Rajat Kathuria: Don't replace the market

The government's intervention in higher education provided by private professional institutions is likely to take the form of regulating both fees and intake, that is, price and quantity (and/or quality).

Contradicting the Supreme Court's observation that private institutions should be allowed to fix their own fees, the ministry for HRD has drafted the Private Professional Educational Institutions (Regulation of Admission and Fixation of Fees) Bill 2005.

The market is sought to be replaced by a committee headed by a former vice-chancellor and two independent experts in finance and administration.

It is an elementary principle in economics that if both price and quantity are fixed simultaneously, markets will not clear, which will result in either rationing or a parallel market.

So what is the rationale for this kind of intervention? Leaving aside political motivations, it seems that the allegations of profiteering by certain private education institutions could have a role to play as could the variable quality of education dished out by certain institutions.

But is fixing fees and controlling the number of seats the efficient method to address the alleged market failure? The answer has to be an unequivocal no.

That the quality of education and input (infrastructure, faculty and so on) required to produce it is so intensely heterogeneous that fixing fees by a committee based on these varying characteristics is likely to be at best inconsistent and, at worst, flawed.

It conjures up images of the license raj, where the power to decide the fate of institutions was in the hands of bureaucrats, who were often obligated to take decisions on the market's behalf.

The theory of regulation is replete with examples of regulatory capture. In this case, it would most certainly create perverse incentives on the part of institutions to expend resources unproductively to try and "capture" the fees and admissions committee. Some of these costs would naturally be passed on to the consumers of higher education.

On the other hand, if the fees were fixed at unrealistically low levels in the interest of equity or political considerations, it could create immense pressure on the part of the institutions to cut costs, thereby compromising quality.

Sustainability of the institution would be jeopardised since lower quality will translate into lower tuition in the market place and its eventual decline.

To date, there is little evidence that higher fees have unduly discouraged enrolment, no doubt because the benefits of higher education are largely captured by students themselves in the form of higher lifetime incomes that their qualifications command.

At some time, the demand might be sensitive to the fees that is charged, but that has not happened yet. In fact, it might be a good thing for all of us if that does happen.

We are told by everyone, including notably foreign think tanks, that India is at a wonderful stage in its demographic cycle. Over 60 per cent of our population is under the age of 24 and, perhaps, a significant percentage of them will seek higher education.

Overall, the poor quality of higher education available in India means that a number of average quality foreign universities will continue to be successful in tapping this extensive Indian resource.

Instead, why don't we allow private initiative in this domain to flourish and encourage not only enrolment from India but also abroad? This represents an immense opportunity. Let us not allow an anachronistic piece of legislation to spoil this opportunity.

The writer is professor of economics at IMI and a consultant at TRAI