Challenges of Running a University in India

Three key challenges are: (1) trust and trustworthiness, (2) balance of vigilance and docility, and most important, (3) the regard for public goods.

When people do not trust others to do the right thing, or do not deserve to be trusted to do the right thing, we try to make up for the trust deficit by writing down rules and procedures to impose order and bring about some predictability. Unfortunately, rules are poor substitutes for judgment, and coarsen communication, relationships, and performance in workplace and in society at large. But in absence of trust, there are no clear alternatives to rules. If a powerful politician calls the director/vice-chancellor of a university demanding the opportunity to speak to the community for political purposes, he/she is violating the trust placed in him/her by the public. The system reacts by trying to draft rules on who can and cannot speak, erring on the side of isolating the university community from legitimate and rich social and political engagement. If a member of faculty uses university resources for personal benefit, the system reacts by drafting rules that err on the side of preventing efficient and legitimate uses of resources. One can come up with many examples. In universities where the output of faculty (and the university) is so difficult to measure, this problem is especially critical, and writing of rules to try to measure faculty's intellectual contributions just makes it worse. What scares most people about taking such responsibilities is walking into an environment where trust and trustworthiness are weak, and not valued sufficiently by the governance structure and the community at large.

Universities, like all societies, face the problem of dispersed information (Nobel Laureate F. A. Hayek, American Economic Review 1945). On one hand it is critical that all people in positions of power be monitored by those who have the information about the consequences of their actions (e.g., employees, faculty, and students in the university and general public in society). On the other hand, it is also important that those who are governed have a degree of docility (Nobel Laureate Herbert A. Simon, American Economic Review 1993) to accept the decisions of legitimate authority even if they impose some inconvenience, and give the authority some benefit of doubt, instead of rising immediately in protest against every and all actions which are, or appear to be, ill-advised. Protests carried out judiciously help governance of the system by feeding information to those who run the place; indiscriminate protests vitiate the environment, destroy reputations, and push authority into a defensive posture behind the rules and become non-transparent. The second fear that scares people from accepting such positions is the risk that the governance structure and the community may not act with a reasonable balance between vigilance and docility.

The third, and in my assessment the most important, issue is the lack of regard for public goods and externalities. Excessive regard for private goods (my house, my car, my children, my safety) without balancing it with public goods/bads (filth outside my house, effect of my car on city air, traffic congestion, and walkability of the street outside my house, effect of private schools on quality of public education, effect of street parking of cars in residential neighborhoods blocking access of fire engines) are just a few examples. Although these examples are chosen from everyday life, they are also applicable to academia. In fact, academic communities often have more intense externalities than elsewhere,with actions of  members of a university having important impact on others. For example, when one faculty member lingers over a cup of tea to arrive late in the class, it affects the punctuality of students in all other classes. The possibility that the community may not value the public goods sufficiently, and transfer the burden of recognizing and enforcing the consequences of extensive externalities within the university to the director scares potential candidates. Such a responsibility immediately puts the director in an untenable position.

None of these three factors belong to the category that (like material resources) either the Board of Governors or the Ministry of Human Resource Development can offer a candidate on a platter. However, the former can, in their own day-to-day functions and decisions, consider how their choices will have consequences along these three dimensions. The same applies to the faculty and staff. Building a fruitful and rewarding academic institution is like growing a tree. No matter how badly I wish to eat mango for dinner today, my ability to do so depends on whether I planted and nurtured a mango tree over the past ten years. Likewise, if I wish to have mango on the table ten years from now, time to start is now. When even the subsidized apex institutions like IITs and IIMs focus their primary attention on the revenue generating degrees (B.Tech. and MBAs respectively) instead of dealing with the problem of insufficient top talent in teaching and scholarship by using their subsidies to support the negative-revenue PhD programs, it is clear that we have some distance to go to recognize and deal with the externalities in the domain of higher education in India.

Why Has the Indian Retail Sector not Modernized?

In the recent controversy about foreign direct investment in the retail sector, the conspicuous failure of Indian entrepreneurs to modernize the industry has remained largely unaddressed.  An efficient supply chain linking producers to consumers calls for a commercial code, business relationships, reputation of products and their brands, transportation, warehousing, financing, and software to operate and control the system. But all these elements are already present or available in India. Why does India need a Walmart to lower the prices its consumers pay? And therein lies a tale.

Efficient mass merchandizing calls for a large scale with hundreds if not thousands of outlets. Control of large networks requires stocking and pricing policies, software for managing logistics and transactions, as well as databases in which all goods and related events throughout the network, including billions of transactions, are captured and permanently recorded in a traceable and auditable manner. Integrity of these databases, being crucial for the ability of the management to identify bottlenecks and remove inefficiencies, is jealously guarded.

