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Sunday, April 02, 2006

On the wrong side of IIM fees hike

The IIMs are considering hiking fees. (That implies 75% higher fees than the 2002 batch; CPI inflation in the same 5 year period would have been 25%). Last time, when Murli Manohar Joshi had forced IIMs to reduce fees; people who have access to media were dead against that step. So now, when the fees have been hiked by 15-20%; people must be jubilant.

I would rather not join the euphoric party and would like to take a slightly contrarian view to the whole IIM fees hike issue.

Time and again, it is heard that IIMs spend 5 to 6 lacs a year to provide education to the students. I have first hand experience of only one IIM where I spent two years; and based on that I can say that I find this number astounding. In our batch, we had to repeatedly raise issues with the authorities to improve the quality of the illegible reading materials, broken benches and dysfunctional ACs of the 4 classrooms that were there. The library was apparently the largest in Asia but had only two-three copies of the books that were relevant. The IT infrastructure was outdated and fully depreciated with greasy computers, slow connectivity and most students had to purchase their own systems. While the student teacher ratio was touted to be 6:1; each class usually consisted of 30-100 students. Given these facts and lack of transparency about the cost structure of IIMs; I find support for the whole fees hike issue quite surprising.

Some of the arguments given for fees hike is that students will not stop going to IIMs even if fees are raised much higher. Consider this, many would go for a bypass surgery whether it cost 3000, 3lacs or 3 Cr or 30 Crs. Does that mean one should charge 30Cr for a bypass surgery? You can't have free market policies, monopolies and cartelized pricing at the same time.
Another argument is that the poor can get loans and paybacks are high. Consider a poor student whose father earns Rs 3000 a month and whose family has never taken a loan. Imagine the mental block faced by such a student when he has to take up a loan of 3.5 lacs at 10-15% interest.
The other logic is that there is no point subsidizing these MBAs who don’t do anything for the country anyway. Well, even if one considers a subsidy amount of 3lacs/student/year; the average tax/repatriation for an employed IIM MBA reaches 3 lacs within 2-3 years of service; and he is employed for 30-35 years.

Students for IIMs and IITs are valued in the market not because of the education they receive at these places; but because of entrance exams that filter a very small fraction from a large number of applicants. Imagine the same IIM/IIT system with no professor or classroom infrastructure; let only the course outlines be provided to students; and multiple questions given to them to grade their performance in these courses. The market value of the student from such a system largely remain the same.

The support for fees hike comes from fashionable free market rhetoricians in the industry; students who have got into IIMs (who are under implicit pressure to support their professors); and ex-students (for whom it doesn’t matter anyways, and they want to retain some exclusivity of the brand). Ask any average aspirant candidate from a middle class family, ask his father; and the response will be quite different. But the voices of these people are not shown in the media.
While I fully endorse greater freedom of operations to IIM management; I would support fees hike only once the cost structure of IIMs is made transparent to students. Only then can a student say no when it comes to paying for the salary of a professor who hasn’t taken a course for years.

20 comments:

Chiru said...

just came across ur blog.. my views on similar topic.. http://chiranjeevi04.blogspot.com/2006/04/iim-fee-hike-implications.html

Anonymous said...

Well, I think most of the arguments you gave are valid but the fact remains that India as a country has limited resources. And instead of subsidising the students of IIMs, I would rather prefer that this money goes to poor and uneducated who do not have means to feed themselves and are unable to send their children to school. So even if it discourages some people to take thier career of choice or give up their IIM ambition, it might help few hundred poor children somewhere in the country.

Anonymous said...

"Students for IIMs and IITs are valued in the market not because of the education they receive at these places; but because of entrance exams that filter a very small fraction from a large number of applicants"

Agreed that CAT exam is one of the component which makes IIM brand but if this was completely true, IIML/I/K would had better brand name than ISB today which is not true. Most people will agree that IIML/I/K gets academically better students than ISB, it is the facility, faculty and Industry interaction which makes ISB lot better.

Falstaff said...

If you really went to an IIM you presumably slept through the class that talked about how scarce and inimitable resources are priced based on demand, not on cost.

