Atanu Dey On India's Development

Imagine No Reservations

Shortages and Nehruvian socialism go hand in hand. Just take scooters, for instance. You could not just take scooters some years ago, actually, thanks to the quota permit license control raj. You had to wait for years before you could lay your hands on one. You could jump the queue if you paid with “hard currency” or paid a premium (black money) to someone who had the foresight to book one years in advance with a view to capture some of the rent that arises out of shortages.

The situation today would have been unthinkable then. Now dealers of two-wheelers practically drag you off the street, give you a cold drink, and by the time you have finished it, they have arranged financing and you roll out the door on your new bike clutching your free gift of a toaster oven. Then your choice was severely limited to four or five models; now a reasonable estimate must be a hundred different makes and models of two-wheelers.

There is no shortage of examples of shortages, some of which persist till date. One plausible answer to why these artificial shortages were engineered is rent seeking by those who were in charge of handing out the licenses and quotas. Where the government was the monopoly provider (as in air and rail transportation, telephone services, etc), shoddy quality, inadequate quantity, high prices, high costs, commercial losses, and institutional corruption was the norm. In those instances where private sector providers were allowed, the entry was limited and rent extracted by introducing competition for the market. When firms have to compete for the market, competition within the market is limited and results predictably in low quality, high prices, and shortages.

Here is a thumb rule to figure out if the government is involved in a particular endeavor. Is it characterized by poor quality, shortages, high costs and prices, and corruption? If yes, then the government is involved; if no, then the government is most likely not involved in that business. Let’s apply the rule to electrical power since I am sitting here on Sunday afternoon with no grid power, a regular feature of daily life in Pune. The backup generator is on.

Poor quality: check
Severe shortage: check
High price: check
Corruption (“T&D losses”): check
Null hypothesis: government not involved
Empirical evidence: null hypothesis rejected

I leave it to the interested reader to apply the rule to other instances and test it. The cumulative effect of government involvement in all those sectors gave the Indian economy what I call the “Nehru rate of growth” with a long run annual average of 3 percent or so. India’s poor economic performance—and the resulting poverty—is due to poor economic policies. India is poor out of choice.

For now, I will move on to education in general, and in particular the matter of reservations in higher education, a matter we have visited before here. By the 12th standard, the drop out rate reaches an astounding 94 percent. Of those who finally graduate out of college, only around 15 percent (or, one percent of the those who enter grade one) are employable, leading to a severe shortage of qualified college graduates. The sheer economic waste of human resource is the greatest scandal that very few people pay any attention to.

The fundamental problem with the Indian economy is that the education system is one of the most flawed systems in the country. If there is one sector which is in dire need of reform, it is that education system. The most urgently required reform is to get the government out of it—lock, stock, and barrel. The recent move by the government to further increase quotas in the so-called elite institutions with a view to social justice is akin to rearranging the deck chairs on the Titanic. No, I take that back: it is akin to scuttling the lifeboats even as the ship is sinking.

I have heard the claim that the Indian education system must be wonderful because the IITs produce so many wonderfully successful NRIs (non-resident Indians), especially in the US. They bolster their argument with the specious reasoning that it is harder to gain admission into IITs than into Ivy league schools, and that Narayana Murthy’s son had to use an Ivy league school as a safety school.

Sure it is harder to get into the IITs than into the top American schools. That does not mean that the IITs are in any way better than those American schools. It is a Herculean task to get into a Mumbai local during commute hours, compared to which using the Paris Metro is a piece of cake. Congestion is not an indicator of quality. When supply is severely limited relative to demand, there will be a mad scramble to get some.

On average, fewer than two out of every one hundred who appear for the entrance exam for IITs get admission. If you were to choose the top two percent of any population, the average quality of that group will be a few sigmas higher than the population average. The IITs turn out good students because those who get in are good to begin with. Then for four years, these way-above average kids compete fiercely among themselves for grades. Finally, from this bunch of super-achievers, those with the highest grades and potential are snapped up by the best American universities. By the time these graduate out of the American universities, they are the crème de la crème who have self-selected themselves for intelligence, drive, ambition, and vision. We read about them as the Silicon Valley millionaires and billionaires, and pat ourselves on the back for having a wonderful educational system.

