reforms. For the purposes of this discussion, the sector can be partitioned into the primary (K-4), middle (5-7), secondary (8-12) and tertiary segments (post secondary). The tertiary segment can be further subdivided into professional, vocational and liberal education segments.

Liberalization

First and foremost is the liberalization of the system. The market has to be allowed to function by allowing for-profit firms to serve the sector. This will expand the supply. Market competition will ensure quality. Most of the entry will be in the tertiary segment (especially in the professional and vocational areas) because the returns on investment for a student is significant and short-term compared to primary and secondary education.

Second, the public spending on primary education has to be channeled properly. Public support of primary education – around 2 percent of GDP – is ineffectively and inefficiently spent on funding schools which don’t function. The problem is systemic and requires a radical rethinking of how to get the incentives right. This can be achieved by, instead of funding schools, funding the students. Primary education providers, whether public or private, will have to compete for students. The market, in effect, will bring about accountability by aligning incentives with performance.

Independent Regulatory Authority

Third, an independent “Education Regulatory Authority of India,” (ERAI) has to be created. Some markets – especially ones in which there are significant externalities and/or have monopoly characteristics – have to be regulated to ensure socially optimal outcomes. The ERAI would have the mandate to not merely allow, but to actually encourage, competition.

The ERAI should be sufficiently empowered to resist political interference and regulatory capture. One of the most important mandates of the ERAI will be to guarantee a level playing field for all entrants – private, public, foreign, domestic – and prevent any special interest group from capturing the market.

A critically important function of the ERAI will be the rating of all providers of education. This will help consumers make informed decisions and thus provide feedback to the market.

Credit Markets

Fourth, creation of a complete funding and credit market for education. Investment in primary education characteristically has long payback periods and high positive externalities. Publicly funding primary and secondary education – through grants – for those who cannot afford it is justified. Tertiary education, in contrast, has short payback periods and sufficient private return to investment that it can be funded by loans instead of grants. Mechanisms can be figured out which will ensure equality of opportunity at all levels and that no one is denied merely because of an inability to pay.

Widening Options

Fifth, policies that enlarge the set of options for post-secondary education. India’s growing economy needs a large number of people with a wide range of skills. To attain a proper mix of skilled people, vocational education has to be accorded appropriate attention. The number of vocational institutions has to go up. This can be achieved by the combined force of previously mentioned items: allowing free entry into the segment and creating credit markets where necessary.

Sixth, a commitment to achieving 90 percent literacy rate in three years. The main reason that India has failed to achieve this over the decades is not a lack of opportunity or resources; it is a failure of will, flawed execution and resources leaked through corruption. It is an end-to-end failure of objective and direction.

Reforms are Hard . . .

India’s future depends on an educated citizenry. Despite heavy expenditure in education over the decades, the rules of the game have been a significant barrier to Indians gaining an education. The persistence of a dysfunctional system can only be explained by the fact that it works for the benefits of those who control the system and not for the larger social good. Reforms will therefore be immensely difficult because powerful vested interests will block them. To counter this, the already educated public has to take up the cause on behalf of those who desperately need a functioning education system.

We have a problem to solve. The solution has to begin with the recognition that our past policies – however well-meaning they may have been – have failed to produce the stated results. Evaluating what has not worked and why is a necessary first step in the most critically urgent task of reforming the educational system.

...But Must Be Done

The consequences of not solving this problem of education are too horrifying to contemplate. It is impossible for a significant portion of humanity to face the 21st century without education in a globalized hyper-competitive world. The choice is stark: either solve this problem or be forever relegated to being a Third World economy. There are no other options.