The system that serves to manage large retail organizations is also convenient for the tax payment and collection. Complete record of goods, cash, and transactions facilitates easy and fast preparation of internal and external financial reports as well as returns for sales, income and any other taxes. The system creates a difficult-to-manipulate audit trail making it easier for management to track any misappropriation of inventories or cash handled by thousands of employees in locations spread across the country. Further, it is easier for the independent auditors of financial reports (for publicly-held firms) and for the government tax auditors to verify the records. Integration of large scale operations and the information system designed to serve them is essential to their efficiency. For example, this system may enable a chain with thousands of stores to track the sale and inventory of each of their tens of thousands of items in real time, and request vendors to ship additional supplies to locations as needed within minutes.

Efficient operation of such an integrated system has two simple requirements: a pricing policy and tax payment. Without a pricing policy, each interaction with customers presents an opportunity to bargain. Bargaining can allow the seller to price discriminate (charge a higher price from customers who place a higher value on the good) and thus earn higher profits. However, in a chain of stores where the owner cannot be present to do the bargaining with every customer, the risk of moral hazard associated with delegating the bargaining function to hired employees becomes too large. Most Indian retailers either do not post their prices, and even when they do, the prices are subject to bargaining by customers who know better. Retailers think that the advantages of extracting a higher price from some customers outweigh the consequences of limiting themselves to a mere handful of stores managed by trusted employees or family members.

Payment of sales, income and other taxes is an even greater barrier to modernization of retail industry in India. By not recording purchase and sale transactions, or recording them selectively in two separate sets of books, is a common method of evading taxes in many parts of the world. India is no exception. Modernization of retail industry, accompanied by integrated and transparent information systems, makes it easier for governments to collect their due. Operator of a large chain who asks the employees to evade taxes becomes susceptible for pressure and blackmail by employees. It is not surprising that entrepreneurs often take the simpler route of keeping their operations small enough to manage through direct personal supervision.

Indian retailers can and should break out of the self-defeating confines of the beliefs about the profitability of tax evasion and bargaining with individual customers. When they do, they can earn much larger total profits on higher sales volume from expanded operations in spite of narrower margins. Narrowed margins, combined with economies of scale of operations, and expanded bargaining power vis-a-vis producers will enable them to lower the price to consumers. Consumers will respond to lower prices by buying more, and increasing total profits of retailers.

It may take entry of foreign retailers to alter the beliefs of Indian retailers about their business model. Once that happens, Indian retailers can be expected to develop modern chains of their own; they may even take their business abroad. If they do, Walmart may have to watch out for its own territory.

TheMint, January 9, 2011

Renovating India's Higher Education

Yash  Pal Committee Report on Higher Education in India: A Review

The Committee to Advise on Renovation and Rejuvenation of Higher Education (the Yash Pal Committee) has submitted its report to the Union Minister of Education on June 23, 2009. Given the wide-spread concerns about the current state and trends in India's higher education system, the report could not come at a better time when the new government may want to take major steps to improve higher education.

The Report, written by a panel of eminent educationists, identifies some major weaknesses of the current system that include disciplinary fragmentation and isolation, separation of instruction from exploration, proliferation of single-discipline institutes, erosion of autonomy and democratic spirit of freedom of thought, unattractiveness of careers in education to the talented youth, excessive commercialization, uneven accessibility, poor financing, governance and management, and excessive and inappropriate regulation of colleges and universities. Political pressures and control from the outside find internal resonance in the interested parties within these institutions, often generating resource and attention consuming litigation and many conflicts which are unrelated to their educational mission.

The Committee proposes a bold structural move in creation of a new constitutional body, National Commission for Higher Education and Research (NCHER), to takeover the responsibilities of the Universities Grants Commission, the All India Council for Technical Education, and all educational aspects of 13 professional regulatory bodies such as the Bar Council of India. The Commission will be directly responsible to the Parliament, along the lines of the National Election Commission, to protect it from political interference.

The Commission will serve as the apex regulatory body in the field of higher education in India and seek to redefine the higher education through (1) developing a vision of higher education as reflected in framework for curricula, university benchmarks, international comparisons, educational policies including costs and pricing; (2) advising the union and state governments, (3) creating norms, processes and structures for entry, accreditation, and exit of institutions and programs; (4) developing sources and mechanisms for funding; (5) promote effective and transparent governance; (6) creating a national database on higher education; (7) promoting an environment to attract talented youth to education and research; (8) creating processes for richer environment for learning and exploration through softer interaction among students and teachers; (9) finding ways of gradually freeing the universities from the administrative burdens of affiliated colleges; and (10) reporting annually to the Parliament on the state of higher education.

