But are these ‘material gains’ I have mentioned above truly as attractive as they seem? Is there even a back-of-the-envelope logic which describes this unbelievable affectation with these particular labels…?
The short answer to the questions I raised at the end of Part-I is ‘no’.
Engineering, medicine and management might just be the best-paying options as far as a career goes. Indeed, for reasons that we will discuss in the third and final part, there isn’t much hope left in alternatives to these fields. But looking only at your salary is a wrong way to go about this. How you need to go about this, is to look at the Return on Investment (RoI). If you followed that link and you hate Investopedia for bringing math back into your life, I can understand. In simple terms, if your salary is better than the money you spent getting educated (by a significant percentage), you got a good deal. The media and the outlying, extra-special-amaze-balls salaries of IITs and IIMs might make you laugh at the need of doing the above mentioned Math. But if you are an average guy who didn’t make it to an IIT and has to suffice with a State-level or private college to live your ‘dream’, RoI is an important fraction. Because what is happening in the hideous underbelly of sub-premier educational institutes will truly justify the title of this series. It is dark, and it runs deeper than you thought.
It would be fun to understand this through an analogy.
Being a Drug-Lord
Imagine for one minute that you are Pablo Escobar – the Colombian drug kingpin who made ridiculous amounts of money by hooking Americans to cocaine. Now here’s the thing with cocaine. It creates its own demand. Someone buys a few grams, and they are immediately looking for a few grams more. With a product like this, you don’t need marketing to improve your revenues. Quite the contrary. The product markets itself. This is what the graph can be expected to look like, if all other external factors remained constant:
But Escobar, being Escobar, was obviously not satisfied with this kind of normal organic growth. So he decided to change the game, and did something called cartelization.
What is cartelization? That is when Pablo and all the other Cocaine manufacturers in a particular region come together and mutually decide how much Cocaine to produce, how much to sell, and exactly where to sell it.
This is a win-win on the face of it. Earlier, you were selling 1000 kg of cocaine at $50/g, and earning $50 million in a period. Now you have fixed things with your competitors in such a way, that you have created an artificial scarcity. You are willfully sending lesser quantity in the market by regulating your production. As the quantity of cocaine reaching the market decreases, the amount of money the junkie wants to pay for the cocaine will increase (cocaine becomes dearer), i.e., now you are able to sell just 750 kg of cocaine, but at a price of $100/g. Now, you are taking home a cool $75 million, and none of your competitors are fighting you. Sound convenient? Now Pablo’s revenue graph looks as below. Notice that the red line is the same graph reproduced from above, but it seems nothing in comparison to the grey post-cartel growth.
Cartels are a very interesting topic, and of course, they are too awesome to stay real for too long. For those which do survive, there are competition and antitrust laws. There is only one legally untouchable, long-standing cartel in this world. It is called OPEC. Anyhow, OPEC is for another post.
Think, however, from the point of view of a junkie. The junkie doesn’t understand, or even care about the economics of the cartel. But he is paying a bomb for a rare product, which is actually amply available.
Applying the Analogy
In becoming the behemoth that it was, engineering had shattered a major myth. In comparing periods pre- and post- ’91, people mostly reference the industrial growth of the country. But the services sector, already a major force, an extraordinary employer for India’s emerging workforce, carried with itself, an untiring momentum. Outsourcing was a buzzword, call-centres were a socio-cultural landmark, and a few enterprising men had pulled the Indian IT Industry out of ignominy into bright sunlight. Bangalore was no longer the humble garden-city; it was the fast expanding Indian Silicon Valley, and engineering, instead of becoming a saviour of India’s manufacturing, had become the messiah of India’s IT Services.
In the early 2000s, there was no denial that engineering education faced no competition in terms of the immediate material gains. As the private sector exploded from the privatization drive, it brought along with itself, disproportionately high starting salaries for the well-qualified engineer.
To the middle class and salaried individuals, this was a blessing – you were in a relatively insecure position, but the salaries were disproportionately high in comparison to your original conception. In other words, you were becoming rich at a risk far lower than the one faced by even a small business operator – this essentially pointed to the boom in the Indian upper-middle class. The upper-middle class was so achievable, and so desirable that it became a default setting for aspiration.
Take the case of management education. In most foreign countries, management education took shape as a stepping stone. Management was the field of education people went for, when they realized that their day-jobs were increasingly becoming associated with making decisions that affect the future of their business, and with coordinating multiple teams so that they may come together to produce a whole which was greater than the sum of its parts. It was a transitional course, at best. There was a little concept of management education as a substitute for a Master’s Degree in your field of choice. Management education was a khichdi – a mixture of time-tested concepts taught through case-studies, which could make one a jack-of-all-trades as far as running a business and controlling a team is concerned. Important to note here was that the man would be a jack-of-all-trades, and ace-of-one.
