Priming the right Pump

When economies start slowing down and economic sentiment becomes bleak, Governments have the habit of creating spending so that there is multiplier effect and there a revival in the economy.  This has been referred to as a Economic stimulus. This was a habit developed after the lessons of the Great Depression in the 1930s. This idea is debated a lot but the simple truth seems that stimulus is a good idea or a bad idea depending on the way it is implemented.

If it implemented in a way that something of use to society is produced (as measured by demand which will pay the full price for it) and/or it increases the productive power of society leading to higher taxes, then it serves it purpose. If this is badly done, it leads to only transfer payments which are spent away by the recipient on things without multiplier effects and the Government is left with  huge debts with no additional taxes to service this debt. The last 5 years have seen the Government wasting away Rs 19 lakh crores with little to show for. (see this link) These expenditures have not had any effect on reviving the economy and has not increased the productive capacity of the country.

As we stand today, the Indian economy is extremely sluggish. We need to find ways to revive it with a well placed stimulus. The easiest way to decide which place to focus on is to find things for which there is very high latent demand.

As is wont with this blog, let us also look at the areas of our economy terribly mismanaged over the past 30-40 years for the great headroom for improvement and growth may lie there.

There are many excellent candidates namely

1. Railways; It is perhaps the only good or services for which the demand can double if the supply doubles ! The infrastructure is very poor and there is an opportunity to build services around the footfalls created by the Railway stations: shopping, banking, postal services, hotel accommodation and  convenience stores.
2. Urban transport - buses and metros: It is a problem plaguing society as many levels.  Lack of urban transport leads to purchase of private transport either in the form of 2 wheelers or cars. This will reduce diesel and petrol consumption and thereby reduce pressure on our currency also, p
3. Low cost housing replacing urban slums. This is an idea which has great possibility but under the current political situation it is a non-starter, as the continued existence of slums is the lifeline on many political parties.

The last idea is a contentious idea and a difficult one to implement as it affects the economic of elections; so let us keep it aside for a later date.

Railways is perhaps the best idea for a stimulus. There is a ready market demand for its services.  The government needs to come up a plan to de-bottleneck the railways and invest in speeding up the rail network and increasing the capacity. There is a massive footfall at every railway station. Most malls would give an arm and a leg to have this kind of footfalls. Monetizing of this footfall could create massive source of funds for the expansion. Expansing the railways capacity will increase employment directly and indirectly and boost tourism all over India.  India has beaches, hills, forests and jungles, snow capped mountains and great places of spiritual tradition. Tourism can unlock the latent energies of many regions whose eco-balance may be destroyed by developing industry. Already we have blundered by increasing industry in hilly areas. This could help in reversing that policy and substituting tourism with industry in these areas.

Urban transport: Lack of reliable, high quality urban transport catering to all sections of society has created a situation where in many cities such as Pune and Bangalore almost everyone  owns his own vehicle. Owning your own vehicle is the modern equivalent of owning a horse. The costs of ownership (interest and depreciation),  fuel, insurance, repairs and maintenance are huge.  Owning even the smallest car sets one back by at least Rs 1,00,000 a year. The resultant load on the traffic system  has slowed down the traffic, increasing commute time and wasting fuel also. We could reverse this by investing in public transport. The transport infrastructure has to be of a world quality-no shortcuts or compromises. This will reduce our fuel consumption and jump start the Commercial vehicle industry, lower cost of living in cities.

Can we find the will to prime the right pumps ?

Capturing the "Entrance Exam Economy" and Firangi education economy

There is too much negativity in speech, though and action in our country today. We need to find ways to convert our negativity into a form of fuel for positive change. So the more negativity in society,  the more opportunity for change.

In this blog, we explore ways to improve the change some aspects of the education system using the negativity in it.

The Entrance Exam Economy (EEE) and the Firangi education economy (FEE) have reached  very large proportions.

A recent article in a business magazine puts the total number of aspirants preparing for the IIT  entrance exams at Kota at 1,00,000. (See this link). The total spending  by these students is estimated at Rs 1,700 crores per year. It is safe to assume that nationally the number of aspirants preparing for this exam  and the spend are multiples of this amounts. Surely, on a national basis, at least another Rs 8000 to 10,000 crores must be being spent on entrance exams to Engineering colleges. The EEE industry has clearly established the price that people are willing to pay for good education. The spending by students is estimated to be in the region of Rs 2-3 lakhs over two years of preparation at Kota.

The total number of seats at the IITs is 9,885 of which only 4,844 is in the open category.(see this link).  At a fees of Rs 90,000 per year for the open category and Rs  20,000 per reserved category students, the total annual revenue of all the IITs per year from undergraduate programs would be only about Rs 220 crores.

The number of   engineering seats available at  quality Institutions available for those who can afford to pay more but could get through the merit list at NITs or IITs  is very small  at about 50,0000 compared to the total number of engineering seats available estimated at 12,50,000 seats per annum  (see this link). The prospects for students from the higher quality institutes is perceived to  markedly different. Hence students and parents are willing to spend a lot of money getting into these courses. This is a symptomatic of every other sector of education where economic prospects are seen to be good namely management education and medical education. ,

The Firangi education economy ie the spending by students on going abroad for education. It is currently estimated at around USD 7.5 billion a year ie about Rs 45,000 crores (@60Rs/$)  (see this link).  While some portion of this will always remain, as some may prefer to go abroad independent of the costs, a large portion of this is due to difficulty in getting admission into good colleges in India. Also the loss of students to overseas institutions is not just a financial loss - it is also a loss of high quality human capital.  In many cases those who go abroad to study do tend to settle down there. While we may not have felt this loss in the 1960s and 1970s as we did not have a choice. Today we have a choice and hence cannot afford to loss our smart youth to other societies.

