Ministry for Human Resource Damagement

The exit tax is the latest of its follies

The mandarins and the ministers at India’s human resources development (HRD) ministry can perhaps be excused for not having heard of Uri Gneezy and Aldo Rustichini. But surely someone there must have read Steven Levitt’s best-seller, Freakonomics, that mentions them? Gneezy and Rustichini conducted a field study in a group of day-care centres in Israel.

Parents used to arrive late to collect their children, forcing a teacher to stay after closing time. We introduced a monetary fine for late-coming parents. As a result the number of late-coming parents increased significantly. After the fine was removed no reduction occurred. We argue that penalties are usually introduced into an incomplete contract, social or private. They may change the information that agents have and therefore the effect on behavior may be opposite than expected. If this is true, the deterrence hypothesis loses its predictive strength, since the clause ‘everything else is left unchanged’ might be hard to satisfy. [SSRN]

No, the HRD ministry is not—at least, not yet—considering imposing fines on late-coming parents. But it is considering something similar. A parliamentary standing committee has recommended imposing an exit tax on graduates leaving the country. The idea appears to have originated from a World Bank report that was published two years ago. The justification for the tax is the recovery of the huge government subsidy for tertiary education.

The presumption, of course, is that keeping the graduate in India is the only way of getting a return on the government’s subsidy. As Reuben Abraham wrote two years ago (via Prayatna), that assumption is questionable considering the effect of remittances. Indeed, as Mukul Asher and Amarendu Nandy argue in an article in the June issue of Pragati, using those remittances to fund education and infrastructure creates a positive dynamic for development.

But let’s consider how the exit tax might influence behaviour. Before that, let’s ask why the government should subsidise higher education in the first place? Well, because education has external benefits. A doctor or an engineer, even when working for private benefit, creates benefits for the society. [Let’s digress a little. On this account, there is justification for those courses where the externality is large, like medicine, civil and irrigation engineering, for instance. And also, that such expenditure is justified only when there is market failure, resulting in a shortfall in the number of graduates. This justification obviously does not apply to India, as the government controls the number of seats, and is responsible for any shortage!]

So how does the government set the quantum of the exit tax? If the reason it funds higher education is because there are externalities, then it stands to reason that merely recovering the subsidy (ie, the difference between the fees charged and the real costs) underestimates the actual loss to society. How does the government price the ‘benefits to society’? Well, it can employ a lot of economists and accountants to calculate these costs each year, adjust for inflation, exchange rates, financial status of the family and yes, the graduate’s caste too. And create a table of exemptions and penalties to ensure that the exit tax is not only accurate, but also ensures social justice. The cost of implementing the exit tax will be borne, ironically, by the taxpayers. It will also be a huge waste of resources, and due to the complexity, will be a veritable goldmine for rent-seeking officials all the way from the university administrators to immigration officers at the airport.

Most importantly, and this is where the Israeli day-care centres come in, it is likely to be counter-productive, and cause many more graduates to leave and never return. That’s because once the implicit social contract is translated into monetary terms—into what is claimed as a small fraction of the graduate’s salary abroad—it can be paid off without any ‘guilt’. It’s entirely possible that like Israeli parents, the number of emigrating graduates might increase.

In any case, unless the government can guarantee its graduates of equivalent employment, there is no moral basis to stop people from seeking a better living abroad. And there is no justification for the government to give such guarantees. So the exit tax is a non-starter from this moral perspective.

Indeed, the bogey of ‘brain drain’ is just that, a bogey. The Indian government has no business discouraging its citizens from migrating abroad. If it is worried about its expenditure being wasted, then it should not spend its money where it is likely to be wasted. In today’s economic conditions, there is no reason for the government to subsidise higher education, certainly not at IITs and IIMs. There are numerous means to finance the education of students who cannot afford the fees, without having to involve subsidies. There is no reason for it to sit atop an artificial shortage of doctors, nurses, engineers or management graduates. It should immediately deregulate higher education. Given the abysmal state of India’s primary & secondary schools—the root cause of most contemporary evils—every rupee spent on higher education is a rupee snatched from the poor and the marginalised by depriving them of better education.

And if the government wants to raise revenues for primary education, here’s how it could do so without raising taxes: the HRD ministry’s department of higher education intends to spend about Rs 6483 crore (about US$1.43 billion) next year. How about scrapping this department and its programmes and use the funds for primary & secondary education instead?

