The accusation that IIM's (Indian Institutes of Management) are 'elitist' schools has been used to justify the recent move to reduce fees at the IIMs. Presumably, HRD Minister Dr Murli Manohar Joshi's goal is to make Indian education, as a whole 'non-elitist.'

This article discusses whether cutting IIM fees will actually achieve this goal and aims to show how it will end up doing exactly the opposite.

• The IIM Controversy: Complete Coverage

The objective of the fee cut: Since Dr Joshi has not defined the context that he is using the word 'elitist' in, he has been able to imply its bad connotations, without really spelling them out. Let me make an attempt to reconstruct Dr Joshi's logic, in order to clarify the debate.

Elitism can be of two forms:

Intellectual Elitism: The IIMs are the premier management institutes in the country. The intense competition for entry into an IIM, coupled with a fair and transparent entrance process allows the IIMs to select the best candidates. The success of this process and the quality of education that the IIMs provide to those selected are well known.

If Dr Joshi feels that providing the best minds in the country (that want to study management) with the best possible education is being elitist, then maybe elitism isn't all that bad.

However, if we really want to achieve this irrational goal, we have to change the admission process to eliminate the most eligible candidates -- and cutting the fees doesn't really achieve that. However, I believe that more credit is due to Dr Joshi -- he probably means economic elitism. . .

Economic elitism: This implies that otherwise eligible candidates do not make it through the IIMs because they are too poor to pay the fees. This means that the students are otherwise eligible, but simply cannot afford to pay the fees.

Lowering the fees certainly does make it easier for economically disadvantaged students to study at an IIM. But this is, perhaps, the least efficient way to achieve this goal.

Other alternatives:

Bank loans: Has Dr Joshi heard of financial institutions called banks? And if he has heard that they exist, has he heard that they provide student loans?

A possibility is that banks don't provide loans to needy IIM students. However, most of the assets in the banking sector in India are owned by public sector banks -- which are owned by the government of India.

And Dr Joshi, as a minister in the cabinet of the government of India, is surely in a position to make banks provide loans to IIM students (and these will be profitable for banks as well).

Can Dr Joshi name a single eligible candidate that got through the CAT (Common Aptitude Test), but didn't go to an IIM because he could not afford the fees? I doubt it. And if he can, then he should walk across and have a chat with (Finance Minister) Jaswant Singh about the inefficiency of his public sector banks instead of slashing IIM fees.

More seriously, an option worth considering, is loans guaranteed by the government / IIMs for needy students. This will eliminate the credit risk for banks and give them an additional incentive to lend to needy IIM students.

Need-based scholarships: Surely not all students admitted to the IIMs are unable to afford the fees. Creating additional need-based scholarships will allow government money to be targeted more effectively -- those that can afford to pay will pay and those that cannot will get a scholarship.

Although ensuring that only needy candidates get these scholarships is not easy, it is obviously better than providing this funding to all students (which is what slashing the fees is doing).

What is wrong with lowering the fees? Dr Joshi, certainly does have a point when he says that only the economic elite go to IIMs. However, the fault does not lie with the IIMs for this.

IIM students (at least while they are in IIM ) are no richer or poorer than the average Indian graduate with the same level of work experience and the same quality of undergraduate education. It's just that the opportunity cost of education is so high in India that the really poor don't end up doing undergraduate degrees.

If the IIMs are elitist, then so are Mumbai/Delhi University and all other universities in the country that select candidates on their undergraduate achievements.

Thus, if Dr Joshi really wants the IIMs to be non-elitist, he should ensure that the pool of eligible applicants contains more economically disadvantaged students, by ensuring that they are able to afford a college education.

If Dr Joshi is correct about economic elitism at the IIMs, it is only because the IIMs are the graduate schools that appear most in the public eye -- they are the messengers that our education system hasn't worked well enough at all levels prior to graduate school.

Go ahead and shoot the messenger Dr Joshi -- because that's exactly what you are doing!

The outcome -- shooting the messenger or increasing educational elitism: There can only be two outcomes of reducing IIM fees:

• The quality of an IIM education declines over the years; and
• The government spends more money on the IIMs and therefore less on primary, secondary and undergraduate education.

Here is why. Lowering fees reduces the incomes of the IIMs. Reduced incomes can only be compensated for by reduced expenditure or increased government grants. Reduced expenditure implies less money spent on infrastructure (computer labs, libraries, etc) or on faculty development and research.

Thus, the quality of education suffers and Dr Joshi succeeds in destroying one of the few good things that Indian education has going for it.

Therefore, in order to maintain the quality of IIMs, the government has to increase their grants.

The economics: Basic economics suggests that markets fail (and therefore governments should intervene) for public goods or in situations where there are externalities. Externalities mean that benefits accrue not only to the person making the investment, but also to the society at large.

For example, although the costs of investing in goods like primary education are much less than the benefits to society at large, they may not be less than the cost for each individual making the investment -- therefore, if the government intervenes everyone is better off.

Now, an MBA from an IIM is a far cry from this -- the monetary value of an MBA for each individual, in terms of the salary he/she commands after it is much greater than its costs -- no matter what the initial wealth of the student.

Thus, it makes sense even for poor students to take loans to pay for an MBA from an IIM -- and for banks to grant these loans. Government intervention is neither necessary nor cost effective.

Bad economics: There have been noises from the HRD ministry that there will be increased grants to IIMs in order to compensate for the cut in fees. Increased grants will basically fund the education of those that will be really rich in the next few years.

A fraction of IIM students will go abroad and this government funding will be lost to the country. The fraction that remain will have starting salaries of Rs 500,000 a year and will be able to pay off the cost of their education a few times over in the next few years.

So, in effect, reducing IIM fees implies that the government will be spending more on the rich or the economically elite. How's that for a bad policy? Achieving exactly the opposite of what you set out to do. . .

Well done, Dr Joshi!