If the IIMs believe that they can charge a higher fees and still attract the same number and quality of students they get today, why shouldn't they? Why leave money on the table and remain dependent on subsidies from a government run by idiots like MM Joshi? Should hospitals charge Rs. 30 Crore for a bypass surgery, you ask. Sure, why not. If they can get away with it.

It strikes me as particularly illogical that you're arguing in the same post for cartelisation / monopoly and for the IIMs adding little or no value. If the IIMs add no value, what, according to you, makes their position as a monopoly sustainable (another class you presumably missed - you really weren't paying much attention were you?) If it's true that recruiters only go to the IIMs because they get the best students, what's to stop all the top students from just switching to a different school and having the recruiters follow them there? (okay, so there's a small coordination problem, but there's no reason why the shift couldn't happen in a couple of periods)? If you're right, and the IIMs are just a pass through for talent and new fees are prohibitive for students, we'll see that shift happening fairly soon, and the 'cartel' of the IIMs will be broken. If you're wrong and the IIMs are genuinely inimitable, then they deserve all the fees they can charge.

There's also some twaddle in your post about poor students who have 'mental blocks' against taking loans that they could easily pay back. Tell them to get over it. If they're too spineless or too dumb to see that taking that loan is the rational thing to do, then they don't deserve to be at an IIM in the first place (I'm assuming that you're not arguing that the decision to take a loan at 10 - 15% is in fact a negative NPV decision, or that such loans are not available; only that it's a 'mental block').

You also complain about infrastructure. a) Last time I checked every dorm room had perfectly good connectivity and no one was complaining, so I suspect it's your information that's outdated, not the IT systems and b) Are you seriously suggesting that because the institute doesn't spend enough on its students today (even assuming it's true) it would be better if they continued to spend as little but didn't raise fees? I'm not saying that there isn't room for improvement in infrastructure - only that the implication of such problems is not to take the miserly approach of petty fee bargaining but rather to increase funding to the institutes and then insist on funds being spent more usefully. If all you're asking for is greater accountability, I don't see why that has to include opposition to fee increases.

Bottomline: I was opposed to the fee reductions MMJ proposed because I saw it as the first step towards increased political control of the IIMs - a step that would only end in the destruction of one of the finest institutions in the country. So yes, if a fee hike now means that the IIMs are closer to being independent of such interference, than I am jubilant about it. Because the best way for the IIMs to deliver value, both in education and on infrastructure, is for them to break free of government interference and grow entirely private. If you really want accountability, that's the way to get it.

confused said...

Falstaff,

You said it better thsn I ever could...Just brilliant...

Someone who is almost sure of getting a rs 9 lakh job after graduation can still demant subsidizies... mmmmm

Dude, if you dt like it. DONT GO THERE...

Jayesh said...

Well if there is no increase in number of seats, the entire increase would go to the professors pockets. Some of the profs are really sad and have not done any research or consulting. They still teach antiquated tools and techniques. The recruitment is a function of pure demand and supply and not the pedagogy followed in the IIMs

Falstaff said...

Confused: Thanks.

Meanwhile, I see the stupidity continues: "if there is no increase in number of seats, the entire increase would go to the professors pockets"

a) even if for a moment we assume that the entire fee increase will go as a surplus into the prof's pockets - surely adding more seats with higher fees will only make this surplus larger and lead to greater expropriation (if that's what's happening). If we really want to keep profs from making any money through this (supposed) route, we should raise fees and then cut out all seats entirely. That way they won't be able to make any money!

b) Of course, the bigger problem is that the argument seems to assume that IIMs are some sort of limited partnership where all profits automatically get redistributed among the profs. Even assuming that higher fees are not met with an equivalent subsidy roll back, so that the institute ends up earning a surplus, it's not clear that any of this will make its way into the prof's pockets. In fact, from what i know of how salary increases in the IIMs work, I'd say it's extremely unlikely.

c) There's also an argument in Jayesh's comment about the profs being really sad (which presumably means he doesn't think they're high quality profs, not that they're just melancholy) and therefore undeserving of salary increases. That's what I call the WalMart theory of compensation - great if you want to hire the most incompetent workers and may them minimum wage, not so good if you're trying to attract the top academic talent. If it's true that standards of faculty in the IIMs are sub-par (a claim that has, in my view, fairly limited merit) then surely that's a strong argument for actually increasing prof's salaries and attracting superior talent. So even if the fee increases do somehow miraculously get passed on to profs, that's only going to attract better profs, improve the quality of faculty and benefit the students who are paying the fees. Doesn't sound like such a bad outcome to me.