Instead, the scene of management education in India grew driven by the ideals of money, fame and appreciation and an aspiration for the upper-middle class. Management was the most ‘glamorous’ form of education – the go-to field to become an investment banker, a consultant, a marketer, and what not. These were the new labels that fresh graduates were aspiring for. In India, management education rapidly became a substitute for a master’s degree in your chosen field of study. The average age of management post-graduates dropped very rapidly, to the point where almost 40% of any premier B-School’s population today is a bunch of freshers – people with no work-experience, who are jumping from engineering to management without any intervening period (I was one myself). Their education is such a hopeless jumble of mixed concepts that they most likely end up being a jack-of-some-trades, ace-of-none.
Spurred by the above-mentioned aspirations of material gains and the upper-middle class, Engineering became a highly sought after label in India, and demand for both engineering and management education exploded. If you were an average student like K, you didn’t really need any marketing to choose these fields – they were obvious, and most preferred choices. But the severely limited number of IITs and NITs – the hallmarks of premier engineering education – caused a scarcity in the number of seats available. This scarcity set into motion a vividly recognizable chain of events, which I have color coded in ascending intensity.
- With limited number of seats, and exponentially increasing demand, the price for each seat goes up. Say from x/seat to 1.25x/seat.
- As increasing prices are unable to satiate the highly inelastic demand for these engineering/management seats, government and private players move in on the field.
- Since the label is as much for IITs as it is for the field of engineering itself, these private/government colleges are a very good plan B.
- Unfortunately, since everyone now thinks the price is in the region of 1.25x, most of the private/government colleges open business at a price of 1.25x or more.
- There is still a scarcity of seats, as the number of people wanting to become engineers keeps growing every year.
- Plus there is a growing regional disparity in the number of colleges. States such as Karnataka and Andhra Pradesh (the South Indians were particularly nasty, here) are almost establishing engineering colleges at whim, while states like Bihar, are lagging ridiculously far behind.
- This becomes a trigger for a ridiculously unfair system of differential pricing among colleges. Karnataka, for example, preserves the interest of its citizens by categorizing a certain percent – say a% for a state-level entrance test (CET) where people from other states can’t apply. Those who clear this test will pay the 1.25x or lesser to get in.
- The colleges of Karnataka (to continue the example) themselves, form a consortium called the COMED-K, which decides that from the remaining seats, b% seats will be filled through an entrance test where all are welcome.
- These seats are even more premium, for no particular reason. Indeed, clearing this examination means you have probably fought greater odds than the CET, since most people who write the CET also write the COMED-K as a failsafe. Your teaching, campus experience and facilities are exactly the same as the one enjoyed by a CET kid. But since you are not from that state (not really your fault), you pay more. In my college, I paid ~₹28,000 a year, whereas a COMED-K student paid ~₹125,000 for the same education. That is, the price/seat is now almost 5.6x. The gulf is wider in Medical seats.
- If (a+b) < 100, than the remaining seats are further apportioned into categories, some of which may be discretionary in nature (euphemism for a paid seat). These seats are at a different price range altogether, somewhere around 10x, or maybe even 12x, depending on the ‘prestige’ of the college.
- It doesn’t stop here, unfortunately. Because as a good salesman will tell you, there are always ways to upsell. This is what colleges like, say, Manipal Institute of Technology will do. Set up a fancy, world-class, highly facilitated campus (much, much above the bare minimum requirement), with huge investments on co-curricular and recreational activities (under the guise of providing a balanced, or more complete experience), and then charge a super-premium price. Then set up a separate entrance test to dissociate yourself from the crowd which is only able to charge a maximum of 5.6x on merit seats. These super-premium seats will now sell at 10x or more, for merit.
- And it still doesn’t stop. Believe it or not, there is still a scarcity. So there are price revisions every year. As mentioned, I completed my engineering education at about ₹28,000/year from a Karnataka State college, starting in 2008. For the batches starting in 2012/13/14, IIT-D students are paying ₹87,500/year. If that seems like a jump, be it known that students starting in 2015, are paying ₹97,500.
But that’s okay, says the economist in your mind. It is completely fine for a dearer product to cost more. It is completely fine for price to increase with increasing demand or scarcer supply. These are the laws of economics. Where’s the analogy?