That is most definitely not so. The dysfunctional Indian education system is the saddest and costliest example of governmental ineptitude and malfeasance. The solution to the problem of the Indian educational system has to have at its core getting the government to let go of its chokehold on the system.

The question then is: what exactly is the problem with the government? My answer is that it is a mentality of scarcity and poverty. It does not believe (and here I am guilty of anthropomorphism) in abundance. It treats the citizens as if they are incompetent children who will not be able to work out solutions for themselves without the patronizing paternalism of the socialistic control of every aspect of economy.

There is one apparent paradox: if the government does not allow economic freedom, why does it allow political freedom? Would it not make more sense to restrict the latter and relax the former? I believe that the paradox is solved by the realization that most of India is abjectly poor and illiterate. Lack of economic freedom over generations cause poverty and that leads to illiteracy as well. Poor, illiterate people cannot meaningfully use their political freedom. Indeed, it is easy to politically manipulate very poor illiterate poor people for electoral gains. Promise them free electricity, free TVs, free land, and they will vote you into power. I am not making this up since I am neither that cynical nor that imaginative.

Is there no role for the government in the education sector? Yes, there is, but it is severely restricted to three functions:

  • First, funding (but not the provisioning) of universal education up to high school level
  • Second, providing an independent regulatory authority for the higher education sector so that private firms can compete fairly on a level playing field
  • Third, providing educational loan guarantees to banks

Sufficiently poor people cannot afford to send their children to school. The total cost to them includes not only the direct cost of going to school but also the opportunity cost of the lost earnings of the children. But since the total life-time benefits of a high school education must exceed the total cost of that education, there is a role for the government to subsidize the education of the sufficiently poor. But the government should not run primary schools. It should leave that to the competitive private sector. Give vouchers to the poor which they can use to pay for the private schools. This is not rocket science and pretty much all possible problems can be anticipated and proper mechanisms designed to fix them. (I will be happy to do this separately.)

The role of the government in higher education is simply to ensure that private providers of education compete fairly. The government must empower an independent regulatory body. Independence is important so that politically motivated interference into higher education is minimized.

There must be no subsidies for higher education. Higher education, for all intents and purposes from the point of view of an individual, is a private good. That is, the private benefits of higher education exceed the private costs. Sure higher education also has positive externalities (and therefore has public good characteristics), but that externality does not have to be internalized by subsidizing higher education for those who are rich enough to afford it.

But what about those who cannot afford higher education even though they are qualified for it? The answer is that they have to be given loans by banks and these loans have to be guaranteed by the government. The basic point is simple: the credit constraint that the poor face with regard to higher education can be released with little effort. This the government must do and if done competently, it will take only one generation for the every poor family to become non-poor.

Let’s see how this would play out in the case of a hypothetical “sufficiently poor” family. Abhi and Anu’s parents are daily wage earners who need the Rs 10 each kid earns every day to keep the family going. So sending them to school where the tuition fees and other school related expenses are Rs 400 per month per child is out of the question. Their total cost of sending a child to school is Rs 400 plus the foregone earnings of Rs 300 per month.

So the government gives vouchers that Abhi and Anu use to pay for the privately run school in their neighborhood that they attend. And on top of that, the government gives the parents Rs 600 every month as long as the kids continue in school. Net cost to the family: zero.

All the way to finishing high school, Abhi and Anu continue to receive free schooling and the parents are given an incentive to continue to keep the kids in school. By the time they finish 12th grade, both Abhi and Anu are as properly schooled as any other kid from a middle class family who are not poor. As it happens, Anu is the bright one and she wants to go to engineering school. She appears for the entrance exam and clears it. It is not an entrance exam to select only a small percentage of a huge pool of qualified students. It just ensures that the student has the required motivation and skills to study engineering. She is bright and is well prepared and she gets in. That is not surprising because about 75 percent of those who apply do get to study their subject of choice. Her brother, Abhi, is into medicine. Same story as his sister: a simple entrance exam to test for eligibility and he is in.

