The Indian Economy Blog

February 10, 2006

Higher Education Needs Fixing, Not Higher Salaries

Filed under: Education,Growth,Human Capital,Labour market,Outsourcing — Nitin @ 3:08 pm

It is time to correct India’s lopsided education budget

Salaries in India, especially for skilled workers, are rising. This is almost invariably attributed to the projected shortage in the number of workers available to sustain the rapid growth in India’s IT, biotech and other services. Those alarmed by rising wages contend that this will make India less competitive as an outsourcing destination. In addition, as economists from the IMF pointed out recently, the manufacturing sector will suffer too because factories will be unable to afford supervisors and managers whose pay scales are being driven up by the boom in the services sector. As a result, India may be unable to attract large investments labour-intensive manufacturing industries that is much needed to provide employment to unskilled workers. The wonks even have a fancy name for this — they call this the ‘Bangalore Bug’.

Yet rising wages are not just a sign of a shortfall in the supply of labour. They are also a sign of increasing productivity. A decade ago service industries employed 30% of India’s workforce and contributed to about 40% of the GDP. Today, they employ the same 30% of the workforce, but account for over half the GDP. Amid all the hand-wringing about losing competitiveness due to rising labour costs it is important not to miss this good news story. Higher labour productivity is also a source of competitiveness.

But as Bloomberg’s Andy Mukherjee argues, the impact of rising wages on the manufacturing sector deserves urgent attention from policymakers.

If the supply of technical and managerial manpower keeps pace with the burgeoning demand, the price for skilled labor will remain within reach of what laggard states (of northern and central India) can afford to pay to create globally competitive labor-intensive factories.

Although the problem is complicated, the solution itself is simple – better and wider education. But it does not require the government to implement grand projects to provide employment or even education itself. It will be far better, as Mukherjee proposes, “to ease the emerging skilled-worker shortage by freeing higher education from the clutches of state controls”.

India’s education policy needs a major overhaul. The issue is not so much that as a fraction of the GDP, India spends less on education than it should. The real issue is that it spends 86% of what it spends on higher-education, leaving only 14% for primary education. [Update: Please see the afterword]. It is not even clear that the state has any role in providing higher education. That 4-6% of the GDP that India spends on education can be put to much better use if it were to invest the bulk of it in good quality primary education across the country. Higher-education, given the clear demand for it, is already attractive to private investers. Amending the UGC Act to allow private universities to be set up, with necessary regulatory oversight, will address both the feared shortfall in knowledge workers as well as the newly identified ‘Bangalore bug’. The next two decades will see India enjoying a demographic dividend thanks to a relatively youthful workforce. That dividend cannot be redeemed if education is not fixed in time.

Afterword: This post was based on the figures cited in Andy Mukherjee’s article. But according to data from UNESCO, for the year 2000/2001, public expenditure on education amounted to 4.1% of GDP. Of this, the expenditure on primary education was 37.6%, secondary 40.1% and tertiary 20.3%. China’s figures for 1999/2000 are similar to India’s for the same period. The distribution is less lopsided using these data but the argument for deregulation of higher-education remains valid.


  1. A few points:

    1. Pumping money into a broken system will not fix it. Let’s not forget a 2% education cess was intriduced in the Budget. But there are problems that cannot be directly fixed by more money– absent teachers, corruption, rampant cheating in schools, parents deciding the oportunity cost of school time is too much (kids could be working).

    2. Private involvement in higher education is not necessarily optimal. In India, most “private” universities are FOR-profit unlike most of the “private” universities of the US. The quality of education in these private, for-profit institutions is questionable. And also, selling degrees perpertrates inequality. The Becker-Posner blog provides some interesting insight into the concept of “for-profit” universities:

    Before we slash higher education and boost funding to primary education, efficient use of the funds must be ensured. Also, research and acquisition of knowledge in higher instutions holds a very important place in society. Its path cannot be totally dictated by money and the markets.

    Comment by Ishani — February 10, 2006 @ 5:44 pm

  2. Before we slash higher education and boost funding to primary education, efficient use of the funds must be ensured.

    That assumes that funds are currently efficiently utilised. But according to what you write in the first paragraph, more money (by its efficient use, or by cess) won’t solve the problem. Both your arguments cannot be simultaneously valid. One has to give.

