February 10, 2006EconomyPublic Policy

It is higher education that needs fixing

Time to correct India’s lopsided education budget

This is an archived blog post from The Acorn.

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: As pointed out by some readers, these figures may be inaccurate. See afterword below] 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.

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