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Indian Private Education Industry An Analysis Economics Essay

Abstract

Private higher education in India has been booming since last decade. The education market in India is worth $40 billion and is increasing at a compounded rate of 16% annually (Technopak, CLSA, FICCI report). New entrepreneurs are rushing into this sector and old ones are expanding. But in this increasing race to acquire profit, what is not focused upon is the deteriorating level of education. Most of the private education players lack efficiency and effectiveness. According to Nasscom studies, India still produces a large number of engineers (about 4, 00,000 annually) but only one out of 4 is employable, rest last technical knowhow. This is because of the poor quality of education provided by private education providers. This paper would study the various concepts of economics of higher education, present higher education system in India and effect of entry of foreign university in India. At last some changes in government regulation are suggested to increase autonomy of private education providers.

Keywords: entrepreneurs, efficiency, effectiveness, regulation.

INTRODUCTION

Till a few decades ago, Indian universities ranked amongst the world’s topmost education institutes, but now it’s not the case. Quality and level of education in India is continuously deteriorating. According to Kaushik Basu,” this is unfortunate since India has three advantages, Its reputation in science and technology, its proficiency in English language, and finally the cost of living which is very low in India”. This is probably because of the unorganized education market prevailing in India. There is still need of about 1500 universities to provide higher education(National knowledge Commission report, 2009) for which public expenditure is not sufficient. To cater for this need of quality of higher education there is urgent need to allow private foreign universities in India.

This paper is categorized into four sections. First one would explain some of economics concepts related to education, second part would focus on current private education market existing in India. Next section would analyze the effect the entry of foreign private universities may have on Indian private market, and last one would deals with some policy related issue suggesting to provide more autonomy to private education institutes.

a. Economics concept of Education

Rate of return2: Human capital theory (Theodore Schultz (1961) and Gary Becker (1962)) views students’ decisions to attend college as investments in higher education. The human capital models have a strong explanatory power to explain how rate of return effects individual decision to invest in education. It is evident that education is an important and worthwhile investment for a large proportion of people but this does not means that education is ever and always a good investment. Some individual may make poor investment in their education, particularly when the opportunity costs to education, such as unskilled wages or other investments fluctuate. For example, research has shown that the likelihood that a student will invest in college is positively related to the earnings differential between college and high school graduates Using the present-value approach, a student would view an investment in higher education as profitable when the present discounted value (PDV) of the benefits of college are more than present spending on higher education.

Fig1.

*Source: NSSO (1998). p. A117.

Efficiency: the efficiency is related to detecting situation in which specific policies or institutional methods will produce net benefit for society. So if a particular way of using a given quantity of resources can produce higher value of output than another then it is more efficient as it produce more value to society. Efficiency is of two types: Productive efficiency and allocative efficiency.

2 Michael B. Paulsen and Robert K. Toutkoushian, Economic Models and Policy Analysis in Higher

Education: A Diagrammatic Exposition, pg 20-25

Productive efficiency: it is the maximum possible educational output from a given quantity of resources. If a university is producing less than the maximum feasible educational output then it has a degree of inefficiency. Productive efficiency of university is difficult to define and measure in practice because universities produces a variety of outputs, some measurable like examination result and some intangible like quality and value of education.

Allocative efficiency: this takes into account consumers’ valuation of goods and services. A system is said to be allocatively efficient if with a given amount and distribution of resources, it produces a combination of goods and services which consumers value most.

Effectiveness: An organization is effective to the extent that it achieves its objectives without taking into account of the cost of resources used. A college is effective is the performance of its students exceeds that which would be predicted on basis of students prior attending the college.

If a university is both effective and efficient it provides value for money. In absence of competition from other private educators, degree of inefficiency increases both allocative (charging prices above the marginal cost of production or not responding to consumers preferences) and productive inefficiency(producing less than the maximum amount of output from given resources). This leads to managers of private universities to pursue their interests in having higher profits rather than pursuing interest of students. Therefore high competition from other private universities is very important for universities to run efficiently and effectively.