This three paragraph summary does not do justice to the grand vision of the future of India's higher education that motivates this 94-page document. Every system, no matter how inefficient and dysfunctional, has plenty of beneficiaries. Threatened by proposals for reform, they stand ready with their inside knowledge to rip the reform proposals apart by line, paragraph and chapter. Where is the evidence for this? Prove it first. But as Samuel Johnson said: Nothing will ever be attempted if all possible objections must first be removed.  The Government of India has a clear choice ahead "act now, or spend its five-year term dealing with the objections.

The Report can, however, be improved by strengthening some of its recommendations. It underplays the severity of shortage of talent in higher education and research and the weakness and consequences of the for-profit "investment" model of higher education for quality and innovation. It hardly mentions the responsibility of the business corporation in supporting higher education and does not adequately promote the benefits of regulatory competition in the vast Indian system. Let us consider each of these issues briefly.

Many of the ills of Indian higher education can be linked to the quality of talent in the field. A significant number of the best minds of each year's graduates will have to be attracted to instruction and research for the Committee's recommendations to have any chance of success. Perhaps the President of India could congratulate the top 1 percent of each year's undergraduate class through a letter, letting them know that as exceptional people, they are invited to pursue post-graduate studies with a government fellowship in any field at a university (in India or abroad) that admits them at any time during the five years following graduation. If even a small proportion of such talented graduates accept this offer of a Presidential Fellowship, we shall have significantly increased the flow of talent into education within a decade or so.

In addition to educating some 40 lakh new graduates, Indian colleges and universities also must also educate about 4 lakh new instructors each year. If undergraduate classroom is the wheat farm, the graduate program is its seed farm; whether we eat or starve tomorrow depends on the quality of grain saved as the seed. At present Indian universities grant some 17,000 PhD degrees annually across all fields and, in the judgment of many educators, of mixed quality. Graduate programs, like seed farms, are extremely expensive to run, and yield little revenue to motivate profit-making colleges. Profit-making companies do not invest in educating educators and exacerbate the problem in India. To create and sustain a good system of higher education, the Commission will have to have a "seed farm" division of its own to deal with the problem.

No university in the world has found a way of delivering quality higher education without government or charitable subsidy. Quality education is expensive, and anyone who can figure out a way of running a world class (or even average) university at profit deserves at least a Nobel Prize. Since none of the top 500 universities across the world is run without large subsidies, the source of widespread belief in India that investment by profit-seeking organizations "whether foreign or domestic "in higher education will help deliver quality education is a mystery. There is no such thing as commercially viable higher education beyond low-level vocational education.

While declining in relative importance, government employment is still important in India. Strict written definitions of qualifications for government jobs requiring specific subjects sustain the compartmentalization of education in universities. The Committee's recommendation on lowering the walls among the disciplines should be accompanied by greater flexibility in defining educational requirements for jobs and allowing greater role for judgment by the recruiting personnel for government.

The Committee's recognition of the diverse skills needed for management of various operations of universities calls for care in education, training and selection of administrators. Managing academic (programs, faculty recruitment and promotion, admissions, curriculum and budgeting), financial, facilities, personnel, government, community, governance, and fundraising operations of universities requires a diversity of skills. The NCHER would do well to help universities build such management capabilities and do appropriate succession planning. Improving the management of universities will help increase the chance of success in reaching the goal of university autonomy.

A great many institutions of secondary and higher education in India were created and are run well by charitable trusts. However, the same charitable trust has also become a veil for colleges run by operators who see them as little more than profit-making businesses. The Commission will have to make sure that the not-for-profit trusts are true to their legal charter and do not leak funds to their controlling parasites. Alumni of these institutions could be given a voice in helping the Commission evaluate the operations of colleges run by the trusts.

Finally, the proposed new structure of the Commission should have appropriate features to protect it from the conditions that led to failures of the structures is will replace. Monopoly regulatory power over higher education for a population of 1.15 billion presents a prima facie risk of getting mired again in inefficient procedures and rules. The Committee Report itself recognizes that one-size-fits-all regulation of higher education will not work. For this reason, the Government of India would be better advised to adopt a model of regulatory competition by creating not one but two, or perhaps three such commissions, each acting independently with jurisdiction over the entire country.  Absence of monopoly regulatory power will induce these commissions to compete, innovate by trying different models and ideas, allow experimentation, comparisons, imitation and rejection, and ultimately evolve a complex diverse matrix of institutions of higher education appropriate for a large fast developing country to support its ambitions to join countries of the first rank in the world.