There is a significant disparity in the demand and supply of higher education in India, especially management education. A high-growth economy like India requires a large number of management graduates. But unfortunately India's management institutes have failed to keep pace with the country's growth.
On the other hand, the market value of an MBA has soared in recent times. A simple extrapolation of current trends, and the fact that there is a bulge in the lower age group of the population, would reveal that this gap will only widen over time.
Unless, of course, changes are made in the extant environment and policy.
In a first course in microeconomics, we are taught that a situation of excess demand would result in a price increase if the market is left to itself. In case, for some reason, prices do not or cannot rise to bring demand and supply to balance, the brunt of the adjustment will be borne by a system of rationing.
Indians are all too familiar with this situation, having experienced it for products such as automobiles, two-wheelers, foreign exchange and so on, for over a generation. The situation eased itself after 1991 when the government decided to allow new firms to enter the markets, increase investment and thereby supply.
To most economists, this would be the ideal way to address a situation of excess demand. But unlike for product markets, such as onions, where supply can be increased fairly rapidly by imports, such a solution is not possible in the market for MBAs.
Supply can be increased albeit with a lag by allowing fresh investment, both domestic and foreign, in management education. In fact this is precisely one of the recommendations of the National Knowledge Commission, charged with the responsibility of building excellence in India's education system.
But augmenting capacity will take time, perhaps a few years to materialise. Are there any immediate steps to addressing the supply constraint for MBAs? I think there are, but they would require a change in the way the system functions.
IIMs (Indian Institutes of Management), the premier management institutes in India, have sprawling campuses and for decades have been the preferred choice of students wishing to pursue an MBA. Demand has increased much faster than supply, making the IIMs jointly the most difficult institutions to enter.
For example, for every 600 students that aspire to an IIM Ahmedabad seat, only one is selected. Naturally, these are among the best and brightest in the world. Unless there is a reason to restrict entry for the purpose of preserving the quality/scarcity rent of an IIM MBA, intake to each of the IIMs can be increased without any significant additional investment.
The faculty-student ratio, one of many signals of institutional quality, should also not be a constraint. Compared with their US counterparts, the faculty-student ratio at IIM-A is only 1:8, while it is 1:19 at Wharton and 1:14 at Harvard Business School (HBS).
IIM-A admits around 250 students a year, while its two American counterparts admit about 900 each. IIM-A annually enrols just 1,620 students in its executive MBA program, against over 8,000 by both HBS and Wharton.
In fact, to accommodate an increase in seats due to the reservation for OBCs, it was agreed by the IIMs that the existing unreserved seats would remain intact and the reservation clause would be honoured by increasing the intake.
Now that it has become almost clear that the OBC quota is unlikely to be implemented with effect from this academic year, the envisaged increase in admissions can perhaps pass on to those numerous aspirants who have marginally missed the bus for selection into the IIMs.
Admittedly, even if this is implemented, it would be a mere drop in the ocean as far as bridging the demand-supply gap is concerned. But it is a start.
Add to that a similar increase in intake for the more than 1,000 private business schools that exist in the country and we would have made a significant initial impact on cutting excess demand. The second round of increases can come when new capacities get established. But one must ask what prevents private business schools from increasing their intake in the first place?
A little history would be useful to understand the situation. The proliferation of private professional institutions in the 1980s and 1990s was driven to a large extent by the enterprise of businesses and even politicians.
The rapid expansion of capitation fee colleges and the public debate that followed created a poor reputation for private institutions in higher education. This occurred in an environment where there already was an immense reluctance to see education as an industry or business.
So when private management institutions started 'flourishing', they were brought under the regulatory control of the All India Council for Technical Education (AICTE), a statutory body established to, inter alia, regulate management institutions.
Regulatory control over management institutions is multi-layered: the IIMs are regulated by the ministry of human resource development, private management institutions by the AICTE and university business schools by the University Grants Commission.
'Ownership' therefore determines who the regulator is, and perhaps also the extent of intrusiveness in the functioning of the institution. While the IIMs and university schools may enjoy a certain amount of autonomy, private management institutions, partly because of their own chequered history, need regulatory approvals for increasing capacity and adding new courses.
The basis for approval is almost formulaic, with the faculty-student ratio, discussed earlier, being a touchstone for assessing quality. There are other norms relating to infrastructure and in sum these make for a set of conditions that are inimical for institutions in responding to market needs.
The AICTE's concerns are valid, but surely there are other ways to ensuring quality and protecting consumer interest.
Given the government's fiscal constraints, the ultimate solution to the shortage in the professional higher education space in general and management education in particular, will have to emerge in the form of private investment, both domestic and foreign.
Until that happens, allowing more intensive use of existing faculty and infrastructure resources may provide a temporary remedy. If not, those lucky enough to get admission to the premier management institutes in the country will continue to enjoy scarcity rent.
The author is Professor of Economics at the International Management Institute (IMI).