15 Responses to Ministry for Human Resource Damagement

  1. The Rational Fool 4th September 2007 at 10:51 #

    Nitin:

    I think the title of your previous post is more apt for India’s HRD Ministry.

    In your analysis, you have left out the supply side. The educational system in India, especially the tertiary one, smacks of rationing with all its attendant inefficiencies. Barring a few exceptional ones, the rest of the higher educational institutions are woefully inadequate in quality teaching resources. Almost none is a research university or institute. For those who are in the academics world over, it should come as no surprise that the publication record of university faculty from India is abysmal.

    The counter-intuitive findings of Gneezy and Rustichini apart, not all of those who leave India for study in foreign universities do so for pecuniary reasons. With the raising of the fiscal and structural barriers to foreign education, it’s not just the remittances to India from abroad that may fall; the world stands to lose Chandrasekhars, Khoranas, Sens, and more. As an ex-academic myself, I seriously doubt if any of them could have achieved what they did, had they remained in India.

    Instead of loosening its tentacles around higher education, the UPA government at the center and its allies in the states seem to be bent on doing exactly the opposite. The sordid saga of social engieering in India continues – only the label has changed from License Raj to Quota Raj!

  2. Gaurav 4th September 2007 at 11:30 #

    Nitin,

    I don’t think (and I am saying this from personal experience)that guilt has anything to do with Indian students deciding to go abroad or stay back. So the comparison with example of Israeli day care centre is not correct.

  3. Nitin 4th September 2007 at 11:47 #

    Rational Fool,

    Indeed. Instead of solving the supply problem, this government can only think in terms of taxes and quotas. And yes, I didn’t even venture to point out the benefits of allowing graduates to emigrate.

    Gaurav,

    The word “guilt” is deliberately within quotes; as I can’t seem to find a good word for the intangible part of a social contract.

    Notwithstanding the smallness of my own vocabulary, we can’t conclude that the results won’t apply. If your ‘debt to the nation’ is calculated to be Rs 4 lakhs, for instance, you might just pay and feel justified in thinking that your debt has indeed been paid.

  4. anonymous coward 4th September 2007 at 12:04 #

    I am a bit confused about this thing can be implemented, I mean how can you stop someone from going abroad ? Will the government prohibit the US embassy from giving visas to graduates who haven’t paid the tax? Or will all graduates need to attach a copy of the tax receipt at the time of applying for a passport ? What if I go abroad to for an internship and then apply for a work visa there ?

    This is some small step for the HRD ministry, one giant step for India towards becoming a police state. IMHO, it will violate my fundamental right to freedom. Well, who cares, I have already given up my right to equality at the altar of social justice.

  5. Nitin 4th September 2007 at 12:17 #

    This is an extract from Freakonomics on the Israeli day-care centres:

    So what was wrong with the incentive at the Israeli day-care centers?

    You have probably already guessed that the $3 fine was simply too small. For that price, a parent with one child could afford to be late every day and only pay an extra $60 each month—just one-sixth of the base fee. As babysitting goes, that’s pretty cheap. What if the fine had been set at $100 instead of $3? That would have likely put an end to the late pickups, though it would have also engendered plenty of ill will. (Any incentive is inherently a trade-off; the trick is to balance the extremes)

    But there was another problem with the day-care center fine. It substituted an economic incentive (the $3 penalty) for a moral incentive (the guilt that parents were supposed to feel when they came late). For just a few dollars each day, parents could buy off their guilt. Furthermore, the small size of the fine sent a signal to the parents that late pickups weren’t such a big problem. If the day-care center suffers only $3 worth of pain for each late pickup, why bother to cut short your tennis game? Indeed, when the economists eliminated the $3 fine in the seventeenth week of their study, the number of late-arriving parents didn’t change.Now they could arrive late, pay no fine, and feel no guilt. [Freakonomics]

  6. Oldtimer 4th September 2007 at 12:21 #

    >>In any case, unless the government can guarantee its graduates of equivalent employment

    That is the crucial point. The second point is that even if the government can “guarantee” “equivalent” employment, it CANNOT guarantee equivalent wages. I don’t think this hare-brained scheme, even if it materializes, will stand scrutiny in courts.