    Also, research and acquisition of knowledge in higher instutions holds a very important place in society. Its path cannot be totally dictated by money and the markets.

    Why not?

    Moreover, even if we accept your argument that money and markets won’t fund research; there is still no case for state-run universities. For example, the government can create a research fund (like the US) and provide research grants to universities and departments to carry out R&D projects.

    Comment by Nitin — February 10, 2006 @ 8:24 pm

  3. I’ll agree with you on this one :D

    Comment by fonzter — February 10, 2006 @ 9:08 pm

  4. Are the numbers 86% for higher-education and 14% for primary education from the federal budget?

    If I am not mistaken primary education is a state subject, so the actual amount spent will have to be a summation of all the state budget allocations.

    Comment by bongdongs — February 10, 2006 @ 9:20 pm

  5. [...] ebruary 10th, 2006 @ 16:48 UTC South Asia India Global Roundups The state of education in India and the current trends of the Gove [...]

    Pingback by Global Voices Online » Blog Archive » India: Education and the government — February 11, 2006 @ 2:50 am

  6. I’d echo everything that Nitin said, and more…

    One of the basic tenets of economics is that there’s no “free lunch”.

    The relevance re this post: the government has limited resources and given these constraints, it would be more advantageous for the government to be spending on primary education rather than higher education, which the private sector can well handle.

    India’s biggest weakness vis-a-vis China (at least, in my opinion) is the appalling female literacy rate — 45% versus 87% for China. Even more than the infrastructure, this is India’s Achilles heel.

    See these posts for more

    Comment by Prashant Kothari — February 11, 2006 @ 2:29 pm

  7. Bongdong,

    I got those numbers from Andy Mukherjee’s article linked in the post, and admit I didn’t verify them against other sources.

    Do you know of an authoritative source that provides the breakup, including the expenditure by the states?

    Update: I’ve looked up the UNESCO database which differs quite a bit from Bloomberg’s numbers. Thanks for pointing this out. Necessary changes have been made in the post.

    Comment by Nitin — February 11, 2006 @ 6:28 pm

  8. Well half of our college graduates are BA and Bcom with no practical schools.Most of them come from rural or semi-urban areas and this half hearted education teaches them to hate their father’s occupation but suggests no alternative , hence the rise in nemployment.
    I would like to suggest
    1.Why wages are low in manufacturing sectors is partly becuse engineers are made to work of supervisers becoz there r not trained supervsers.In this whole rush for BPO etc we have neglected pur ITIs or polytechnics badly.
    2.I suggest close all this BA ,Bcom and Bsc selling shops.Most of such graduates are absorbed in clerical jobs ehich can be performed equaly well by a 12th pass man.So reduce qualification for all technica ljobs to 12th and you would see a drop in enrolment for BA etc.
    3.Let there be private universities which are self financed so you can have only people genuinely interested in doing graduation going for it.
    As far as for poor students the huge money saved from all this BA ,Bcom infrastructure ca neasily create a few lakh scholarships.
    4.As someone pointed out having a central R&D grant institution would be right step.Encourage business houses and industries to establish reserch chairs.
    5.Most importantly 95% of jobs can be done by anyone with a decent level of IQ so this harping on right degreee should be done away with.
    6. Most importantly people passing out fro mIIT and IIM an like institutes agould be made to contribute certain percentage of their earning or a fixed amount whichever is higher after they pass out.Saying that we create a global brand valure is just not enough.
    7.As far as medical students are concerned ,let private players come and charge the money.Wecan welcome studentys from other countires also who can pay money.Each such private college should provide some free seats.In this way we will create a gud infrastructure and is rule in Maharashtrra make all interns spend 3 months in villages.

    Comment by Anshul — February 13, 2006 @ 1:14 am

  9. Allow me to bring out the ideas behind the sentiments and suggestions we have in this thread.
    I hope that can be a good complement.

    I believe that change in the fraction for education in the budget is required. But expenditure that lacks focus is a waste. Elsewhere
    I have tried to point out the what I see as the problem of lack of quality education. It is a later concern whether private or government institutions provide the service, and what are the pros and cons.

    Before we slash higher education and boost funding to primary education, efficient use of the funds must be ensured.