But then they are still poor. So they go to one of the several banks and show proof their acceptance and the bank gives them the loan that they need to go to college. When they graduate from their professional courses, they will pay off the loans with interest. Their children will not be requiring support from the government at all. Only one generation needs help.

Not just that, no one is even remotely interested in knowing the caste of anybody. If you are qualified, you get to go to college. If you are poor, and have admission, you get a loan.

Imagine there is no reservation; no one cares what caste you are; no one denied a chance to study and learn because of lack of money. (Sung to the tune of John Lennon’s “Imagine.”)

Imagine if I stopped here for now. And carry on some days later. Wouldn’t that be wonderful?

  • Pardeshi

    Atanu,
    I totally agree with your analysis of IIT admissions and the commuter train analogy. Though I don’t feel any grudge against the engineers from these institutes, I always have interrogations about the real entrepreneurs from IITs who bring wealth and development to India except perhaps the IT sector.What the billionaires contribute to their Alma Mater doesn’t make any difference.
    You have a workable idea of providing high school eduaction.As the financial resources by tax payer’s money are limited,
    do you think the redistribution of aid to the needy poor would please the urban middle class ?
    Would the members of the Independent regulatory authority be govt employees ?

    If I am not mistaken you also imply that one has to pay for the university education including IITs.
    To implement your model you need the accord of people of different social levels, and especial those who contribute more by taxes.

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  • http://pnarula.com Pankaj Narula

    Atanu,

    As always a great a post. BTW was choice of names Abhi and Anu for the kids a random one :D

    - Pankaj

  • http://bombatbengluru.blogspot.com/ Prasanna

    Agree with you that the educational sector tops the list of “sectors that need reform” (followed by power and infrastructure, no doubt) – and from where the government needs to get out of.

    But, I think you’re analysis of a daily wager earner – and the solution is simplistic and just wont work.

    Here’s why:
    1. Most daily wagers are illiterate. And consequently are – and will be – unaware of their rights until someone fights on their behalf/educates them of their rights – in every nook and corner of India.
    I dont think India has that many crusaders.

    2. Corruption. How much money does it really take to put out a certificate saying that someone actually earning crores a year as earning sayin 20K rupees? probably 10K rupees – lesser even, if you have the right influence.
    So what’s stopping those same corrupt bastards from doing the same – and misappropriating, and denying funds for the poor families? little, very little. After all the law enforcers are their contemporaries – and colleagues and pals at times.

    So your solution wont work, until we revamp our adult literacy programs.

    What we need is a serious focus on Adults being literate – and educated enough to know, and ask for their rights. And only in such a case can we then think of your plan. Otherwise just more taxpayer money down the drain.

  • http://akaroundpeg.blogspot.com/ AkaRoundPeg

    Atanu, Good post. I liked the allegory of the Mumbai local versus the Paris Metro!

    Prasanna, regarding the point on corruption, its more likely that a family will take the ‘voucher’ and the promised Rs 600 and then NOT send the children to school.

    Its unlikely that a family that earns well will want to send their children to a Govt school. The average Indian values education highly – the problem is he does not have access to quality and meaningful education that will help him earn a living.

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  • http://kamlabhatt.wordpress.com Kamla

    Atanu: Nice post. I agree with your analogy that education must be treated as a private good.

    Yes, it would be nice to imagine a country without reservations. (I am sure we all have our share of stories about encountering reservations in schools and colleges.Yes, there is such a thing called reverse discrimination.)

    Great job analyzing the situation. I think the current involvement of the Government in education does not yield effective results. The government had a role to play in the initial years when the country was involved in nation-building etc etc.

    I agree with you about IIT. The IIT model does not represent the Indian education system as it currrently obtains. It is an outlier, if you will.

