The Indian Economy Blog

May 30, 2007

The Indian Education System — Part 4

Filed under: Education — Atanu Dey @ 10:29 am

The absence of universal basic literacy and education is a constraint on present economic performance and future growth. Doubtless, education is costly but the opportunity cost of not having an education is even higher. The old adage about a stitch in time saving nine holds with special force in the case of basic literacy. Here’s the argument. At most one generation requires help in becoming literate; the children of literate parents are overwhelmingly literate; and the children of illiterate parents are more likely to be illiterate compared to those of literate parents.

Therefore, the earlier an intervention is made in ensuring universal literacy, the cheaper it is, for a growing population. At India’s independence, of the 350 million about 240 million were illiterate. If a big bang approach had been taken and the entire population were made literate within three or four years, it would have perhaps cost (in today’s terms) around US$24 billion, and the problem of literacy would have been solved half a century ago. By going at it half-heartedly and piece meal, many multiples of that sum has been spent over the last half century, and yet the number of illiterates has increased to 350 million. We are forever falling behind by not putting enough resources to solve the problem.

If India had solved the basic literacy issue by the mid-50s, it would have developed more rapidly. It would have had a lower population (population of developed nations grow less rapidly), the aggregate wealth of the country would have been higher, and per capita incomes and wealth would have placed India in the running. Even now it is not too late and it is quite possible to make India fully literate within three years, provided the political will is there. The returns on that investment would have been staggering. I have outlined one mechanism for doing this here.

Both at the micro and at the macro level, return on investment (ROI) in education is positive. In other words, the net present value of the increase in the lifetime income of the person is greater than the cost incurred in educating the person. National spending on education is akin to investing in productive assets such as roads, ports, factories and power plants.

One immediate implication of the positive ROI in education is that it makes sense to borrow the money required for education as long as the ROI on education is higher than the interest rate – which in most cases it is if the labor markets are not distorted and if there are no information failures.

The other implication is that higher education does not require public financing if the credit market is complete. In the case of a person whose parents can afford to pay for his college education, clearly the credit market is complete: the person implicitly “borrows” from the parents for the education and the returns accrue to the family. It is easy to see that the ROI must be positive, because it is universally true that people systematically educate their children.

That has an important public policy impact: public financing of higher education is not required; all that is needed is to make credit available to those who face a credit constraint. Give loans to all those who seek, and qualify for, higher education, and which loans are repayable over a suitable period upon employment. Thus, for example, IITs and IIMs can be entirely self-funded instead of being subsidized by the public. More importantly, by removing the subsidies and allowing the capital markets to provide the credit required, the market for education will efficiently provide adequate supply to meet the demand.

Which brings us to the question: if the market can solve a severely supply-constrained education system, why is the market not allowed to function in the education sector? Let’s look at that the next time.

[Previous post: Part 3. Continued in Part 5.]

8 Comments »

  1. [...] 05/30/2007 01:29 AM The Indian Education System Part 4 The absence of universal basic literacy and education is a constraint on present economic performance and future growth. Doubtless, education is costly but the opportunity cost of not having an education is even higher. … [...]

    Pingback by Webducator.com » Blog Archive » To Rome, then, we are indebted most of all for ideas as to government, and — May 30, 2007 @ 11:09 am

  2. Agreed, More investment in education is a no -brainer, but don’t we need to focus on delivery mechanism ( I know you do)..So while a big bang approach will surely work, an apt delivery mechanism needs to be looked into. Throwing good money after bad as in case of PDS, NEGS etc doesn’t makes sense

    Comment by Rishav — May 30, 2007 @ 2:30 pm

  3. “why is the market not allowed to function in the education sector?”

    Can you give examples of where government regulation constrains the functioning of the market in the education sector? I agree with most of your points here, but you haven’t provided any specific evidence that government policy is preventing delivery of education through private markets. Subsidies to institutions like the IIMs only crowd out the private investment. They can’t be blaimed for the failure of private markets to deliver education to non-IIMers.

    Comment by Doug — May 30, 2007 @ 3:30 pm

  4. Cannot each corporate entity in India which has a revenue beyond half a billion (nowadays, every company is says it is a billionare) take up the cause and improve the existing government schools? I am sure this will make a huge difference. I don’t suggest starting up new primary schools, but improvement in the existing schools alone will make a huge difference.

    Comment by Bhargav V — May 30, 2007 @ 5:13 pm

  5. Atanu,
    Kudos, this is a great series. Would it be possible (on the deesha website, perhaps) to collect all the parts together in one article?

    thanks

    Comment by Corporate Serf — May 30, 2007 @ 5:18 pm

  6. Atanu

    Dude, you\’re on fire.

    This is a great series. I like it much better than the one on urban planning.

    Comment by Skeptical Desi — May 30, 2007 @ 7:08 pm

  7. good stuff…hope u comment on the pathetic state of the syllabi that’s taught in schools and colleges today…

    Comment by Amogh — May 30, 2007 @ 11:45 pm

  8. [...] May 31, 2007 « The Indian Education System — Part 4 [...]

    Pingback by The Indian Economy Blog » The Indian Education System — Part 5 — May 31, 2007 @ 9:34 pm

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