My own opinion, FWIW, is that while there are certainly a few dinosaurs on the IIM teaching staff, most of the faculty members are exceedingly bright and talented people who could, frankly, be making more money elsewhere, and are only teaching because they see it as their vocation. Given what the average IIM prof makes, it's amazing to me that we still retain the quality of people that we do, and anything that pays them more and creates a more sustainable future for the institutes by attracting higher quality talent is welcome. So let's not just raise the fees from the students. Let's go ahead and actively raise the salaries of faculty as well - because that won't happen automatically.

Shivaji said...

I expected strong reactions (and language) to my post. But I still can't understand why people don't want transperancy in IIM cost structure and are willing to take ballpark round number cost estimates of 5-6 lakhs/year/student as the reason to hike fees.

Chanakya said...

I thought of writing a big post. Other commentators took care of it.

CS

dhoomketu said...

Shivaji, If you wanted to rant on the lack of transparency on costs (assuming that is the reason the IIMs have offered as to why costs are increasing), you should have written about it, and not taken a silly undefendable position on why fees should not be increased.

By the way, Falstaff, I agree with you on most things except for the premise of your argument!! :-) Prices as far as I understood depended on both marginal cost (supply) and demand.

Assuming that IIMs are a monopoly commodity (probably is at the moment, if they can, as you argue set prices irrespective of average costs of production), then unless prices are regulated, we would create deadweight loss right (in terms of number of seats)?

If on the other hand, they aren't (people can argue that they aren't really because of the alternatives available to students and no entry barriers for other players like ISB), they would be able to charge prices which the market would pay. If this price is very high, we would see other players like ISB enter the market.

The problem with that argument is that supply of talent for B-schools (profs) is low in India at the moment (That is my hypothesis though I would love to be proved wrong, as Best students don't stick around for research etc.). Unless we solve that problem, the rest of the debate is meaningless. Marginal fee hikes and High salaries are good to write about in the tabloids, but if we really want to create value, the debate needs to be shifted.

Since professors are a kind of a public good (non-rival consumption to an extent and huge externalities which can't be priced), I can see a role of the state in shaping the policy around it.

If the Ministry really wants to do a good job in this, it needs to move away from meaningless debate on marginal price hikes but try and create avenues so that supply of academic talent is increased (actually not only in IIMs but in other places too). It can do various things, actually, incentivise creation of ISBs (tax holidays, easy access to land), encourage participation of the private sector in faculty (actively seek guest faculty), incentivise inter-insititution cooperation. The answers are not clear, but unless the supply issue is handled well, short-term costs will be high.

Falstaff said...

Shivaji: as dhoomk2 says, acountability may be an issue but what has that got to do with fee hikes. Nobody's saying we shouldn't have accountability (though I'm not sure that that doesn't already exist. I personally have never tried to ask for a detailed P&L and Expenditure account of any IIM. Have you?) only that whining about accountability is no reason to block an eminently sensible fee hike proposal. Also, presumably the fact that that's the only part of your post you're trying to defend implies you've abandoned all your bleeding heart low income families to their mentally blocked fates.

dhoomk2: Not quite. Actually the reason dead-weight loss may not be an issue (and marginal cost may not matter) is in your post - if we believe that IIMs are constrained resources - then maximum capacity is fixed, at least in the short to medium run. So the supply curve is kinked at the full capacity output, rising or flat till that point, it becomes a vertical line at full capacity. So assuming that Marginal Revenue at full capacity is sufficient to cover marginal cost (which, when you think about how much of IIM cost is fixed, so that marginal cost is unlikely to be high, seems more than reasonable) the relevant section of the supply curve is essentially completely inelastic. So price is essentially the price on the demand curve at the full capacity output. That needs to be enough to cover cost (fixed and marginal) for the firm to stay in business, but otherwise cost plays no role. (incidentally, notice also that i would expect Marginal Revenue in this market to be pretty close to, if not equal to price (at least in the relevant range) - essentially I don't think you'd have to drop fees much to attract the marginal candidate. Another reason why dead weight loss may be less salient)

Theoretically, of course, over time the supply curve should shift out with capacity increases driven by supernormal profits (and that's part of what the ISBs are about). But as you correctly point out, there are other structural conditions that are keeping that from happening. But that only suggest that we need to do more to attract academic talent - which goes back to the stuff you're talking about.