    But here is a problem…there are no neat or clean-cut solutions to manage this reservation issue (resolving it would be a Heruclean task). I believe you have indirectly hinted at it. Yes, you do offer the voucher solution, but I think it is difficult to come up with a comprehensive solution. (Remember when the voucher system was first introduced in Milwaukee county, WI, years ago and the challenges involved in implementing it?) In a country like India there is no neat formula that can be applied for various reasons: fragmented education system combined with the political forces that influence/color the policies in this area. The interesting trend is the increasingly fragmented education systems, where the faultlines are becoming rather well-defined. For instance, there is a trend now where private schools in India are charging about $15,000 to $30,000 a year…why that is almost on par with Philips Academy in Andover or other private schools in the US. Then there are private schools that regular middle-calss folks send their children where they pay $1,500 to $2,00 a year, and this does not include the capitation fee. There are so many examples of this fragmented education system…

    I believe you hit the nail on its head when you linked the education/reservation policy to the voting block/group. That is the nexus that needs to be addressed. Question is how do you resolve/handle this Gordian Knot?

    Kamla

  • http://www.dhwanit.org/jot dp

    A good hypothesis but somewhat lacking in a holistic solution (strictly my opinion!) to the problem. In utopian theory, your solution might work but its practicality is mired in a vicious cycle that needs to be broken. But where? And How?

    The argument that one generation is sufficient for a poor family to become non-poor sounds appealing, but it is only after a wide spread implementation of privatized education (as you mentioned) has taken place. How many years do you think that would take to go “critical” such that masses from around the country can benefit? Even if it is, say, five years from concept to completion do you think the vote-bank-eyeing politicians have the nerves to go for it? Ever since they land in power, half their thoughts are on how to retain power after five years and (I’m sure) a significant portion of the other half on how to “earn” during this tenure.

    Five years to privatized education may be attainable in Maharashtra, but would it be so in UP? How differently would Anu and Abhi fare if they stayed in a village in Bihar as opposed to a village in Karnataka? A generation’s worth of time in the latter might be sufficient to move up above the poverty line, I don’t know how many generations it would take were they from the former!

    Lastly, this comment is not meant to be critical of your post. Your ideas are quite good and your style of communicating in layman terms (for people like me) is impressive, but I see this unaddressed area… an area I can think of no solution to in the first place.

  • Vivek S

    thought provoking. good one !

  • http://www.musafiri.rediffblogs.com Laukik

    Nice one. Doable with sufficient political will. My apprehension is that the parents will take Rs.600 given by govt AND send abhi and anu to work to earn the extra Rs.600. This thinking is largely driven by getting reach NOW than waiting for next generation to be NOT POOR. How do we solve that? Do we leave to a poor’s conscience? Should I, as a tax payer trust my money to the conscience of a alcoholic, uneducated man with 6 children?

  • http://bombatbengluru.blogspot.com/ Prasanna

    Round Peg,

    I was referring to private schools, not the farce that the government runs.

  • Yogesh

    Atanu…I’m a new comer..and am really impressed by the thoughts that are exchanged out here…not just by you…but other as well.

    I had one comment, how can we prevent Anu or Abhi’s parents from ‘generating’ multiple Anu’s & Abhi’s (real or virtual) to generate a living out of the vouchers?

    After all…we Indian’s are the best at beating the system (I guess that’s why Indian’s are hot in computer systems)

  • Prof. Shashi Panikar

    This is a wonderful piece.Fully agree with the issues raised.Look at Singapore,a tiny state,but a truly smart one!Before opening up of the education sector in other countries,the Singaporians are turning their state in to a’Global School House. They have invited the best in the west to open campuses in Sing….We are talking of reservations to chase them away.Our politicians always wanted to keep this country poor.The political class prosper only in an economy where artificial scarcities are the common norm.
    Everyone knows Arjun Sing’s credentials.He has been very faithfully licking the as….. of all congress leaders.He raised the issue now hoping that he can sit on the P.M.’s chair by becoming the ‘savior ‘of all poor and down-trodden! I think his dreams will remain as it is. the unfortunate part is that our P.M. has no back bone to call a spade a spade.He is too afraid of ‘Madame’.India has enough resources to setup seventy I.I.T.s .

