UPSC Essay: Credit Based Higher Education System – Status, Opportunities and Challenges.

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 hadn’t 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 can’t 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 didn’t offer better terms to the teachers, the more qualified ones would have simply migrated away. Similarly if our institutions didn’t 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 India’s 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 scientist’s 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 man’s 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…

UPSC Essay: Are our traditional handicrafts doomed to a slow death?

The success of any business in today’s competitive world depends upon how well it is able to capitalize upon its core competencies. Indian handicraft industry, too, can’t be any different. So it is natural to ask ourselves – what are these core competencies of this sector?

Indian handicraft industry can be divided into two broad segments – one being the ‘high end’ segment comprising of the luxury products and catering often to the foreign markets. Examples could be the pashmina shawls or the fine sari works of Kanchi. The other segment is the one catering to the local market and often selling the ‘no frills’ products at cheap rates. Examples could be the temporary stalls put up around festival times in many cities selling flower garlands or pots for the ‘pooja’. Both are obviously different and have different sets of core competencies. Some further thought quickly tells us that while the former segment draws its strength from the rich socio-cultural heritage of India, the ‘no frills’ sector depends upon its ease in cost effective geographical penetration. Clearly the wants of both segments are very different.

Next we must ask ourselves what does it take for a business to be able to successfully draw upon its core competency or what are the key factors driving success. In the framework we use, such factors can be broadly classified under three ‘pillars’:

– The Knowledge Pillar,
– The Linkages Pillar, and
– The Environmental Pillar.

The knowledge pillar includes factors like how well is the business using modern management techniques, or how is it faring on the technology front. Is the entrepreneur willing to take the needed risk to grow his business or are there certain factors which are systematically suppressing the risk taking appetite in the industry? Finally, is the entrepreneur being able to impart the needed skill training to the labor employed (including his self labor and that of his family as the case may be). Needless to say the importance of this pillar cannot be under emphasized and it is often this one which becomes a determinant of how the business fares in the other pillars as well.

The second pillar of business success is the linkages pillar and this stems from the fact that every business today is linked with other businesses in the economy. It draws from others and supplies to others. Thus an entire supply chain is formed and constraints arising anywhere in this chain may hamper the development of this business. In our framework, this supply chain includes the forward linkages, the backward linkages, the infrastructural linkages and the capital linkages. Here the questions we ask are – is the business able to reap the rewards of its venture and sell its output profitably or are there other players in the supply chain who cream off all the profits leaving little for our business? Are the poor infrastructural amenities driving up the costs too high so as to nullify any advantage arising out of our core competencies? Or despite having everything else, the business just can’t get enough capital to make it big?

Finally there is the environmental pillar which means are the macro (both national as well as the international) conditions favorable for the business? Are the governmental policies really enabling? Also (and with growing importance in modern times), is the business being able to comply with the new environmental regulations being set across the world?

Having defined the framework let us now see how does the Indian handicraft industry (both segments) fit into it so that we may be able to determine if its doomsday is inevitable. A convenient tool for such purposes is the SWOT analysis tool i.e. analyzing the strengths, the weaknesses, the opportunities and the threats to the business.

Let us begin with a quick review of the current situation. it is no secret that the Indian handicrafts are struggling. We had expected that post-WTO, our handicraft exports would increase due to improved market access. And they did for a while though not quite as much as we had expected. And finally in 2008 when we were expecting them to increase from Rs. 17,000 crore (in 2008) to Rs. 30,000 crore in 2010, they actually almost halved (Rs. 8,000 crore in 2010) and have stagnated since! One easy way out is to ascribe the phenomenon to the global meltdown and definitely its role can’t be denied, but the consider this. China which commands a much larger export share than us in the global handicrafts market (despite having considerably less cultural diversity than us) is now again seeing an exponential growth in its handicrafts exports after the 2008-10 blip. So clearly our SWOT analysis needs to probe deeper and into each of the pillar. Since the current state of affairs is not particularly an exciting one, let us begin by seeing why it has come to what it is today.

To see the weaknesses / challenges in the knowledge pillar first, it is important to analyze the background of the Indian handicrafts sector first. Virtually the entire sector lies in the unorganized sector. Not just this, the entrepreneurs are marred by chronic poverty (the percentage of poor in this sector is abnormally high), social injustice (due to cultural factors, it is mostly the scheduled castes / tribes or the other backward sections – specially the backward minorities who are engaged in the sector) and serious insecurities relating to health and education. The net result of these disabilities is that the entrepreneurs are forced to be risk averse (how can we expect a person on the verge of starvation to assume any risk when his survival could be at stake). Thus they are not able to adopt modern management practices, latest technology or even provide the needed skill training to the labor.

Now this has the effect of landing them into a vicious cycle. For the lack of above means a denial of capital since the potential lenders / investors suffer from informational asymmetry and our entrepreneur suffers from lack of credibility. With no capital his bargaining position becomes weak and he can be easily denied even his rightful gains by the supply chain. That would mean lack of capital generation and thus he would never be able to make a transition to the modern management, technology and skills. Hence the loop.

Similar loop exists in the linkages pillar as well. By definition the handicraft units are small and thus suffer from diseconomies of scale. Add to it the fact that most of them lie in the rural areas where the infrastructure access is poor or else they are too poor to afford infrastructure access even when it exists. Thus a ‘crowding out’ mechanism sets in as they now become cost inefficient which further weakens their bargaining power and thus the vicious loop.

