As a stable, thriving democracy in the heart of Asia, India’s financial system has embraced the concept of market efficiencies seamlessly despite numerous challenges, and this has led to sophisticated and well-regulated capital markets.
It’s worth noting that the very aspect of market efficiencies, catalysed by higher literacy levels and disruptive trends, are critical to building transparent and competitive systems. After all, knowledge is power, and democracy, by definition, empowers all citizens.
As the youngest nation in the world, education, its allied infrastructure and education policies form the triad of holistic socio-economic development. A majority of the 250 million youths in the country resides in its villages and the per capita income currently stands at a little above $2,000. Considering these two metrics, what should be the characteristics of the education sector to propel India to its real potential?
The education sector is expected to cross $100 billion (₹7 lakh crore approximately) by the end of FY2019. There are over 39,000 colleges and 900 universities across the country. The numbers are only expect to swell.
Woeful lack of resources
While in absolute terms, India’s spend on the education sector has increased, as a percentage of GDP it still falls woefully short in terms of resources to fuel this juggernaut. The primary reason, is the approach methodology which prevents this sector from attracting private money and reducing the pressure on the government.
The government has indeed been on its toes, to move in tandem with the needs and changing trends. The Prime Minister’s Skill India initiative to train 400 million youths by 2022, the Pradhan Mantri Kaushal Vikas Yojana, the National Policy for Skill Development, the Unnat Bharat Abhiyan and the MHRD’s Ek Bharat Shreshtha Bharat campaign are breathtaking, big bang reforms that are transformational. But these fundamental structures have not yet been adopted smartly, by the private sector.
Today, over 70 per cent of higher education in the country is delivered by the private sector. While not doubting the altruistic motive of these institutions, it is unfortunate that some of the decisions are not earmarked to the criteria of maximum academic and social impact.
There are asymmetries that exist in the regulatory framework that compel the private players to focus substantially on the commercial viability aspect. Regulatory control and cap on the fee structure leaves institutions with less room to maneouvre. It puts an immense amount of pressure to operate in a constrained financial environment.
Why it all adds up
Let’s take a look at the math. Promoters of institutions are expected to own infrastructure during the floating of their education venture. The edupreneur creates these more often than not, by borrowing funds against either hereditary or purchased land holdings. This imposes a cost of interest, which is then passed on to the students in the form of creative fee components. The tuition fee is then loaded to provide for the 10-13 per cent interest cost.
Even profit, the key motive for any entrepreneur, comes at a cost, as there are levies attached to it. The levy towards these profits are discretely inducted in the form of services fee for the various resources availed by students within the institution’s purview. These amount to anywhere between 10-15 per cent rise in costs of tuition fee.
Then comes the cost of marketing — from the student acquisition to the campus placement, the total costs incurred are in the range of 25-30 per cent. These too are factored in as cost-to-student in the form of fees.
The result of these — bloated student loans. While in the US student indebtedness has already garnered national interest, in India, its still insulated, but unfairly so. It is interesting to note that the student pays the interest on such bank loans and indirectly for the financial costs for the institution funding. This is indeed a double whammy.
Forced to take loans, mortgages
Most students end up funding higher education through bank loans by mortgaging family assets. Test preparation, entrance examination fees, coaching and so on are the other added costs that add to the total cost of education. It is time to develop an ecosystem to deliver upon the true intent of ‘not for profit’ education.
The top-notch institutions globally, are funded through endowments, grants, donations or state funding. They receive significant funding for developing patents, offering consultancy and research activities.
It is high time that the sector needs to develop a formal and regulated mechanics of funding. There are enough and more HNIs and institutions who may have the philanthropic desire to participate in the education sector through grants and endowment, even for a lower return.
The best formal mechanism for making this happen is through the already mature capital markets of our country — leveraging conscious capitalism to empower India through education.
A new asset class could encourage the investors in capital markets to fund educational institutions and reap reasonable returns which are tax free. This would allow the investors to tap into the latent value of educating high potential academic talent, while at the same time reaping the obvious monetary and social benefits.
A Bharat Edushare model
The investment vehicle in a social corporation which is public limited is created for the purposes of delivering education. Such a corporation should be permitted to distribute profits not exceeding 20 per cent of the net surplus generated and should be provided with a tax exemption on its surpluses as long as the corporation is recognised by the education regulators.
This could become a self-regulatory mechanism for funding education in the future and also could be opened for funding by foreign investors to attract overseas investment. The already established regulatory mechanics of the capital market will reduce the trust deficit associated with funding education and provide a more attractive proposition for the monies that are being spent overseas for the same purposes by high net worth Indians.
Such an asset class would help reduce the dependency of finance of private education on debt and the reduced burden of interest would surely make more monies available with the institution for investing into the quality of education. It would also enable the genuine private educators to access the capital markets and raise finance based on the credibility established by their institutions in the education world.
The price discovery mechanism by virtue of the free hand of the markets, would develop market capitalisation for quality institutions enabling them to raise larger resources with lesser dilution.
It is commendable that the Government has formed the Higher Education Funding Agency (HEFA) with the aim to seek funds to improve and provide more robustness to the institutions and the curriculum. Despite the noble intentions, the initiative has not garnered sufficient interest among investors.
Then what’s stopping the private sector and entrepreneurs to sprint ahead and take a leap? For starters this model could be called, the ‘Bharat EduShare’.