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Economics of Higher Education in India: Tamil Nadu as a sample state

e look at the numbers and the economics of higher education, with special focus on the State of Tamil Nadu, since it is much more advanced along the curve of private players in higher education.

In this section we look at the numbers and the economics of higher education, with special focus on the State of Tamil Nadu, since it is much more advanced along the curve of private players in higher education. The intention is to derive an economic solution for the issue of NEET protests and the seeming unfairness of the selection process.

The 2015-2016 All India Survey on Higher Education, an exercise conducted by the Union Ministry of HRD found 799 Universities, 39071 colleges and 11923 Stand Alone Institutions listed on AISHE web portal across India.

78% Colleges are privately managed; 64% Private-unaided and 14% Private aided. Andhra Pradesh & Telangana have more than 80% Private-unaided colleges and Tamil Nadu has 76% Private-unaided Colleges.

Total enrolment in higher education has been estimated to be 34.6 million with 18.6 million boys and 16 million girls.

Tamil Nadu had 2466 colleges and 35 colleges per lakh of eligible population, ie, the 71.8 lakh individuals in the age group 18-23.

A vast majority of the enrolments is in undergraduate courses – 79%. Across India, only 7.4% of students are enrolled in Diploma courses, majorly in Technical, Nurse and Teacher Training. So, the core market for the education sector is the market for undergraduate 3 and 4 year Bachelor’s degrees.

Before we proceed further, a couple of definitions.

  • Gross Enrolment Ratio in Tertiary Education = no of people of age 18-23  years enrolled in college vs total number of people in that age group
  • Eligibility Enrolment Ratio = no of people who  of age 18-23  years enrolled in college vs total number of people in that age group who have completed higher secondary school.

India’s GER is 27% while Tamil Nadu’s GER is 49% – 49.8% for males and 48.3% for females. This implies that more than 34 lakh students are enrolled in colleges and 26.8 lakhs in undergraduate courses.

7.99 lakhs students appeared for the Tamil Nadu XII Standard State Board examinations in 2020, of which 7.2 lakhs cleared the examination.

The number of high school matriculates in the last 8 years is tabulated below:

YearPassed Students in lakhs
2015Not Available

Assuming similar passing numbers and percentages, we arrive at a total number of 45 lakh individuals between the ages of 18-23 that have cleared the 12th examination. Of these, 34 lakh are in college and a further 17 would have completed undergraduation, implying a EER of 100%.

Given reducing drop-out rates and increasing prosperity, we can see the GER go up to 60% in the next decade. This implies a growth rate in addressable market of 20% over 10 years. However, given Tamil Nadu’s low TFR, this growth may moderate to no more than a 15% gain in addressable market share.

Clearly, in the face of a static market, the only choice for a provider in this space is to migrate to higher value segments – that is professional courses that fetch higher fees.

High Value Segments – Engineering

In the academic year 2017-2018, 10 Government Engineering Colleges, 3 Government-Aided Engineering Colleges, 17 Constituent Colleges of Anna University and 550 Self-Financing Engineering Colleges were operating in Tamil Nadu. The number of self-financing colleges grew from 498 in 2011-2012 to 550 in 2017-2018. Of these, 65% of seats in non-minority colleges would be allocated under the Anna University Single Window counselling system and 50% in minority colleges.

For minority colleges, there is a further restriction that 25% of the seats or half the seats in minority self-financing category would have to be filled with students from minorities only.

This means that 35% of seats in general institutions and 25% of seats in minority institutions are available for allotment as per management’s discretion.

The DOTE regulations restrict fees in Government Quota to a maximum of Rs 55,000 per year and in management quota to Rs 87,000 per year. This may be contrasted with typical fees of 25,000 – 30,000 per year for an arts and science degree that is not part of a Liberal Arts program.

While there are 550 self-financing colleges, in recent years, enrolment rates in engineering programs have been very poor; less than half the approved seats were filled in 2019. If this is the situation in Government quota, the situation is equally poor in management quota, where formerly highly sought-after courses of Computer Science and Electronics now go begging.

Between 2005 and 2015, the vast majority of students enrolled in these courses in the hope of securing a placement in an IT company. Over the years, recruitment has dried up, with only the IT Services majors recruiting consistently. Even among the majors, recruitment rates have been very unpredictable. 2017 saw fresh offers of 40,000+, while 2018 saw only 10,000 odd and again perking up in 2019 with 40,000 offers.

As the IT majors move to fixed pricing, longer tenures for junior employees and build out platform-based services, they are no longer relying on a headcount-based growth paradigm. This affects the fresher hiring and thereby prospects for engineering graduates.

Between poor admission rates, regulations and public scrutiny on the practice of collecting capitation fees from students admitted in management quota, many engineering colleges are cutting back on programs, reducing headcount and diversifying to other areas.

Colleges and Politics

The private education market in Tamil Nadu is dominated by politicians or powerful individuals connected to political parties. Wealth of politically powerful individuals through inheritance and rent-seeking crony capitalism is invested in land. An important means of safeguarding land is to transfer property rights to a trust and utilize the land for educational institutions.

A recurring feature in the country side of Tamil Nadu is the sight of huge buildings and a vast bank of land many kilometres away from an urban centre by the side of a highway. Operating a college in such a location offers many opportunities to maximize the investment in land and buildings, in the form of cafeterias, canteens, transport services, all of which have a captive market in the form of college students.

One of the authors has come across a politically well-connected individual who is also from a dominant land-owning caste who runs educational institutions catering to nearly 5000 students. In a vast campus of hundreds of acres, the controlling family runs and engineering college, arts and science college, matriculation school and a residential CBSE school. Besides the usual transport and catering operations, the family also owned poultry and dairy farms, the produce of which has a ready market in the catering operation.