Higher education financing3:

3 Bruce Chapman(2006) in his research paper Income contingent loans for higher education international reforms, from handbook of the economics of education, Vol2, Pg1435-1450 proposed this model to study concepts of financing higher education

Let’s assume that in case of no market distortion, education is priced at P=M-E, where P is price of education, M is marginal cost of producing good x which is cost of education in this case, and E is marginal value of externalities(reduced criminal activity, more informed public debates etc) associated with production or consumption.

As we see in above fig. marginal benefit curves slopes downward since the higher the number of students getting education, lower would be their wages. The distance between social and private benefit curves reflects the value of externalities, which we assume not to depend on enrolment level. The marginal private cost curve is shown for a zero-fee regime and slopes upward as number of enrolment increases supply decreases which would increase cost of education. The difference between marginal private and marginal social cost curves reflects the extent of subsidy implicit in a no-fee regime.

At q1, overinvestment in higher education takes place since it is assumes that there is no tuition fee, subsidized. But if we assume that there is no subsidy, then all cost is paid by student(full-fee regime), then the marginal social cost and marginal private benefit would be identical which would lead in underinvestment of higher education(q2 case). Thus the optimum fee is BC, and rest should be subsidized.

Public expenditure on Higher Education in India:

India has developed one of the largest system of Higher Education in the world with over 230 universities and 6500 vocational colleges catering to about 10 million students (Asha Gupta(2008)). Most of these are publicly funded although some may be privately run. The financing of higher education, however, is often reprioritized due to competing demands for budgetary funds from primary and secondary education sectors.

Public expenditure on education has been very small and has decreased since 1990’s. As a proportion of GNP it has decreased from 4% to 3.6% in 20014. Higher education suffered more severely in terms of public subsidies. Public expenditure per student declined by nearly 25% in less than a decade. India ranks 83rd in world in terms of the Public expenditure on education in terms of percentage to GDP.

Resource crunch in higher education is being felt in a serious way. Other sources of

financing besides the government have to be developed so that the massive expenditure required to expand, improve and bring it to world standards could be carried out. With an expanding middle class and globalization this is possible provided innovative policies are formulated and implemented.

4 A Chandrashekaran, Contribution of public expenditure on education to economic growth, an assessment, Eonomic of health and education Pg331.

Table 1: Public Expenditure on Higher Education in India

YEAR

Expenditure on Education in terms of % of GDP

Expenditure on Higher Education in terms of % of total Expenditure on Education

Expenditure on Higher Education as % of GDP

1991-92

3.44

9.78

0.41

1992-93

3.78

10.79

0.40

1993-94

3.68

10.97

0.39

1994-95

3.61

10.81

0.37

1995-96

3.60

10.14

0.35

1996-97

3.57

9.77

0.35

1997-98

3.53

10.01

0.38

1998-99

3.85

9.93

0.46

1999-00 (R)

4.37

10.63

0.48

2000-01 (B)

3.91

12.14

0.60

2001-02 (B)

4.18

7.52

0.43

Source: Analysis of Budget Expenditure (various issues)

b. Indian higher education Industry

The growth of higher education in India has been phenomenal. Starting with 1950-51, there were only 263,000 students in all disciplines in 750 colleges affiliated to 30 universities. This has grown by 2005 to 11 million students in 17,000 Degree colleges affiliated to 230 universities and non-affiliated university-level institutions(Asha Gupta,(2008)). In addition, there are about 10 million students in over 6500 in vocational institutions. The enrolment is growing at the rate of 5.1 per cent per year. However, of the Degree students only 5 per cent are enrolled into engineering courses, while an overall 20 per cent in sciences. The demand for professional courses is growing rapidly.

The private sector has been playing an increasingly vital and influential role in field of education in India over the past few years. Private educators have been enormously increasing since last decade. In fact, over 50% of educational institutes in India are privately owned. In US, private sector share is just 32% and in China its 25%. As an industry, private educational institutes were worth $40 billion in 2008 and 16% is the compounded rate (Business today, Sept20, 2009, pg 40) it is projected to grow at. It means its investment will grow to $70 billion by 2013 and $115 billion by 2018 from a demand growth perspective, if supply increases at same pace.