But is this scarcity real? Or is it artificial? You see, all this time we have been looking at prices increasing in engineering/management education. But can this insane spike of prices be made applicable to the remaining fields within the industry? Can this scarcity be made applicable to all fields? I don’t think so.
Imagine a hypothetical situation where there was a very uniform distribution of demand for seats across different fields. This would be an ideal case, where people have understood their personal motivations, realized their true aptitude, and then applied for a seat. Given the rich diversity of our country, the variety of professions that entire communities in the past have engaged themselves in, and the law of averages, it is not very hard to imagine a situation where the demand is not as heavily concentrated on two to three fields as it is today.
When you graph this ideal condition along with the condition of stage-wise growth of seat prices, you will see a very similar graph to the one we encountered previously when considering Pablo’s Cartel.
So is there a cartel here?
To be accurate, no. There is little to no evidence that will support colleges colluding to limit available seats (some parallels can definitely be drawn from differential pricing and discretionary seats, though). In fact, in states like Karnataka, there are some really sub-standard engineering colleges, which have to go with empty seats. But there is a very similar case to a cartel here – because of the relentless focus on only one field, an artificial scarcity is created in the education industry, which pushes up the weighted average prices of seats across the board. In truth, a prospective student is paying a bomb for a seat which he thinks is rare, but is amply available if he doesn’t narrow his focus down so much. It is a reversed or at best, a pseudo-cartel.
And of course, this seat price increase is causing decreasing material gains for students. But institutes mask these decreasing gains so well, that they don’t become obvious to most. Fees for admission into IIMs have been on a steady rise. For example, a student from IIM Indore who joined in 2014, most probably had to pay around ₹1,400,000 for his course, excluding many ancillary expenses.
The placement reports from IIMs will continue to show an increased average salary with each passing year. But this is a clever misrepresentation of facts. Most prospective B-School students already know that average salaries are pushed up severely due to outlying job offers of ₹2,200,000+ p.a. which are bagged only by a select few. The median income is more likely to be below the fees you paid the institute, and even more likely to be below the total of fees and ancillary expenses (including the parties) which you spent for this education. Further, these job offers are all actually CTC (cost-to-company) figures. There will be a lot of components in the salary which do not at all translate into money in your hands.
The press often adds fuel to this fire by selectively reporting on an even more constricted range of ₹10,000,000+/p.a. Thus, while placement reports continue to mask the truth by indicating growth in salaries, the actual Return on Investment for an average B-schooler is definitely on the downward trend. The cost of education is growing much, much faster than the salaries.
The ironies don’t end here. To continue the example, IIM Indore recently increased the size of their placement pool by more than 26%, by adding the students from an integrated 5-year program to the regular list of 2-year post-graduation students. Not only did the number of seats go up, the integrated program was priced at super-premium, allowing a heavy positive top-line change for the institute. At the same time, however, it is not possible to equitably place an additional ~100 students at salaries which allow a quick recovery of their investments.
IIM Indore also has a Mumbai campus – extra heads to place in top companies. The multiple campus thing is in fact, a fad. ISB has a Mohali campus, and a Hyderabad campus; IIFT has a Delhi campus and a Kolkata campus, BITS Pilani, has a Pilani campus, a Hyderabad campus, and a Goa campus. BITS and SP Jain, have actually even opened campuses in Dubai… the list could go on. The institutes may be priced differently, and may not be able to maintain the same teaching standard and intellectual capital across campuses, but they often pool the placements, unfairly grouping students who have passed through a finer competitive sieve with those who haven’t.
Even recruiters feel the heat from this insane uptick. It is quite safe to assume that actual managerial positions, or positions which groom leaders, are very, very few as compared to the number of management graduates who pass out every year. Year after year, therefore, not just the return on your investment in education, but your designation and importance to the organization is waning too. Similarly, while there are ever increasing job switches at lower positions, there is considerable inertia at the top, because people are reaching top positions at a younger age as compared to earlier. This is also limiting the opportunities of organic growth in salaries and designations for newcomers.
Education, as it turns out, is India’s cocaine.
But the core underlying assumption here, is that a uniform focus on ALL fields of education would cause this pseudo-cartel to go away. What’s ailing the alternative fields of education? Why haven’t they improved? And what exactly should one hope for? That’s what we will cover in the third and final part of the series.
NOTE:- I have named a few institutes, testing systems, etc., in the post. This is purely a reflection of my comfort level with the respective institute or testing system, as compared to others. It doesn’t imply that these institutes/tests are any better or worse than the others in their set, in any way. Don’t use this as a reason to rage.