Finally in the environmental pillar as well, the challenges are not any less daunting. The government policies no doubt appear to be favoring the handicrafts. But for a long time they suffered from over emphasis on reservations for the sector or we can say were anchored in a Keynesian framework. The logic was simple that reservations would create enhanced demand and thus enhanced production. But Keynesian policies alone are not found to be as effective in the traditional sectors of developing countries due to the presence of the large number of market distortions. So there is a need for supply side ‘enabling’ measures in such cases and such a need was felt in our case as well. Then we took some supply side measures like ‘cheap’ credit. But we failed to address the ground level problems effectively and such measures as the ‘cheap’ credit remained an illusion since credit itself was simply not available. The 4th Census of small industries (2006-07) reveals that over 92% of such units don’t have access to any form of credit (institutional or otherwise)! In the international front also the OECD countries accounted for a large market share and when the financial crisis struck, the demand for the ‘luxury’ items from India crashed as well. Then the sector also became victim to the various environmental regulations – genuine or otherwise – imposed by the developed countries such as the REACH regulations by EU on leather works.

Clearly the challenges are immense both on domestic and international front and it may very well explain the stagnated state of affairs today. However before writing off the case of the Indian handicrafts industry to doom, let us also look at the various strengths and opportunities and evaluate whether they present a genuinely viable case or not.

As we have already highlighted the strength of the industry is the rich cultural heritage of India and nothing can ever take that away (at least for perhaps next few centuries!). On the other hand, it were the other challenges mentioned earlier which prevent us from reaping the dividends of this heritage. So is there any feasible way to overcome such challenges? We believe yes, and we also believe that those very weaknesses vis the rural, unorganized setup are its biggest strengths.

Indian villages are unique in having immense ‘social capital’. True they may be lacking in finance capital but finance capital can easily flow in from outside if the conditions are appropriate. We saw how the informational asymmetry and diseconomies of scale prevented this and led to the denial of capital and crowding out. But if we utilize the social capital of the villages to form self help groups such information asymmetry and scale problems can be effectively addressed. We can then train these SHGs to adopt modern management practices, we can incentivize them to get credit ratings done from standardized agencies which will then address the informational and scale problems and thus the capital will flow in (and there will be no need to dedicate public capital here as private capital specially the micro finance groups have shown to effectively step in such cases). Banks too have found it useful to lend to such SHGs via the new Business Correspondents model and if we amend some laws, these SHGs may have the potential to raise capital directly from the markets via SME exchanges. By creating viable SHGs of critical mass, we are also doing away with the bargaining weakness problems since the entrepreneurs will be able to negotiate better terms. Thus the inefficiencies in the supply chain will be weeded away by a market based process and the entrepreneurs will now be able to generate capital, invest in technology and skill training and thus be able to create a virtuous cycle out of the vicious one. Also, importantly, we already have seen that the SHG model works in real life as well (NRLM, Kudumbshree in Kerala, NE-RLM in Assam). Similarly while it may be a tall order for the government to provide infrastructural facilities to every village, the ‘cluster’ based approach can help us overcome the infrastructure barrier and can also increase the bargaining power of the entrepreneurs.

Another important challenge which we saw was how these entrepreneurs are forced to be risk averse out of socio – economic disabilities. Definitely we need to remove the impediments to their risk taking ability. And such impediments as we saw were the chronic poverty, health and educational insecurities and social injustice. This is where the fundamental right to education (implemented via Sarv Sikhsha Abhiyan), providing food security (proposed under National Food Security (Draft) Bill, 2012) and universal health care (Planning Commission high level group recommendations) step in. Once such ‘unfreedoms’ (to borrow from Prof. Sen) are removed, there is no reason why can’t unleash the enterprising potential of the handicrafts sector in India as China has already done.

Finally, like any other business, handicrafts too will need an enabling policy environment framework. Focus needs to shift from Keynesian approach to a more enabling approach. Some of the aspects of the enabling approach we have already covered above. To address some other concerns like the skill training in the knowledge pillar, we have come up with the National Skill Development Programme directed by the National Skill Development Council. The increasing penetration of cellular and broadband services (as envisaged under the National Telecom Policy, 2012) can help address many of the concerns under the knowledge pillar and the linkages pillar. The PURA 2.0 scheme of the 12th FYP too is a highly cost effective scheme to improve the rural connectivities and thus help overcome the infrastructure constraints.

Finally in terms of improving the international environment, we need to diversify into newer markets (and for this we already have a Focus Product Market Scheme under the Foreign Trade Policy 2009). To help our handicrafts comply with the international regulations, we definitely need the state to disseminate information and to aid the entrepreneurs in making the transition. We have already seen this in the leather industry of Kanpur where the state provided grant (60% center and 15% state) to the leather units to set up waste treatment plants to comply with EU’s REACH regulations. Such informational exchange can also be enhanced along with improved supply chain efficiency if we increase the participation of our entrepreneurs in various trade fairs.

Thus we see step by step, how there is a genuine viable case for the handicrafts here. We don’t need to ape other countries and spend huge sums of public money, rather just need a change in approach and follow a unique model to utilize our own core competencies – and we can turn our handicrafts around.