The education industry can be categories into four major subparts. They are Schooling, Higher education, vocational and training, ancillary segments. Some major players of India’s education industry are mentioned below5:

Amity University

Established 1991, Revenue: Rs 600 crore, Fee : Rs 2.4 lakh to Rs 10 lakh, Student strength: 60000

VIT university

Established 1984, Revenue: Rs 500 crore, Fee: Rs 30,000 – 1.55 lakh, Student strength: 15,000

ICFAI

Established 1984, Revenue: Rs700 crore, Fee : Rs 6 lakh to Rs 9.5 lakh, Student strength: 12,000

Manipal university

Established 1953, Revenue: Rs 800 crore, Fee : around Rs 2.5 lakh , Student strength:18,000

Problems with Indian Education Industry:

Discrepancy between Demand and supply of labor

Skill development is an important element of a nation’s knowledge initiative. There is a growing concern today that the education system is not fulfilling its role of building a pool of skilled and job ready manpower, resulting in a mismatch between the skill requirements of market and the skill base of the job seekers. It also said that 57% of India’s youth suffer from unemployment. In recent years, India economy has grown rapidly especially in service sector. This resulted in surge in demand for graduates in certain areas taking the higher education by surprise. Unable to meet this demand, higher education sector received a lot of criticism. Ironically these shortages were accompanied with rising graduate unemployment and underemployment.

Quality Manpower

The total addressable global offshoring market is approximately US 300 billion dollars, of which US 110 billion dollars will be offshored by 2010(Sanat Kaul(2006),. Indian has potential to capture 50% of this market. This would generate direct employment for about 2.3 million people and indirect employment for about 6.5 million people. However, high quality manpower would be required for such jobs. But quality of higher education is low and because of which only 25 percent of Indian engineers, 15 percent of its finance and accounting professionals and 10 percent of Indian professionals with general degrees are suitable to work for multinational companies (McKinsey-NASSCOM study).

5 the details of private universities revenue, fee, student strength is taken from article by Vivan Mehra and Deepak G. Pawar from Business today, Sept20, 2009, pg 40- 50

Research in India

According to a study measuring research output from different countries published by Thomson Reuters, during the period 1st January 1999-31st October 2008, China was in fifth place and India in twelth place. Further, the study indicated that China jumped from 1.5% of worlds share in 1988-1993 to 6.2% in 1999-2008 whereas India limped from 2.5% to 2.6%.

The current gross enrolment ratio(GER) for higher education of the age group enrolled in a higher education institute is 10-11 percent(Vijendra Sharma(2007)), which is much lower than the 25% for the many other developing countries. Moreover, we have also suggested reforms aimed at the regulatory structures in tertiary education and a move to create a new paradigm of governance which will encourage openness, transparency and remove cumbersome barriers blocking the entry of the institution of higher education.

Fertile market

India provides a big market and playing field for private initiatives at both the national and international levels. It is very rich in human resources, in terms of quantity as well as quality. About 55% of its population is below the age of 30, and it has a bourgeoning middle class comprised of about 350 million people that is willing to invest in quality higher education (Pillai, 2003). Every year so many Indian students join private colleges, whether recognized and unrecognized, primarily because most of them are either unable to find a place in reputable public universities or are unable to get into the subject of their choice due to very tough and highly competitive India-wide entrance exams. Private initiatives in higher education are not only feasible, but also desirable, if India is to meet the target of 20% of its youth in the age group of 17-23, as against 7.2% today

Table 3: International Comparisons in Higher Education Sale and services

Country

Enrolment in Higher Education in terms of %

Collection from tuition and other fees

Government subsidies

Private donations and others

Income from endowment

provided by higher education institutions

USA

92

39.6

19.2

13.3

5.3

22.6

(1995)