    While on the subject of education, I’d urge this blog’s readers to take notice of Ramdoss’s continuing assault on AIIMS, and the “mainstream” (is it?) media’s indifference to the issue. (Contrast that with the saturation-level coverage of Joshi vs IIMs controversy.) But for the high court’s intervention, AIIMS grads would have been left in the lurch without certificates.

  7. Gaurav 4th September 2007 at 13:02 #

    Nitin,

    I guess “attachement” and “security in identity” will be better terms, of course it has nothing to do with “guilt” or for that matter the subsidy by government.

    I can think of one more reason, guilt was introduced in case of the example of day care centre, because the contract was of more personal nature, with inconvenience caused the other party (due to delay) very much visible hence triggering the guilt reaction. In contrast subsidies are impersonal as is the authority. Individuals are much more prone to cheat authority than to cheat other individuals.

  8. Nitin 4th September 2007 at 14:19 #

    Mr Gaurav,

    Allow me to register my utter shock and disappointment that a fine young individual like you does not feel the guilt of not repaying the debt to the nation; and instead finding esoteric arguments to point out that cheating authority is impersonal and hence can be done without guilt. :-)

    Less seriously, yes, you have a point. Perhaps the propensity to, and the guilt from cheating is inversely proportional to the size of the other party.

  9. rc 4th September 2007 at 14:55 #

    Well, it can employ a lot of economists and accountants to calculate these costs each year, adjust for inflation, exchange rates, financial status of the family and yes, the graduate’s caste too. And create a table of exemptions and penalties to ensure that the exit tax is not only accurate, but also ensures social justice.

    Took me about 2.5 seconds to locate “ground – zero” of the scheme.

    Seriously, Why is there such an laser like focus on fixing tertiary education ? I’d venture to say we are doing quite well with what we have. Does anyone think that we can produce CV Ramans with the quality and reach of the primary education we have ? Cmon Arjun Singh, move on, nothing to see here. A dull, arid, and acceptable state of affairs.

  10. Nerus 5th September 2007 at 01:34 #

    This is one of your best ever.

  11. Nanda Kishore 5th September 2007 at 06:28 #

    Thanks Nitin for posting this. Strengthening and/or reforming primary education is a long term project that takes political will, vision and a clarity of thinking. IMO, most people don’t expect anything on that scale given the downward spiral of the political class, they would just appreciate if governments didn’t make things worse. If nothing else, I think the NDA administration did much better by not doing much damage. This latest yojana has a bad odour about it.

  12. Sriram 5th September 2007 at 10:29 #

    This could be the elusive solution to the H1B abuse problem which the Americans are fretting about. ;)

  13. gaddeswarup 9th September 2007 at 07:23 #

    It seems a pity to give up the advantages that the country already has. What about considering these subsidies as loans with a small interest and recover from ALL after they get jobs. This is roughly the Australian system. The amounts vary for courses and students are periodically reminded of the amounts they owe. Part of the funds from the government to the universities depend on these calculations. Recovery from those who go abroad is a bit tricky. One of my daughters did not pay when she was working abroad.

  14. Svaha 18th September 2007 at 04:35 #

    Education in India (and elsewhere)