    Perhaps the sentiment could be rephrased as: A necessary part of fixing the system involves ensuring efficient use of the funds. I assume that “fixing” is inclusive in that everything from the principles to the practice that is wrong is to be corrected.

    Also, research and acquisition of knowledge in higher instutions holds a very important place in society. Its path cannot be totally dictated by money and the markets.

    Why not?

    Research is of two types: (i) one used to answer questions of immediate relevance, and (ii) one used to pose questions that could be relevant in the future. Each type involves information collection and manipulation, but creative leaps are central to the second kind, while are a “side effect” in research of the first kind. Research of the second kind is knowledge acquisition activity, and is the presumed business of higher education institutions. This activity is expensive because the goals carry high risks, may turn out to be unrealisable, and could be unrealistic/expensive to start with but become realisable after persistent effort. Seeking new knowledge is shooting in the dark. Money and market based directions are not useful because: (i) markets fluctuations operate over short time scales that are in direct opposition to long term time scales that knowledge based research requries, and (ii) the use of money would induce conservative attitudes – e.g. defining only well defined, demonstrably realisable goals – going against the ‘high risk ventures’ required by knowledge seeking activity. Even if high risks are taken by financially strong organisations (public or private), the incentive to own the acquired knowledge is high, and is impractical since sharing (of ideas) is the prime, and only, mechanism to further knowledge. Money/Market forces can be partial guides, not total!

    I do not believe that money markets cannot finance education and research; rather if they do then the RoI estimates have to be drawn very differently than usual and some conventional ideas like ownership may have to be done away with. It might be useful to remember the adage “Work with the masses and live with the classes, work with the classes and live with the masses.”

    Finally, Anshul puts forth a number of suggestions that essentially try to ‘fix the wrongs’ in the system.

    In summary: It is true that a change in our education system is required – including but not restricted to only the budget provisions. The question however is: what issues/factors/ideas should guide the change, and thus determine what should be changed and how much ? I believe that quality – rather than quantity – of education should be the focus, and a pyramid like model with primary education at the ‘base’ and higher education at the apex would be useful. In particular, the quality of primary education at mass level needs a strong (and honest) focus than what exists today. A greater expenditure on prim-ed is necessary, but not sufficient.

    Comment by Abhijat — February 13, 2006 @ 11:24 am

  10. Government collects taxes from citizens in order to statisfy the basic needs like Education, public health and sanitation. Of this Education, especially the primary education is the most important one. The return on investment on this spending though not visible immediately, does result in compounding effects in the long term.

    Sustained and continous investment into the education sector, especially the primary education and that too in the rural areas is the need of the hour.

    India is going to feel the glut of educated youth in next ten years. Also, there would be continous brain drain for valuable talent from government sector jobs to more lucrative and less cognitive jobs in IT sector, which would result in waste of investment done on education.

    Hence, the need for educating the other half (rest 50 crore of the population) and strenghtening the education system so as to reach the ‘last mile’


    Comment by Nagesh Vishnumurthy — February 14, 2006 @ 4:00 pm

  11. Our education system has become so focused on examinations and rote-learning, that learning, in the true sense of the term, has taken a back-seat. A subject like economics often ends up being yet another theoretical, difficult to understand and boring paper. While in reality economics is a fascinating area of study which can be applied in almost every sphere of life. This is exactly what teachers at Acharya & Marathe College, Mumbai wished to prove. They wanted to bring the subject to life and for this they knew they had to take the subject beyond the classroom. Therein came up the idea of having an interactive platform where students could be actively involved, and what better way than a festival. Thus was born “Arth-Manthan’, a two-day festival based on Economics and Finance.

    It was launched in 2001 to mark a decade of economic reforms in India. In 2005 students from more than 60 colleges in Maharashtra participated in the festival. This year the college will welcome renowned economists, teachers, managers, academic experts and students on 8th and 9th September for Arth-Manthan 2006.

    “Rang De Basanti” is the underlying theme for the festival this year. The organisers aim to transform Arth-Manthan into a platform, where it will be possible to discuss the economic choices which affect not only the economy but also the life of the youth and their future. The focus is on bringing forth burning economic issues and problems and perspective of the youth on these issues.