(1990)

(1990)

(1990)

(1990)

(1990)

Canada

88

14.2

65.2

6.8

4.8

8.0

(1995)

(1993)

(1993)

(1993)

(1993)

(1993)

Japan

45

70.4

13.0

6.5

10.0

0.0

(2002)*

(1987)

(1987)

(1987)

(1987)

(1987)

S. Korea

68

82.0

3.0

10.0

5.0

0.0

(1997)

(1988)

(1988)

(1988)

(1988)

(1988)

India

7.2

12.4

80.5

6.5

0.43

0.0

(2002)**

(1987)

(1987)

(1987)

(1987)

(1987)

Source: UNESCO (1999), *Altbach and Ogawa (2002), **Gupta (2004)

The financial situation.

 Higher education in India has low price elasticity, hence private funding of higher education is not only more efficient, but also more equitable. Raising the fees will not lead to equity; rather it will further decrease the enrolment. The public investment in higher education is just about 0.37 percent of the GDP and is much below the required levels.

Loss of Forex

Currently, India exports nearly hundred thousand students abroad for higher education. But it imports only 30,000 students from foreign countries. Most of these students come through Indian Council of Cultural Relations (ICCR) scholarships. As a result, India loses nearly Rs 45,000 crore every year(A Prabaharan, Business Standard, 24 January 2006). By encouraging foreign private education universities to take-off, India can increase its foreign exchange from education immensely.

c. Impact of Foreign universities entering Indian education market

Entry of foreign universities into Indian Private Education market would lead to an increase in competition in the Indian education industry. Efficiency of Indian private universities is much lower than foreign universities. So entry of foreign universities would lead to increase in efficiency of education system. It would also cause social welfare to increase because of the high quality of education provided by world renowned private universities and more number of seats available for students affecting the gross enrolment rate of higher education.

Government is spending about .5% of GDP in to improve quality of higher education system in India. Advent of foreign universities would give an opportunity for government to invest more in primary education which should be the main thrust area for improvement. Also it would decrease the loss in forex as discussed earlier in the paper. Also with their sound financial backup they will be more capable of investing in research.

But there are some uncertainties also regarding entry of foreign universities. Into Indian education market. Advent of these universities may increase the gulf between the poor and rich people because rich people would be more capable of affording costlier education. Also loss of culture can happen if the foreign university focuses only on profit seeking and ignore cultural importance of India. Therefore proper rules and regulation should be laid down by government so that the foreign universities don’t focus only o profit seeking take support of dishonest advertizing to promote their profits.

d. Rules an Regulation

The present regulations of central government are not efficient enough to increase welfare of society. The central government has exclusive legislative powers for coordinating and determining standards in institutes. Apex body such as the University Grant Commission (UGC), the medical council of India, AICTE and others determine standards of education. These bodies are indirectly controlled by ministry of higher education. Private players are regulated a lot, not providing them enough flexibility to work in an efficient way. . Too often, government regulation appears designed to discourage private investment without any commensurate gain in the quality of education. If the government want to increase quality and efficiency of Indian higher education system, it have to make some changes in its policies which are suggested below (John Fielden and Norman Larocque(2008)).

Profit seeking universities and higher education institute should be allowed to operate but their profit should be checked

Private institute and HEI should be allowed to set their own tuition fees

Entry of private institutions in market should be scrutinized based on their objective and motives. Also the procedure of regulating them should be transparent.

Provide a sound policy framework for the operation of the private education sector.

Provide parents and students with Information to help them select quality private education.

Establish quality assurance (QA) /monitoring processes

Conclusion

As we see above, Indian private education industry has been booming but the quality of education, its efficiency, effectiveness is very low. This is because private education players mainly focus to maximize their profits. With the increasing demand of higher education and government constraint to invest in it(as we see from reducing public expenditure for higher education) there is an urgent need for allowing foreign well-known universities to set up their branches in India and increase quality of education. We have seen that there entry would make market more competitive and efficient thus increasing social welfare of people.

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