For India to emerge from being an impoverished country, some degree of sanity in policy makers must be an absolute precondition. The situation is so bad that one cannot read a paper without being hit in the gut with yet another insane policy being proposed. Take the matter of the Indian Institutes of Management (IIM) and what the Ministry of Human Resource Development (HRD) is proposing.
The ministry is proposing some changes to how the IIMs are funded and run. First the good news: the HRD proposes that all managements institutes have a common entrance exam. This is sensible and I have already written about why a common admissions test is a good idea.
Now for the bad news. Here is insanity #1: Deficit financing.
The IIMs used to get block grants from the central government. The biggest of the IIMs received around Rs 20 crores annually which went towards their expenses of about Rs 50 crores. Whatever was not spent was saved for future growth. Now in the new system, whatever an IIM saves will be deducted from future grants.
Anyone with even half a brain can immediately see that this bring perverse incentives into play. Will the institute work as hard at raising funding from external sources knowing that at the end, its hard work would not leave it any better off financially?
Trouble is that the IIMs are sitting on large savings, with IIM Ahmedabad topping the list at Rs 112 crores. The HRD wants none of the IIMs to have more than Rs 25 crores and to hand over the rest to the government.
Insanity #2: Reduction in fees.
The HRD is pushing for a reduction in fees to about Rs 15,000 from the current Rs 100,000 or so for a 2-year course. This is so insane that I don’t know where to begin dissecting it. It goes against all rational analysis. First, is the demand for an IIM education so low that the price has to be reduced? Not so, because already 130,000 candidates apply for the 12,000 seats.
Next, is the cost of an IIM education so low that the prices have to be aligned downwards from Rs 100,000 to Rs 15,000? I am sure that even at Rs 100,000 the price is below cost and hence the education is already being subsidized. Reducing the fees will definitely require an increase in the subsidy. Besides that, to keep costs down, quality of education will also suffer. And finally, it will lead to tremendous deadweight losses due to the distortions introduced by the subsidy.
So I have pointed out the problem with the HRD’s policy. Now I am obliged to give a sane solution to the whole mess. Here are my recommendations.
Recommendation #1: Have a common admissions test for all management schools in the country and make it revenue neutral.
Also, the fees for the test should be adjusted to be revenue neutral. For instance, currently the fee is Rs 1000. With about 130,000 examinees, the revenue is Rs 130 billion. After costs of administering the test of Rs 2 crores, there is a surplus of Rs 11 crores. This is currently divided among the IIMs. This scheme is regressive in that those who do not get selected (about 118,000 test takers) subsidize those who do get selected (about 12,000). This is blatantly unfair.
Recommendation #2: Increase fees to be more aligned to the fees for comparable schools around the world and provide student loans to all students who require it to pay for their IIM education. Tomorrow I will elaborate on why I am recommending this. Please stay tuned.