    Eminent personalities from the industry will interact with the academic community through interactive sessions, talks and seminars. A few of the distinguished speakers at Arth-Manthan have been Shri Diwakar Gupta, CGM, SBI, Shri M.N. Chaini, President, Corporate-Affairs, Reliance Industries Ltd., G.N. Bajpai, Ex-Chairman SEBI, Dr. Narendra Jadhav, Principal Advisor to R.B.I., R.H. Patil- Chairman of UTI Asset Management Company and Shri Sharad Joshi-Founder Shetkari Sanghatna.

    Spread over a period of two days, Arth-Manthan has various events which test the participants’ creativity and knowledge. The various events are:
    Rang De Basanti – The Maha Debate
    “Loose control… I’m a Rebel !!!”
    “DJ, played by Aamir Khan, expressed his voice and anger on the current system through Rang De Basanti… But you don’t have to be Aamir Khan to do so. You can be you and do that! Come and unleash your potential! Join the Maha-Debate of the Year!” say the organisers through the event Rang De Basanti. In round one of the event, to be held on the first day of the festival, students can speak their heart out on any one of the following two topics: “Given a chance I shall change the destiny of India…!” or “If you want the change, then be the change!”
    10 best speakers – fiery, passionate and sincere – will qualify for the Maha-Debate on 9th September.

    Global Leaders Meet: “To the corners of the Earth…What is our worth??…What is our destiny??” so goes the slogan for the event. The participating teams will play the role of economic advisers of the various world countries allotted to them in advance. They will analyse the current economic policies of their country and discuss on measures to improve the standard of living of their country. Classic collection, the Book Exhibition which will be held during the festival will include a wide range of books on Economics and Management. Some of the most popular textbooks and reference books used in foreign universities will also be displayed.

    This year Arth-Manthan has a whole bundle of events dedicated to Mumbai under the name, MUMBAI MERI JAAN “Jahan hain yahan sapno wala”.
    The first event under this section “Wah! Kya Plan hai…” is a business plan competition. Students have to look at Mumbai’s burgeoning population a business opportunity and come up with a business plan specifically catering to needs of Mumbaites. PEN’EM DOWN is an Essay Competition on key issues facing Mumbai. The topics include, If I were the CEO of Mumbai, I have a Disaster Management Plan for Mumbai and Turning Mumbai into a Knowledge City. In ‘Toony Lunes’ the Cartoon competition, students will express their concerns on Mumbai’s infrastructure problems through creative and humourous cartoons.

    WAR OF WORDS – the Elocution competition will see students speaking on issues like globalisation, improvement of the education system and their message to the current leadership of India. The topics for the event include, ‘Call of the youth: 10 Tasks for the Indian Prime Minister’, ‘Should we allow unrestricted entry of foreign universities into India?’, ‘Think you don’t deserve such leaders… are you ready to come forward?’ and ‘Is the world really becoming flat?’.

    “Naye rang bharne ko, khoon chala, khoon chala..” DRAW’ EM UP will see the desires and aspirations of the Indian youth on posters.

    For all those who aspire to be Amartya Sen or John Nash, Budding economist offers them the chance do so. Students will make paper presentations on issues like reforms in India, tackling the rising cost of energy and enhancing the employability of the youth. CUT OUT DA NOOSE is an event which encourages students to read newspapers. Based on a theme of “Save our farmers” students have to submit recent paper cuttings, photographs, cartoons on issues relating to Indian agriculture, empowering farmers and suicide of farmers.

    Then there is AD-MASTERS, the advertising game and QUIZ WIZ, the quiz competition.

    On the whole, Arth-Manthan is a two day festival laced with lots of learning and even more fun and excitement!
    For details, send in a mail at You can also visit their website

    Comment by Shashi Panikar — August 6, 2006 @ 6:16 pm

  12. Primary Education Requires a very BIG FIX.

    Comment by Apun Ka Desh — September 13, 2006 @ 4:02 pm

  13. if every man think to become a big bang so main school or college are our society and nature

    Comment by Runjeet chauhan — September 30, 2006 @ 2:13 pm

RSS feed for comments on this post. TrackBack URL

Leave a comment

Powered by WP Hashcash

Powered by WordPress