The Budget 2020 has an innocuous statement in the beginning of the 72-page document on allowing FDI in the education sector. It says that "steps would be taken to enable sourcing External Commercial Borrowings and FDI so as to able to deliver higher quality education."
The fine print doesn't offer much details other than 'enable sourcing' in the sector. Different interpretations of the statement can have huge consequences for education sector, say experts. A complete overhaul of the system could arise, they add.
Even though the consolidated FDI Policy, 2017, already allowed Foreign Direct Investment (FDI) up to 100%, global educational institutions were not interested in entering India because there were too many conditions. Experts believe it's these conditions that may see relaxation in the days ahead.
"My sense is they are trying to make it smoother. Currently, there are too many regulations for anybody to invest in the education sector and run an institution, and the norms are much more for foreign institutions," says Parthapratim Pal, Professor- Economics Group, Indian Institute of Management Calcutta.
The market has been buzzing that Ivy League universities are coming to India to set up campuses but that hasn't materialised yet. A lot of them don't necessarily have any investment issues but there seems to be massive regulatory problems due to which they have stayed out.
"Institutions invest in India because it makes good business sense and would want to take some returns back," says Professor Pankaj Chandra, Vice Chancellor of Ahmedabad University. He adds to attract FDI, the government must allow it to happen. As per the current regulations, educational institutes in India that give a degree are not-for profit entities. This means that the Institute cannot take money out and has to invest it back. "If FDI is coming in, the government will have to change those requirements for everybody," he says.
The second scenario is when private institutions want to raise money. External Commercial Borrowings would facilitate easy flow of money in the country in the education sector. "Globally, there is a lot of liquidity in the international market so borrowing is easy and the rate of interest is quite low, at 4-5 per cent. In India, the rate of interest is 12-13 per cent," says Pal of IIMC.
Allowing borrowing from international market will reduce the cost of capital for educational institutions but there is an additional risk component to it. Pal says, the rate of interest is dependent upon London Interbank Offered Rate of interest. If they change the interest rate, cost of capital can go up. Secondly, since Indian institutes will be borrowing from the international market, the capital amount will be in dollars and if rupee depreciates, it will be expensive in terms of interest and principal amount.
While the intent to open up the education sector to foreign investors is good, what is key is the government has to go beyond investment and regulation. They also have to create an enabling and welcoming environment for them to come to India. Currently, that is not the case.
Also read: Union Budget 2020: Govt to bring new education policy; allocates Rs 99,300 cr for sector in FY21