Given the sunk costs and the saturated market, education entrepreneurs are now looking at a new market.

Medical Studies

The premium segment in the education market is the MBBS degree. In lesser order of importance are other associated degrees for Dentistry, Clinical Practice and traditional Indian systems of medicine.

Given the paucity of doctors and increased demand for medical services due to rising incidence of chronic lifestyle diseases, MBBS seats are highly sought after.

After an MBBS, an MD or MS degree has become a necessity for doctors to recover the costs of the MBBS degree. Since the available capacity in India for medical education is scarce, the demand is fulfilled by China, Phillipines, Kyrgyzstan, Poland and Russia. 4000 students go abroad for studying medicine each year. This is a Rs 2000-2500 crore per year opportunity overall.

Tamil Nadu has a total of 3050 approved seats for MBBS. There are 23 Government Colleges, 2 Government Aided, 12 Self-Financing Colleges. Of these, 520 seats are available for self-financing colleges under management quota and another 220 seats under NRI category.

The Government quota seats in self-financing colleges are given by means of common counselling and the colleges cannot charge more than Rs 3.85 lakhs per year. For management quota seats, colleges are allowed to collect 22.5 lakhs per year for regular seats and even higher for NRI quota.

Medical Council of India guidelines place a demand of running a 300-bed hospital for an approved intake of 50 students per year and progressively increasing up to 1100-bed teaching hospital for an approved intake of 250 students per year. There is also an additional restriction on the occupancy rate. Given the long list of regulations, this is a prized source of income for many vested interests in Government.

Since the demand for services from teaching hospitals is low, the college often treats patients at very low costs in order to keep occupancy at mandated levels. In private communications with practising medical professionals, we gather that the total cost of running a 300-bed hospital runs into a sum of Rs 100 crores per year. Of this, at least Rs 50 crores has to be subsidised by the college.

To even recover the costs of running the college, a college must collect at least Rs 1 crore in capitation fees for each admission in management quota.

The educational institution can turn a profit only if it also provides post graduate courses. Colleges were using their own selection criteria to allot seats, ie, sell them to the highest bidders. Now, with the introduction of a standardised test like NEET, this introduces scrutiny.

Between 2006 and 2018, grade inflation became institutionalised in Tamil Nadu’s public exams. The introduction of Samacheer Kavi, with a watered-down syllabus in 2010 meant that even students that got through the management quota had high scores of 85% and above. Now, with standardised, nation-wide tests being administered, the scores are being brought under scrutiny and questions are being raised as to the vast gap in scores of students being admitted to Government colleges vs students admitted into private universities.

If NEET score criteria are applied to private colleges without distinction between Government and management quotas, it will sound a death knell for the medical education industry.

50% of the high fee yielding seat capacity is held by 2 politicians, both of whom belong to the DMK’s political formation and the remaining is held by individuals with political connections across parties.

We hope that this analysis will yield an insight as to the reasons behind the protests against NEET in Tamil Nadu.

Finding a Solution

Now that we have an idea of the situation, let us attempt and frame a problem for which a solution must be sought.

The problems that we seek solutions for are:

  • The supply-demand mismatch in MBBS seats.
  • Making the supply of MBBS seats profitable, to enable private providers to close the gap that Government providers cannot.
  • Ensure that merit is not compromised in selection of candidates
  • Ensure social justice is not compromised, enough seats are available at affordable prices and reservation norms are fulfilled

To ensure that the first requirement is fulfilled, there must be a gradual increase in number of seats and build-up of capacity both in Government medical colleges as well as private colleges. Setting up new medical colleges with one Government college for each district, and increase seats by 10% per year with an aim to double the availability of Government college seats in 5 years.

Similarly, the Government must engage with private players to define the optimal number of total seats and the ratio of Government vs management quota in such a manner that private medical colleges are able to make a profit even at an overall cost of Rs 30 lakhs for a MBBS degree.

A simple back of the envelope calculation would show the split of seats that could achieve all four goals across India

  • Seats in Government colleges – 45,000 from the current 23,000
  • Government quota seats in private medical colleges – 25,000 from the current 17,000
  • Management quota and NRI seats – 40,000 – at a annual cost of 7.5 lakhs per seat, this would imply an income of Rs 15,000 crores per year, which could go towards subsidizing 9 lakh beds in teaching hospitals.

This must be done without allowing management and NRI quota seats to be allotted to students that score less than 40% in the qualifying examination. A standardized set of evaluations administered at the end of the MBBS degree will also help in avoiding dilution of quality in qualifying doctors.

A cost of Rs 30 lakhs overall will also create a space for banks to step in with loans. The same cycle has played out in the engineering education segment. The rise of a large number of engineering colleges and reduction in cost of education created a market for education loans. The boom-bust cycle in IT jobs and dependent engineering degrees having played out, bankers are facing rising NPAs and education loan defaults.

Taking lessons from the engineering education industry, the increase in seats must not follow the same rate of growth but rather allow the market to grow in a slower fashion, so that the risk of NPAs is lower.

At the same, we must also plan for cyclical growth and slowdown in medical education markets. Failing to do so will only result in increase in financial malpractice and reduction in availability of qualified doctors.

To summarize, a gradual increase in capacity for MBBS seats to roughly twice the numbers of today all-India and continue with the existing quota system will have the following effects

  1. Reduce the per-seat cost of a management quota MBBS degree to Rs 30 lakhs over four-and-a-half years.
  2. Create a market for medical education loans
  3. Improve the scores of students admitted under management quota, since a much larger pool of people will be able to apply under this quota.

This will have an impact in improving availability of medical services and increasing the per capita physician availability rate.

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