Freak games mandarins play

Gneezy and Rustichini conducted a field study in a group of day care centres in Israel. They introduced a monetary fine to deter parents from arriving late to pick up their children. As a result the number of late-coming parents increased, significantly. Moreover, after the fine was removed, no reduction occurred. They conclude 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 behaviour may be opposite than expected."

The HRD ministry is not 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 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. But in 2006, remittances through formal channels alone stood at $26 billion (equivalent to 3% of the GDP). Around two-thirds of this arrived from the US and Europe. In comparison, the Central government’s higher education budget for 2006-07 is just over $1.1 billion. Not at all a bad return on investment.

Let’s consider how the exit tax might influence behaviour. But first, let’s ask why the government should subsidize 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 society. So, there is a case for public spending where the externality is large, such as in medicine, civil and irrigation engineering. Such expenditure, though, is justified only when the market has failed to produce a socially optimum number of graduates. This does not apply to India, where the government controls the number of seats, and is thus principally responsible for any shortage!

So how does the government set the quantum of the exit tax? Given the externalities, merely recovering the subsidy (i.e, the difference between the fees charged and the real costs) underestimates the actual loss to society. How then does the government price the “benefits to society"? Well, it can employ 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 not only be a huge waste of resources. It will also be a veritable gold mine for rent-seeking officials all the way from university officials to airport immigration officers.

Most importantly—and this is where the Israeli day care centres come in—the tax is likely to be counterproductive, and cause many more graduates to leave and never return. That’s because once the moral incentive to stay is converted into a financial incentive—at a small fraction of the graduate’s salary abroad—it can be paid off without any “guilt".

In any case, unless the government can guarantee the graduates equivalent employment, it has 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 morally a non-starter.

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 public funds being wasted, then it should not spend the funds where it is likely to be wasted.

In today’s economic conditions, there is no reason for the government to subsidize 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 resort to 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 and secondary schools—the root cause of most contemporary evils—every rupee spent on higher education is a rupee snatched from the poor and the marginalized by depriving them of better education.

And if the government wants to raise expenditure on basic education, here’s how it could do so without raising taxes: The HRD ministry’s department of higher education intends to spend about Rs6,483 crore (about $1.43 billion) next year. How about scrapping this department and all its programmes and using the funds for primary and secondary education instead?

Nitin Pai is editor of Pragati —The Indian National Interest Review. Comments are welcome at theirview@livemint.com

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