  • http://sluggard.rediffblogs.com Shreyas

    Brilliant Piece Atanu! The subsidies higher education attracts is ridiculous when the government cares a dime about primary education. Despite all its boasting about the crores put in Sarvasikshan Abhiyan, it has just resulted in notional increases in enrolment, without translating into quality education. Every government, with unfailing regularity, seems to think spending money is the answer to all problems. And most of the general public is taken by it all too.

    I would definitely feel a lot less enraged if my tax money ( and of million others) is used to subsidize and educate crores of underprivileged children, instead of unnecessarily funding the higher education needs of a blessed few.

  • Abhijat

    Atanu,

    Can’t help feeling that the solution is idealist, that translating it into a pragmatic framework still remains. Will comment in a little more detail later. Basic criticism: the incentives of the politician do not seem to have been considered. But later on that, and then if time and space permitting.

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  • indian mediocrity

    India looks good only due to a percentile/percentile of a percentile has done well in the US. This figure looks good as the base of all this percentiles is one billion. They all worked, fought, studied,struggled and made it BIG.

    With the congress and like powers in governance, Stupid Trolls, Other Bashed-up Classics -by vision 2020, the percentage begging for will touch 90%. In 2050, there will be a mound of shit, as one has to just check out what the express highways of bombay are reserved for 5am – 8am.

    Once BPO / IT goes to Vietnam and China,… ???

    Lost a deal from a british firm in IT, certain regional engineering types in chequed greed shirts, blue trousers, red and yellow loud ties smoking cigarettes, and singing regional songs got the client worked up. Maybe we are too good for our own selves. Maybe with time and numbers, our way of living will be what others could aspire for.

    Keep it up Sonia-ji / sardarjee / and jo-bhi-dekhna-karna hai jee.

  • Calculus

    Atanu , I liked your analogies. The solutions provided are utopian and perhaps not work out fine .
    We always see political parties opposing each other on trivial issues . But did we see even one political issue happenning with this one . An educated and power hungry politician has made the correct guess..that no political party will oppose for it would reduce their own vote banks . Everyone knows the mathematics , has done the calculations and knows the result , but will behave as a toddler who knows not what he has done after breaking the costliest vase . The educated urban middle class is still in its siesta , and will not wake up until the house is on fire , and everybody is happy as they were in Soviet Union few years back . And guess what , after 50% reservations , it will be even tougher to get in to IIT’s and so the level of Indian Education will rise and just by this political gimmick we will be better than Stanford / MIT . Its simpler than getting a pizza . Dont know which party came or went but the poorest distribution of wealth has always gone to education and defence [By defence I dont mean the Republic Day parade where our trophies are shown , but inside , right inside India , we know how poor our police are.]But thats irrelevent I suppose . Keep the votebank happy by reservation , keep the common [ read stupid ] man happy by less tax , and make more people fight for seats , if successful , he fits into the political agenda , if he fails he fits into the business agenda …..kudos , kudos and kudos Mr Singh .

  • http://everydayentrepreneurs.blogspot.com Intrepid

    I second the fact that highly ranked colleges do not guarantee high quality of education. Although, I didn’t go to an IIT, I did get admitted to the #1 engineering college in the state, and after three years of questionably mediocre labs, professors and facilities, I quit. In that entire time, I completely failed to understand why this college was so highly ranked. It had become a self-serving cycle – the highest ranked students chose this college, and the best companies chose these students. The college itself, played very less role, other than to live off a (probable) legacy of having been a good institution once.

    The fact that without a formal engineering degree I (self-admittedly) still managed to well, points to the very necessary need for emphasis on vocational education, rather than the standard textbook education, where all the focus currently tends to be.

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  • Kartikey Sehgal

    Atanu,
    1.How do Abhi and Anu pay back the loans to the banks after graduation? Could you also elaborate on this aspect?

    2.What if Anu wants to learn singing instead of engineering and Abhi wants to be a journalist? How does your story read then?

    Looking forward to your reply.

    Kartikey

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  • http://www.jantaraj.com/sapankumar/defaultpet.asp?pid=106 Karan kapoor

    Hi,
    How are you doing?

