Saturday, July 02, 2011

Venturing into Education: India spends barely 3% of its GDP on education

Much has been said about India’s demographic dividend, especially our ‘young’ population. But serious effort is required to leverage this advantage, particularly if sustainable growth of 9% or more is targeted over the next five years. Above all, our capacity to innovate will be a critical factor in influencing decisions concerning new investments that nurture high growth.

It is unconscionable that for a country with a GDP of $1.3 trillion and population of over a billion, barely 3% of GDP is accounted for by investment in the education sector. A decade ago, the US spent the most on education, roughly $500 billion, followed by Japan, Germany and France at $139 billion, $89 billion and $82 billion, respectively. Other top spenders included Norway, Malaysia, France and South Africa — all of whom spent in excess of 5% of GDP on education (2003 Environmental Scan, OCLC). Today, while Japan and Korea lead OECD countries in education spending, both countries are also leaders in innovations, with strong links between industry and academia. Not surprisingly, China, having surpassed Japan’s GDP, has realised the urgency to universalise quality education and vowed to increase its spending on education from 3.3% to 4% of GDP by 2012.

India has to narrow the education gap —b oth in relation to global trends and in terms of connecting investments with innovations. Almost five decades ago, the Kothari Commission had given deep insights into the need to spend more on education at all levels and recommended an increase in investment in education to at least 6% of GDP. In spite of the global downturn, North America and Western Europe have continued to invest 5.6% of GDP in education, followed by 4.9% investments by Arab states. Even sub-Saharan Africa’s investment of 4.5% in education exceeds ours. Not only is India’s investment in education dismal at around 3%, an investment deficit estimated at $39 billion could pose a further threat to our long-term growth.

Today, the capacity to innovate is emerging as the key to developmental growth, as universities are becoming hubs of innovations. In the 1990s, China produced just 5,000 PhD students a year, much less than the number produced by Japan or India. But now, China has overtaken every country in the world except the US in terms of doctoral degrees awarded. While strong government support and corporate funding has made this possible over there, research funding available to our best engineering institutes barely exceeds $10 million — a marked contrast. Compare this figure to the endowment funds of Ivy League colleges in the US, which often exceed $10 billion.

Higher education in India needs a focused strategy to unleash its innate potential. Why not attract more of venture capital and private equity into our education sector? Our PE market has, after all, has grown quite a bit since its humble inception in late 1980s. Plus, India has already emerged as the second-largest Asian PE capital recipient after Japan. Venture capital and private equity investments in India as a percentage of GDP have also grown, from a mere 0.4% of GDP in 2004 to more than 1.5% of GDP in 2008. Of course, the beneficiaries of VC and PE have so far been the technology-led, capital-intensive sectors like telecom, power and infrastructure, besides traditionally favoured sectors such as real estate, IT, banking and healthcare. The time is ripe for education to be positioned as an attractive destination for venture capital and private equity investments.

In fact, private equity can easily bridge the $39 billion investment gap in education funding. Consider that we are willing to spend a disproportionate amount of our income on universities abroad. We are also prepared to go back there and re-skill ourselves to gain more meaningful employment. Our education market has yet another unique feature, wherein there is often a time gap between the K-12 and the higher education segments of education, and another time gap between education and work. These gaps are often used to augment skills through vocational training or to prepare for placement exams. Both gaps have the potential to be productively developed by private equity funding.

Then why has private equity funding not found its way into our education sector? Perhaps, the “not-for-profit” diktat imposed upon private investment, wherein no dividends can be paid to the investor, has traditionally discouraged venture capital. Above all, it is the fact that education continues to be overly regulated which makes it unattractive for the private players. Though private entities can bypass such hurdles by establishing unaffiliated higher education institutions, there remains the problem of securing industry recognition and acceptance. And rule books do not recognise higher education institutions that have no accreditation. Moreover, the non-formal segment of this sector is too small and fragmented and, therefore, lacks the scale necessary for making it lucrative as an investment opportunity.

To underline, the challenges that private equity faces in entering the Indian education sector are that (1) the particular schools and colleges are required to be non-profit institutions, (2) they are also required to be certified by or affiliated to government boards like the All India Council for Technical Education, and (3) there are not only restrictions on foreign investments in higher education but also a lack of clarity in policies governing these investments.

Some have found a way to bypass the stringent regulations to invest in the sector, by establishing higher education institutions outside the purview of UGC (University Grants Commission) regulations. The significant point here is gaining acceptance not from UGC, but from industry. As long as industry is satisfied with the quality of education and training of such students, higher education institutions can do without stringent and cumbersome affiliations and regulations. For instance, the Indian School of Business (ISB), Hyderabad, is a reputed name in the industry corridors despite not being affiliated to any formal regulatory board.

But such outreach is restricted and not available to professional education related to doctors, architects and lawyers who have to graduate from affiliated institutions to be able to practice in India. Here again, recognition is accorded to select foreign degrees and holders of such degrees are allowed to practice as professionals in the country. Private equity could explore tieups with such foreign institutions and set base in India.

The Global Talent Index Report has tabulated 60 countries based on their capacity to nurture talent. India is ranked 35th. Worse, many countries, including China, are projected to surge ahead of us by 2015 on account of their substantial investment in education. Will we squander our demographic dividend for lack of funds? Or will we take this opportunity to nurture talent, by encouraging venture capital inflows into education?

Source: The Financial Express, July 2, 2011
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