India’s higher education must reflect the dynamics of its economy and the diversity of the needed human capital for powering its growth in an increasingly competitive globalized world. The circular causation between an effective higher education sector and the economic growth makes the sector especially amenable to positive feedback effects – once the process is initiated, the system automatically builds up capacity to keep the growth of the sector to match the growth of the economy. Policy choices dictate the initial conditions and kick-starting of this virtuous process.
India’s population is sufficiently large that it can create the wide range of human resources it needs. This means that a portfolio of institutions of higher education must be allowed to flourish. For example, driving leading-edge growth requires institutions which do path-breaking R&D. These have to be publicly funded since the products are public goods that are factors in long-run growth. Catch-up growth requires the institutional capacity for supplying large number of engineers, scientists and managers. These institutions must be competitive to ensure quality and be privately funded to reflect the fact that private returns to this kind of education sufficiently compensates for the costs.
A brief formulation of one set of policies for India’s higher education could include the following components:
• Provide public funding only for those higher education activities such as R&D that have public goods characteristics and which would not be privately funded to the socially optimal degree.
• Remove all public support for those higher education activities the result of which have sufficient private returns to cover the costs. Thus undergraduate education must not be subsidized. Policy must, however, make loans available to qualified students who face credit constraints.
• Ensure equality of opportunity and access to higher education. This means that policy must allow the expansion of the supply of higher education in response to expressed needs and demands of the population. This directly implies, first, that the higher education sector must be liberalized to allow for-profit entities to supply to market demand. And second, that equal opportunity and increased access to secondary education is a precondition for equality of opportunity in higher education.
• The range of disciplines must match the range of skills needed and changing opportunities available in a dynamic economy. This implies that bureaucratic centrally planning of higher education which may have worked in the past cannot respond appropriately and effectively now. A competitive market-liberal system must be allowed to operate instead of central planning.
• Foreign direct investment must be allowed for the sector. Apart from capacity expansion, India would gain from the flow of expertise that accompanies FDI. This capacity expansion would not only stem the flow of Indian students going abroad for higher education at great expense (estimated annually to be of the order of $20 billion), it would be able to transform India into a destination of choice for foreign students.
In summary, capacity expansion in higher education and increasing the production of diverse human capital requires the sector to be liberalized so that private sector can participate in growing the human resources that are needed for economic growth. The increased capacity is needed for providing equality of access and opportunity for the tens of millions of Indians who are capable of being highly educated. Public funding must be directed only to those parts of the higher education sector that would not be funded privately.