While the EEE and the FEE, in its current scale and scope, is definitely an undesirable activity for our country for reasons detailed in this blog  its presence provides a very good opportunity for the Government India to convert into a fuel for a positive change and solve  the following problems -

1. lack of supply of much larger pool of  higher quality engineers and management graduates in India  
2. high level of stress and angst that some of the brightest minds are put through by Entrance exams process
3. subsidy model of higher education where high quality higher education institutes are dependent on government funding and hence cannot expand to meet demand are expansion means more subsidy (which a Central Government with Rs 5,00,000 crore+ fiscal deficit is very reluctant to do)

In this blog post, we will explore possibility of creating a model where Institutes which cost a lot of money to put up will be self financing thereby creating a virtuous expansion mechanism where capacity will expand to meet demand for higher quality education.

As it stands the EEE and the FEE dwarf the domestic education economy in the quality education segment.  Apart from being a burden on national resources, the EEE  is undesirable as it is teaching students skills which have low value in the real world as compared to the expenses incurred in imparting these skills.  It also destroys their soul.  While the EEE is undesirable, its presence also gives one very good opportunity - that of capturing  and diverting this wasteful spending by building higher quality institutions such as  IITs and NITs and capturing this spend as fees and reducing  the  size of EEE to a more reasonable level.

We have strangled capacity addition of the colleges with the right quality due to regulations- fee limits, curbs on admissions and reservations amongst others. As a result, too much money and effort is spent on trying to enter the existing quality colleges.

What is to be done ?

Let us discuss a solution for Engineering. Other solutions will also be similar. Since existing Institutes are political hot potatoes- it would be better to create fresh solutions.

We need to create  new New Institutes  (NI) with about 50,000 seats capacity which will admit students in this ratios:

33 % for high paying seats  who will pay two times the actual costs of an IIT education.( say Rs 5 lakhs p.a)
33%  for open quota merit students who will pay fees equivalent to the real cost of IIT education
33%  for  Quotas -OBC and SC/ST  who will the real cost of the education.

These new colleges would use the same entrance exams such as IIT-JEE and give seats based  only on rank, even to those who can afford the higher fees.

The only major constraints for this initiative will be in finding good teachers for these institutes and perhaps in finding adequate land. The Government will need to find ways to attract the best talent especially from the Indian diaspora and even among Professors of other nationalities.   We also need to find creative ways in using technology, in ways like www.coursera.org or Khan Academy (See this link),  to achieve a much larger Student Faculty ratio and tide over Faculty shortages.  This will also help the institute lower the cost of education and also tide over difficulty of getting high number of faculty in a short time.

Education institutions are  relatively very pollution free activity and so these new institutions can be put in eco-sensitive zones (instead of putting polluting industries there by giving tax exemptions as is the current policy). Industrial development has followed the setting up of good education institutions, if the right environment is created. The progress of Stanford and the parallel development of Silicon Valley is an outstanding example of this. In our country, the development of engineering industry of Belgaum is an excellent example of the role a good college in the neighborhood namely NIT - Surakal in creating entrepreneurship.

We need to create high quality townships which will  have high quality amenities so that it becomes attractive for Professors from overseas locations. The NIs should also have spaces for  development of industries along side it.

We could create a  National Education fund and provide it tax free funding similar to NHAI and REC and  allow it to raise funds for creation of new institutions. This would allow access to funds at 6% per annum and this may even allow for creation of institutions at almost zero government funding.

What will this accomplish ?

• Since the Colleges will be self funding all they would require only temporary capital and no permanent subsidy or grant for yearly operation. This would make it easy to create and expand the colleges without annual financial support from the government.
• Students who are willing to pay more need not go abroad to study. This will save forex and make available a much larger talent pool in India making India an attractive destination for Foreign Direct investment.
• Students from families who can spend more may prefer to go to NI rather than spending a lot of money and slogging mindlessly for Entrance Exams with low chance of success. Once admissions become easier, students will not want to go through EEE but can use their school years to actually gather knowledge. The  spending on EEE and FEE can be converted into spending at NIs. 
• More IIT and NIT seats, which are subsidized and hence more affordable, may go more towards more economically weaker section students
• Creamy layer among reserved sections may also choose to go to NI  freeing up seats in IITs, NITs etc.
• Creation of new high technology industries around these institutes over a period time- leading to better development and revenues for the Government.

Conclusion

Our country is poor and rich at the same time. There are people who are willing to pay for quality. By not recognizing this diversity as a strength, we have kept fees at higher education institutes low even for those who could easily afford more. This low fee structure has made these institutes dependent on the Central Government for funds and incapable of expanding to meet demand.

We have thus created a  man made shortage in higher quality education and have created a EEE and FEE industry. The revenue models of the IITs, NITs, IIMs are constrained by one-size fits all approach. It  is not advisable to change the models of these institutes at this point of time, as it will become a political hot potato.

To solve these problems, we need to create New Institutes which would have high quality and cater to the classes who can pay full cost and more for high quality education.