This is a continuation of my previous post on HRD and management institutes. I had ended that post with the recommendation: Increase fees to be more aligned to the fees for comparable schools around the world and provide student loans to all students who require it to pay for their IIM education.
This is a necessary condition for avoiding economic losses that arise from mispricing. Prices have to at the very least cover costs. The question then is whether the price for an IIM education should be above cost even? I think that a case can be made for that. Suppose that an IIM degree increases the net present value of the future stream of income by, say, Rs 25 lakhs. Assume that the cost of an IIM degree is Rs 10 lakhs. By pricing the education at Rs 10 lakhs, about Rs 15 lakhs is the net benefit to the student. There is no reason why part of this cannot be appropriated and used for some socially beneficial purpose.
The proposal that I put forth is this. For this exercise, I will assume specific numbers for costs, prices, net present value of the future stream of income, etc. The actual values will be different but will not affect the outcome of the argument.
First determine the full cost of an IIM education. Assume it is Rs 10 lakhs. That figure must serve as the floor for the pricing of an IIM education. Then determine the net present value of the increase in the future stream of income arising from an IIM degree. Assume that it is Rs 25 lakhs. That figure must serve as the ceiling for the pricing of an IIM education. Now set the price somewhere between the two, say, Rs 18 lakhs.
So for every IIM graduate, the net ‘profit’ is Rs 8 lakhs. Every year the IIMs graduate about 10,000. Aggregate net profit will then be Rs 80,000 lakhs or Rs 800 crores (approximately $170 million). That is a large sum of money which can be used in various ways. One way to use it would be to fund primary education. Assume that it costs $170 to provide primary education per year per child. That means we can educate one million children from doing something that we already do but don’t capture even part of the value created.
Alternatively, $170 million a year could be used to fund the creation of futher IIMs. After all, we have no dearth of applicants. Something of the order of 130,000 students compete for about 12,000 seats.
However, the question would then be: how are students going to be able to afford Rs 15 lakhs for an IIM education? Simple. Give every candidate a loan for the entire amount. Make the loan repayable in the next 7 years, say. Every year the student pays off 10% of the loan.
What does this scheme achieve? Primarily, it avoids economic waste. If the increase in the future stream of incomes were not sufficient to cover the full cost of the education, then clearly this education should not be delivered. Secondly, if the full cost is recoverable, this scheme further captures some of net benefits and channels it to primary education — which itself has multiplier effects. Channeling it to primary education in effect increases the pool of talent from which future IIM graduates can be drawn.
We need to think through the funding and pricing of higher education. Leaving it to bureaucrats who have little understanding of the larger issues is not very smart.