Shivaji said...

I have not abondoned any of my heart bleed for the poor. Much of the comments sound like "If you can't have bread, eat cakes". And if it were a pure market demand supply thingy, then why have entrance tests at all?
Its easy to say that hospitals can charge Rs 30Cr when your own father doesnt suffer from that exclusive ailment.
And as long as the IIMs dont say how their cost of educating comes to 5/6 lakhs/per student/year; i find it hard to understand whether fees need to be hiked or lowered or whatever.

Falstaff said...

Sigh. Some people just don't want to learn. One last try.

Shivaji:

a) It's more like if you give someone who currently can't afford bread the opportunity to afford cake, he shouldn't be complaining about the price of cake. If the comments sound like anything else to you it's probably because, among the other concepts you failed to pick up at whatever IIM you went to, was this useful thing called listening.

b) The entrance tests aren't about allocation - they're more about maximising the value of the output by picking the best raw material. If we didn't have the entrance tests, and let people in based purely on their economic status, then we'd end up with a whole bunch of people who wouldn't learn anything in their two years there and would end up sitting around making inane and incoherent arguments on their blogs. Of course, this would mean that even you mentally blocked poor would be able to afford an IIM education - it would be worth so little.

c) Ah, the 'how would you feel if this happened to a member of your family' argument. Always the last refuge of the obtuse. I'll try to make this as simple as I can. Pick one of the following:

1. A pricing scheme where prices are set based on the lowest income consumers ability to afford a bypass (after all, why stop at your father. Or mine), hospitals and doctors make no money, so they have no incentives to do bypass surgeries at all - over time, getting a bypass becomes impossible

OR

2. Allow hospitals / doctors to set prices so as to maximise their own profits, charging people what they are willing to pay. New hospitals / young medical trainees see bypasses as an exciting opportunity. More bypasses get offered every year. Over time the price of a bypass comes down and they become freely available.

d) Also, help me understand this - as long as the IIMs were spending taxpayers money you didn't care whether they were accountable or not. Now that they're charging fees instead, you suddenly think that costs matter. Where do you think the taxpayer money comes from? What do you think could be its alternate uses? Unless you can explain to me how charging fees to cover (supposedly unknown) costs is worse than taking subsidies to cover them, I don't see what this red herring of accountability has to do with pricing.

e) Finally, if you still can't see why costs are irrelevant to the pricing decision, then you're welcome to your ignorance. You may not be able to understand that. Hopefully, the people who actually set these policies do / will.

Shivaji said...

Well, Falstaff; you know little about what I did at whichever IIM I went to. Unfortunately, your textbook economic theories wont help you with that; the theories which you believe to be an elixir for everything.
If patients were to wait for competition to bring down prices of surgery, they would have been dead twice over.
I am not willing to indulge in personal attacks as attempted by people here and so will not respond to anymore comments on this post irrespective of their size.

Anonymous said...

When ISB can charge upwards of 13 lakhs for a 1 year MBA and still attract quality applicants, IIMs are underpricing their MBAs (at the expense of the tax payer). ISB has set the market price and IIMs have to follow or be left behind. If somebody is 'poor' and can't afford an MBA straight after graduation, can always work for a few years, earn the fees and then go back to school. No big deal! The IIT and IIM free lunch makes no sense in a free market, especially when the people who run these institutions are crying for autonomy. Given the desperation to break free, the government should sell them off at their “current value” and start comparable institutions from the money raised. IITs and IIMs can enjoy all the autonomy in the world and go their own way and charge whatever they like. Of course, they can also go universal and start campuses all over the universe.

dhoomketu said...

Falstaff, agree with you on the vertical supply curve at the moment. It makes even more sense now to parcel supply it out to people who would value it the most and hence are willing to pay for it. Obviously, in the real world there will be liquidity constraints for people who can't pay 3 lakhs or whatever, and still value an IIM education. This is where I guess the loans will come in. Haven't heard of anyone till now who has got a call from an IIM and didn't join because of financial reasons. So, that is taken care of.