    I believe, education acts as a refuge in adversity; it empowers the people and is a tool, which breaks the chains that resist a nation’s development. Don’t you? Well, quite unpleasant to know but the fact is that 30% of the world’s illiterates come from our country, India. Now, undoubtedly this is the biggest weakness in the development of our country.

    Illiteracy has proven itself as a major handicap here and everywhere and as you know lack of education has many disadvantages in every aspect of it. Most of the voters here (in India) are illiterate too and so the nation often ends up with a government being made out of a mistake. Evidently, illiteracy dominates India.

    I would appeal to all to help eradicate illiteracy as it sets big drawbacks to our society and will pull our country back; no matter how hard the we try. Connect with me to kill illiteracy in India to make it a 100% literate country at http://www.jantaraj.com/sapankumar/defaultpet.asp?pid=106

    Many people here live below the poverty line and thus can’t afford to educate their children. And as always, the funds raised by our Government for the same, exhausts’ before reaching the right place and people. Well, as usual it finds its way into some corrupts’ pockets.

    I think, education up to standard X must be made mandatory by the government and particularly free education must be provided to the poor. Now, we all know, the future of a nation is molded and chiseled by its youth and the student of today is the future of tomorrow. Therefore, to secure a bright future for India – The youth of today must be empowered by giving the essential education – only then will they be able to create a secular, civilized and developed India in the future.

    Thanks & Regards,
    Karan K.

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  • surekha

    I am not in favour of reservation , i think it divides society in two parts & with reservation India can not stand in the world as it could be otherwise.

  • Rashmi Sharma

    Please read these comments to know how important it is to stop the reservations and get rid of the caste system.

    ”We are the only nation in the world, where people fight to be called backward rather than forward.”
    - Narayan Murthy

    “India is ready to discuss racism as long as it is in other countries, but not caste in its own backyard.”
    - Dipankar Gupta, professor of sociology , J.N.U. New Delhi

    ”In place of appealing for removal and abolishing this old curse on India, all the Indians have been shamelessly accepting the caste system imposed upon by their Religion. People are fighting against the reservation quota. Is there a single sensible person who wants to fight against the caste system which is the main reason for the quota ? ”
    - Damien Rebello

    Caste conscious lunatics and live in this lunatic asylum, of course against our will, and ‘blessed’ with an eternal curse of associating with the insane. The Indian caste system is pointedly diabolical. It is a real curse.
    - Swami Vivekananda

    Year 2006 : Indian newspapers carry daily stories of atrocities against Dalits or young couples being killed, sometimes by their own families, for daring to fall in love with someone from another caste. The caste based communities in Bihar and Uttar Pradesh have militants to terminate people belonging to the other caste. In spite of all this the Indians think that they are making progress.
    - from DailyNews U.K.

    Nobody is saying that the caste system should be praised, for it has indeed degenerated India’s self-pride.
    - Francois Gautier

    Without question, caste system is the curse for India, and it has humiliated millions through the ages. Caste is India’s sorrow, the apartheid that makes Indians hang their heads in shame. Caste serves as the prime reason for conversions even today.
    - Barbara Crossette

    So you see to what extent this disgraceful caste system has taken us? Our political parties trade on it, our governments use it, our police connive at it. There is a nexus of criminals, police and government, as everybody knows, and we suffer.
    - Shri Parthasarathi

    India’s real curse lies in the fact that, 57 years after Independence, people continue not only to face daily injustices, but they can be murdered, raped and viciously humiliated merely because they have tried to break out of the caste trap to assert their rights as equal beings.
    - (Human Rights Report)

  • kanis

    Vouchers will NOT solve the problem of a lack of teachers.

    The major reason why students drop out is NOT because they cannot go to school it is because of a lack of teachers. Competition amongst private schools is a terrible idea because there will exist no “choice” as such for a poor family living in a slum. Competition being efficient is built on the idea that people can choose; but it needs to be explored whether people really can choose and whether this choice is necessarily the best one.

    Can you expect uneducated low skill individuals without any exposure or understanding of the education that their kids will recieve being able to make a good choice?

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