    There has been a lot of discussion lately about the quality of some higher education institutions in India such as the IITs and the IIMs, some of it from the US media. While it is true that some of these graduates have done well in the information technology sector and, to a lesser extent, in other parts of the corporate world, as well as in entrepreneurial activities, the key questions are whether they truly represent value in India’s growth equation, and whether they are truly the product of meritocracy. I would make the following observations:
    1. The biggest public gains from a public welfare standpoint to any society is in primary and secondary, rather than in higher education. Since there are more private gains for every additional year of higher education, this is best left to private capital to manage at market prices. Affordability and access to such higher education institutions should not be an issue as long as tax policy and access to private funding is encouraged (bank loans, etc.) since the key underwriting question will be the net present value of future earnings from such education; the “sheepskin effect”. I would venture to suggest that institutions such as the IITs should be sold to private entreprenuers (and even such institutions such as JNU whose current contribution to public welfare relative to tax spending is questionable) in order to release substantial efficiencies. The AICTE and other regulatory bodies, on the other hand, should be considerably strengthened in order to provide quality-control and oversight over privately funded institutions. Government expenditures in higher education should focus on niche areas relevant to economic growth such as biotechnology or alternative fuels research that may not attract short-term focused private funding, but even here, TATA (as in BP solar) or Suzlon and Biocon should be encouraged to fund their own future requirements in manpower and R&D (tax breaks). Also, fees in IITs should be increased substantially to reflect the true cost of education, mitigated appropriately by scholarships and loans to provide access to less-privileged students.
    2. Although there is a strong myth about the competitive nature of IIT and IIM entrance examinations, and the focus on meritocracy, there is a considerable skew towards prospects from urban, english-language schools. Go to any IIT campus, and you will see that the proportion of students from such schools is much higher than the underlying proportion of such schools in the overall geography of India. My point is not to argue that those schools have an unfair advantage since they offer better educational facilities and preparation for IIT entrance examinations, but to suggest that kids from rural schools or government schools in general have a disadvantage when it comes to understanding the real relevance of IITs and other elite institutions in their future lifetime earnings. When one looks at other publicly funded “institutions of national importance” such as the ISIs (Indian Statistical Institutes) the skew is even more pathological; why is there an overwhelming overrepresentation of Bengalis in the ISIs, is it because they are genetically predisposed to be statistical in their thinking, or is it because the ISI entrance examination notices appear next to tender notices in many national newspapers, and is more heavily advertised in Bengal newspapers? The answer is that fees (and scholarships) need to be raised in these insitutions and specific funds need to be applied to advertising and coaching for students in rural and vernacular schools. Then you will see a real meritocracy, not just meritocracy among the children of the Indian professional elite. Think of the quality of IIT graduates then!
    3. Despite the appearance of academic quality, there is a dearth of good faculty at these institutions and this is primarily due to the lack of pay but also due to the lack of quality control in faculty hiring and promotions. A lot of these issues are due to lack of autonomy and interference from government agencies, and the fact that the existing faculty and administrative bureaucracies at these institutions haave taken shelter under the pretense of lack of autonomy to subsidise large-scale inefficiencies. The lack of merit in teaching and research related income streams clearly will have downstream effects on the quality of graduates coming out of these institutions. These facts are often hidden from the taxpayers who fund these institutions, creating a classic “moral hazard” from a public welfare standpoint. The central universities, in particular, where an increasing share of taxpayer funding is diverted, are places where this kind of pathology is rampant — JNU, Jamia, AMU, Pondicherry are all excellent (!) examples.
    4. When it comes to primary and secondary education, there needs to be a sea-change in taxpayer funding, focussing large funds on rural schools, in teaching as well as in infrastructure, but also in the local control of these fund expenditures. Give local taxpayers control over schools and their governing bodies and you will see better visibility in their functioning.
    One little known fact is the skew in public tax-based funding of Kendriya Vidyalayas, which subsidise inefficiencies and restrict access to these “better” schools through the tariff barriers of admission criteria. Let me expalin this tax scandal which has been going on in India for the past half-century, which neither our media, nor tax-paying citizens have chose to make visible. Kendriya Vidyalayas are, like many other publicly funded institutions, primarily paid for by corporations and private-sector employees. However, the children of private-sector employees in effect have almost no access to these schools, who have a stated policy of discriminating in favor of government and public-sector employees as well as defence personnel. Why hasn’t someone moved the courts against such an obvious flouting of equal treatment constitutional principles? Again, taxpayers in private-sector jobs probably have written this off as yet another cess and in any case have access to other private-sector primary/secondary education options, but what about access and scholarships for children of day laborers in the unorganized sector???
    Perhaps the left leaning ideologues at JNU would wish to comment on this dictatorship of the proletariat! Why are there so many of these Vidyalayas in urban areas or in public industrial towns or in district headquarters towns rather than in far-flung rural areas?
    Enough said.
    By the way, educational access and skewness against the underprivileged is not just an Indian problem. Just see how asymmetries and inequalities are reinforced in other educational models; in the UK, how many Oxford and Cambridge graduates come from working Cockney families in relation to their proportion in the population? In the US, how are Harvard and Stanford admissions criteria different for children of alumni and donors, as opposed to the general population?
    India has a tremendous focus on education (I have benefitted) but I would argue much of it is familial and societal culture; the specific question to honestly answer is how much the government has done to unleash productive human potential through illiteracy eradication. How much of India’s education policies are simply a function of the need to provide quality education enclaves for the children of bureaucrats, the successors of the British collectors? Are we democratic in our education policies? Think about this the next time you vote.

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