Shivaji, "you know little about what I did at whichever IIM I went to" and you reveal little by your posts and comments. :-)

I just wrote a long comment and deleted it, as it would probably not make sense for you. If you agree that the supply of IIM seats (or bypass surgeries) is scarce, and you have to make a choice between two people then, whom would you rather give it to? The person who can't afford it but values it or the person who can afford it and values it. If it is the first, then how will you create enough incentive and investible surplus for the supply curve to shift?

Or do you think that this is just theory which is not elixir for everything (whatever that meant)?

Shivaji said...

Dhoomketu:
Once again, I wish life was always made up of one or two variables as you indicated and ceteris paribus beyond which no economic theories are able to handle.

Somehow; a few people have misread my post in their zeal to emerge as baby Adam Smiths. Here's a booletpoint summary for those who didn't get it.
1. I cant take at face value the cost of education as mentioned by the IIMs; whats the problem in telling what costs are directly linked to an MBA education. Evidence of facilities at IIMs dont seem to suggest such pricey nature of their education.
2. Until you don't know that number and whether it makes sense, you dont know whether IIMs are bleeding or not; and if yes, who should bear the burden. E.g. if salaries are the major component; professors have to figure out what revenue earning activity they need to do for the 9 months they dont teach in a year.
3. Rationale for fee hike as given in the media are based on arguments like 15% annual inflation, rising salaries at IIMs, and ceteris paribus economic theories.

Baby Adam Smith said...

Thanks Shivaji for going back on your previous comment: "will not reply to any more comments" you said. Probably you should have stuck to that.

anyway, now that you have summarised your blog post in 2-3 sentences, probably that's all you should have written on, since the rest of all had mindless stuff like "mental blocks faced by students" and "giving coursebooks and multiple choice questions to students instead of profs". However, I wish at least those 2-3 make for a post. Let us examine your 3 point summary.


1. I cant take at face value the cost of education as mentioned by the IIMs; whats the problem in telling what costs are directly linked to an MBA education. Evidence of facilities at IIMs dont seem to suggest such pricey nature of their education.

Where is this evidence? All I have is your personalised experience of broken chairs and illegible reading material (very different from my experience of 100% power backups, a swamky computer center, decent chairs, a great clean hostel block, huge library (so much so that other institutes in the city used to come and use them), proper published books. So unless you had a particularly tragic experience (which I am sorry for), I am not sure what are you talking about. By the way, probably you should ask for evidence of the fees. By the way, regardless of your level of knowledge of economic theory, in a supply constrained system, prices should be set by ability to pay (and thus maximising the marginal value derived from the good).

2. Until you don't know that number and whether it makes sense, you dont know whether IIMs are bleeding or not; and if yes, who should bear the burden. E.g. if salaries are the major component; professors have to figure out what revenue earning activity they need to do for the 9 months they dont teach in a year.

Good idea. But irrelevant. Btw, if ISB can charge any fees which they want, without you ranting (or do you do that there as well?) then why should IIM not do that? No, they should continue to get government grants is it?

3. Rationale for fee hike as given in the media are based on arguments like 15% annual inflation, rising salaries at IIMs, and ceteris paribus economic theories.

Are you ranting against the media or the IIMs now? Probably all you should have done is try to calculate whether IIMs indeed spend 3.5 lakhs/ student. That would have been a better post. Oh, you just wanted to rant is it? Okay then.

Anonymous said...

Shivaji, one question. Which part of the economic theory do you question? When you bring in ceteris paribus in your comment, what variable would you change that would negate what Falstaff's being saying? Very curious to understand.

Shivaji said...

Dhoomketu:
you may feel that I am ranting and thats fine with me. What else are you doing out here; changing the world, are you?
I saw with my own eyes the facilities at IIM for two whole years and I dont need your double verification of that.
I am not saying anything about the media. Whatever came in the media regaridng this came from IIM board members only. IIMs are not monopolies because of their value add, but because of an entrance system set up by Government of India that also limits the number of seats.
And talking of variables, I could think of many: merit of the students selected; ability to pay of the selected students who pass the merit criteria, stakeholder goals of the IIMs, direct cost of eductaion, indirect costs,etc etc.