Education in India has always assumed a larger than life role in the society.

Whether it be the Guru Gobind Dono Khadey, Kaakey Laagun Paaye of

Rahim or the twice born doctrine in the Vedas, education has always had that
spiritual connection and the business of imparting education was never
considered a business at all. Perhaps out of this conceptualization only,
education has always received the patronage of the taste and the wealthy
through our history and was never a financial burden on the students.
Whether it be the Kumaragupta founded Nalanda, or the Gangai Konda Chola
Mandap mentioned in the Anaiyyavaram inscription of Rajendra Chola, or the
madarassas founded by Sher Shah, the students and the teachers were
always comfortably maintained out of the donations and India maintained its
distinction of being one of the most sought after destinations of higher
learning.

Things changed for the first time under British India where it was clearly felt
that free education would not be valued properly by the natives, and hence
should be changed. But post independence, the Indian conceptualization
again took the center stage and the seats of higher learning became the
temples of modern India. Nehru knew the central importance of higher
education in his vision of a planned economic development and hence
ensured that the doors of these temples remained open to the very best of
minds irrespective of their financial capabilities. So liberal state grants were
made for this cause and thus the fees were maintained low as well. Within all
its constraints such a system functioned remarkably well in serving the needs
of the economy.

However, by the 1990s the structure of this economy began to change. State
led approach gave way to a market determined pattern of development and
the enterprising potential of the economy was unlocked. Naturally the wants
of this economy from its education sector were much larger in scale and more
diverse and dynamic in character.

To meet these new demands, the higher education sector had to reform as
well. First of all its size was simply not big enough. India had a particularly
unimpressive record of the penetration of higher education and this was
simply not consistent with the ambitions of taking the economy on a high
growth trajectory.

Next there was a need to meet the new unconventional needs of the
economy. No longer, thus, it sufficed to produce graduates with standard
degrees possessing standard skills. One needed to be dynamic. Similarly, as
our economy competed on a global scale, we needed human resources who
could work with world class technologies and management practices as well.
Thus a large scale investment in the sector was needed.

Now this is where the reliance on government could become a constraint.

Because public funds are scarce and slow in coming and are just not suited
for such a dynamic environment. Thus budget constraints became hard and
the sector was forced to rely more on internal resource generation and thus
the credit based education system proliferated.

There were other factors driving the change as well. For instance the new
economy offered a larger number of better paying jobs. So people were now
prepared to pay more for the higher education which could land them with
such jobs. And it is always difficult to run against the market forces in full
swing. If we hadnt allowed the higher education institutions to increase their
fee, it would simply have created more compliance issues as the higher fee
would have been pushed under the table, because market forces cant be
resisted on a macro scale without significant costs.

Moreover as the economy became more integrated with the world, so did the
people. Migration, specially of the qualified people, increased and if our
institutions didnt offer better terms to the teachers, the more qualified ones
would have simply migrated away. Similarly if our institutions didnt offer
world class facilities and education to the students, both the students and
their prospective employers would migrate away as well.

Thus there was a clear need for higher investment in the sector and so the
credit based system emerged. With time there has been a gradual
strengthening of the system as more and more private institutions come up,
government institutions increase their fee, private jobs develop more and
banks reorient their business to take advantage of the opportunity. Finally as
we speak, there are proposals to allow foreign universities into India and a bill
to that effect is in the parliament.

Having examined the transition towards the credit based education system,
let us pause and ask ourselves what are the implications of such a transition.
Can it continue to suit us in future as well? What are the opportunities which
lie forward? Or what does it do to the student and to our cherished dream of
equal opportunities to all?

Let us look at the opportunities first. Clearly the biggest strength of the
model, as seen earlier, is that it is aligned with the market forces. This makes
it smooth. This makes it dynamic and this makes it scalable. This gives us the
potential of creating world class human resources. The model is capable of
generating and attracting resources for developing state of art infrastructure,
for retaining top level teachers and students and thus create a positive
feedback mechanism. Apart from providing the lubricant to run the economy
efficiently the model can also help enhance Indias soft power. As our highly
trained professionals go abroad, they will help create the image of a new, rich
India. Finally, this model is unique in the sense that it can produce the
barefoot engineers needed to advise on the MGNREGS projects and can also
produce the best investment bankers capable of dealing in complex
derivative transactions. Thus the opportunities offered by the model are
immense. But before passing the verdict, let us also look at the potential
causes of concern.

Given the alignment of the model with the market forces and its potential to
serve us, should we then leave it entirely to the market? Well, certainly not.
To begin with ECO 101 tells us that education has positive externalities and
thus if left to the market, the market will always over price it and provide too
little of it. Thus state intervention is needed to correct this distortion.

Then think of what the model is doing to its principal stakeholder the
student. It is upping the stakes. And by upping the stakes it is putting her
under a lot of additional pressure. And in an educational system not exactly
known for its sensitivity towards the students, add one more woe to her
already long list of woes how will I ever repay the credit if I fail? There is
already at least ne suicide every year in my alma mater since at least a
decade do we want to increase that any further?

Next think of the implications in the current context when an effective

regulatory mechanism is lacking. One aspect clearly is that this puts the

students (and their guardians) in a worse situation since they are locked in
and thus subject to being manipulated by the college authorities. Even apart
from it, think of the wider context. Higher education is a sphere where there
is a clear information asymmetry with the students being at the receiving
end. This credit based model will create a classical lemons problem since
because one would expect the better institutes to charge higher fees, even
the worse ones wold charge a higher fee for otherwise they would be
considered bad by the virtue of charging a lower fee. Then having put so
much at stake, these institutes would be inclined to publish paid rankings in
the media and thus compounding the information problem.

Worse still, what would happen if such institutes come together and form
cartels creating artificial scarcity and higher fee. And in all this let us not
forget what happens to the research output in such a case. Clearly having
paid so much for the education, students would be inclined to take up jobs in
industry rather than donning the scientists coat.

And finally the concept of equity what happens to it under this model. We
all know credit flows towards the haves. It filters out the have nots. How
can we expect a poor mans child to ever furnish a hundred thousand dollars
loan guarantee notwithstanding however deserving she may be. Thus the
system automatically weeds out the poor.

Having seen the practical limitations of the model, it is clear that we need to
build in sufficient safeguard mechanisms first. This would ensure it
contributes to growth meaningful inclusive growth and not just a number
called growth. Clearly there is a need to safeguard the interests of the
financially poorer children. Is there any way of doing this without putting a
strain on the public funds? Perhaps we can draw upon the Universal Service
Obligations (USO) Fund model from the telecom sector. Or we can look
towards a RTE kind of feature (25% reservation).

To address the other issues, specially to protect the interests of the students
at large and also to prevent a lemons problem from occurring, we need to put
in place strong and independent regulatory mechanisms. The proposed bill on
the higher education is certainly a welcome step in the direction. Student
counseling must invariably be a part of this regulatory package and we need
to bring laws which empower the students. And finally, to make sure that

research activity is not sacrificed in the din, we would need to put in place
larger incentives structure so as to make India a hub for global R&D.

The credit based model is powerful because it is aligned with the trends of
the age. It offers tremendous potential to serve the country as well. And
certainly we must encourage it. But at the same time we need to put in
sufficient safeguards as well. The future awaits