The recent lowering of tuition fees of Indian Institutes of Managements to Rs 30,000 per year from Rs 1,50,000 per year as required by the Minister of Human Resources Development is hard to understand.

If it is felt that education including higher education should be the right of every Indian and that the State should provide it, Rs 30,000 is too high. Many poor students may find it difficult to pay that much amount.

The IIM Controversy: Complete Coverage

The logical thing would be to make it free. Education has externalities and one may say that the society benefits from well-trained people and that education should be financed from general Income-Tax.

This should certainly be the case for education till the high school level in today's world of knowledge economy.

For higher education and that too postgraduate education in professional schools it is not obvious that education should be completely free.

There are problems with free education at higher levels. First of all quality is difficult to provide and maintain. Most state universities in the US, who charge very low tuition fees, have comparatively poor standards.

Governments are not able to provide for whatever reasons, the amount of resources that private institutions are able to. Even when government is able to provide adequate resources, the problem of efficiently running a public institution remains.

In our case there may be one more difficulty. Universities would then be infested by permanent students, many hanging around for political reasons, distorting the academic environment.

Also, free education will distort allocation of resources as many people would devote more time to education than it is worth for them and for the society. Anything free is likely to be wasted.

Thus there could be significant social costs. Making students pay part of the costs of education could alleviate some of these problems. Also universities and institutions that depend entirely on government funding become vulnerable to government and bureaucratic interference.

The present minister may scrupulously avoid any interference in academic matters, but the next one may not. The fear that the grant may be curtailed might make institutions conservative and innovation might suffer.

Government's objective in supporting higher education should be to maximise social welfare. That would depend on the number of educated persons produced as well as the quality of their education, of course, net of the cost of educating them.

Quality is thus of paramount importance here. The government would find it difficult to differentiate between institutions and support them differentially.

Good institutions would suffer shortage of funds and the poor ones are unlikely to be cost effective. Thus, completely free higher education for all poses problems.

A market price determined solution also has some pitfalls. The most obvious one is that it may deprive poor students of higher education.

A second problem is that quality schools enjoy monopolistic power and may be tempted to appropriate a part or even a large part of the gains from education.

This would reduce the number of students who seek higher education. That would also lead to socially inefficient allocation. Also when cost of education becomes too high, the graduates will be too preoccupied with money and the services they provide may become more expensive.

Thus if medical education is made very expensive, doctors' fees would surely be high. Thus a free market determined fee structure may not be socially desirable either.

How should one then set tuition fees for higher education? We have to recognise that good quality education requires good teachers. Good teachers require good research facilities and time for research.

An appropriate mix of teaching and research is needed. This calls for resources to pay for such a faculty. Who should bear this cost, students or society? This should depend on the discipline.

Professional higher education in different disciplines involves different levels of gains to the individual and to the society. When someone studies philosophy, the social gains may be much higher than private gains compared to when someone studies management.

The level of social support needed for philosophical education in percentage terms may be higher than for management education. Society may fully support, and even encourage by giving fellowships to people to study certain subjects.

When the gains from education in a particular discipline such as management, accrues substantially to the graduate, there is a strong case for making students pay a large part of the costs of education.

Of course as pointed out earlier, we should not leave the schools completely free to set their fees when the supply of education is not competitively market determined.

If for example, supply of medical colleges is limited, charging market determined price may end up with expensive medical education and high cost medical services.

In a competitive environment if medical colleges start appropriating the full gains from education, new colleges would be started and competition would bring down the freedom of colleges to charge what they want.

In the equilibrium, they would charge only the full marginal cost of education. When the supply is not competitively determined by the market, we need some level of control, may be through a social norm.

My suggestion would be for schools to charge full marginal cost but with a ceiling. A ceiling is required for otherwise the schools would have no incentive to be cost efficient.

The ceiling should depend on the expected income of the graduates in the first five years after graduation. May be the tuition cost of getting the degree should not exceed say two years' of earning. Why two years? It is an arbitrarily selected number.

Something that one can repay within five years and not get too constrained in the choice of the kind of work one may like to do after getting the degree. A tuition fee of Rs 1,50,000 per year is only a total cost of Rs 300,000 for an IIM degree.

Given that an IIM graduate surely gets a salary exceeding Rs 300,000, it is less than a year's earning.

Even when the education is fully financed by a loan, the graduate would not feel unduly debt ridden and constrained in her choice of career. From this point of view the tuition fee charged by the IIMs is not very high. There would seem no need to reduce it.

The question of poor students remains. The solution is obvious. Financial aid should be guaranteed to all deserving students.

Admissions should be on merit and aid should be based on need. Need may be determined on some socially acceptable criteria. One may require a family to pay for education.

How much should the family pay should depend on the family's income now and over the next few years, their wealth, the age of the parents, the number of children that the parents have to educate, and other special circumstances that require additional expenditure.

A norm could be evolved and enforced. This would be like a progressive income and wealth tax. At the same time, a financial package can be tailored to the need of every student.

It may range from full support including for cost of living to partial support to provision of loans to no support at all.

If instituting such a differentiated system may take time, the government should have just insisted on 25 per cent free seats rather than lowering the tuition fees so drastically for all.

This does not benefit the deserving poor adequately and gives a free ride to many well off students who could and should pay.

The writer is Chairman, Integrated Research and Action for Development, New Delhi and Professor Emeritus and Former Director, Indira Gandhi Institute of Development Research

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