Madhav Raghavan: Value versus legitimacy

Combining an ineffective regulator with adventurous producers and anxious consumers invariably causes conflict. The alcohol industry in India has always been an example. Now the higher education sector seems headed in the same direction. Conditions are just right for the consolidation of a parallel, unregulated and unofficial market for higher education, at least for technical subjects such as management.

The regulator in this case is the All India Council for Technical Education (AICTE). It grants approvals and maintains norms and standards that it sets. But these norms are now outmoded, and regulation has given way to a tangle of files, committees and other bureaucratic inevitabilities.

But the good news is that the adventurous spirit that now characterises Indian markets may yet cause reform where others have failed. What's new is that now in the education market "" comprising educational institutions, students and the potential employers of graduates "" all three parties are willing to share quality- and price-associated risks. The net effect is to create a dynamic alternative market which bypasses the regulatory environment altogether.

So there are now institutes, especially management ones, which function without AICTE approval (for instance, ISB). Students enrol in these institutes although they lack official sanction. And at the end of the chain, employers snap up the graduates, even though they may only hold diplomas. The AICTE "" and therefore regulation "" features nowhere.

The risk is not just of price and quality, but also of being declared illegitimate. Though each of the three parties ends up bearing only part of this risk, this is in sharp contrast to the more cautious environment of yesteryears when nobody undertook any risk and only official approval mattered.

There is then a clear shift in signalling "" where value now counts more than legitimacy. And this trend is catching on. In effect, the market is forcing the regulator to modernise itself. This is most welcome. Indeed, there is a lot to gain from a state of less regulation and more institutional freedom. For example, a dynamic private sector will facilitate the development of an education system that is more responsive to changing times. India's economic growth will continue to create new jobs and there will be a constant need for new and regularly updated educational programmes. The market is usually better placed to respond to these changes.

However, there are dangers in an unregulated market. At the very least, there must be some standardisation of degree requirements for the labour market to be effective.

Though initially employers may have tie-ups with unregulated institutions, future employers may not feel secure without being able to verify and compare the quality of education received, and may not hire such candidates. Appetites for risk are notably fickle, and a shift in the opposite direction is not out of the question. Moreover, standardisation will also help institutions set transparent admissions criteria.

Regulation is also crucial in the case of professional colleges, where sub-standard graduates can cause much harm. People need confidence in their doctors or lawyers, and a regulated, reputed degree helps. Anyway, Indian consumers are price sensitive and education is a politically sensitive subject, so institutions are unlikely to be left to their own devices. This is especially true given that student mobility and financial resources are still limited.

But though the need for regulation is not in doubt, market dynamism coupled with the highly bureaucratic system is certain to further a parallel unregulated market. This is counter-productive in the long run. Instead, incentives should be created for institutions to stay within the system. This will unify the market and eventually improve the regulator's reach and scope. But this can only be done by first relaxing control.