illustration by James Ferguson

A few years ago, it was boom time in India. The economy was awash with capital and investors were salivating at the prospect of a nation with a young population and a growing aspirational middle class. For many entrepreneurs, whatever their background and experience, opening a business school seemed like a golden investment opportunity.

“The education market got seduced,” says Ajit Rangnekar, dean at the Indian School of Business, one of the most respected institutions in the country. “A whole lot of opportunists and, as always, some charlatans started all sorts of business schools …thinking this is now the magic mantra to make money.”

Although some of India’s newer MBA programmes are highly regarded, such overzealous enthusiasm helped create a bubble of oversupply in the management education market. However, this bubble has now burst, as the Indian economy limps out of its worst financial crisis in almost two decades and the poor quality of many of these fledgling institutions has come to light.

More than 160 management schools have shut down in India in the past two academic years, according to the All India Council for Technical Education (AICTE), the statutory body responsible for accreditation.

These closures follow a period of delirium when low-quality management institutes proliferated across the country, often churning out unemployable graduates.

During the upturn, MBA students were receiving multiple job offers with the promise of hefty pay packets even before they graduated, which in turn fuelled demand for management degrees.

Colleges are required to operate as not-for-profits in India – a rule that is often criticised for stifling investment – but commentators say many institutions are highly lucrative, covertly providing sizeable returns to the investor. Meanwhile, low barriers to entry make it easy for anyone with access to land to open a college.

“It is one of the most highly capital-efficient industries on the face of this planet,” says Amit Garga, senior principle at the Parthenon Group, an education consultancy. “You can make a return on equity of 30 to 35 per cent unleveraged.”

As a result, between 2008 and 2012 the total number of management schools in the country doubled to 2,385, according to AICTE, while the total student intake rose from 114,803 to 313,920.

Demand for management and engineering degrees has been rising consistently at about 6-7 per cent a year, Mr Garga estimates. But a few years ago that was outstripped by supply, which grew at double-digit rates and created the current excess.

AICTE estimates there are now 400,000 seats at management schools across the country but one in eight lies empty every year, forcing unprofitable schools to close.

“Your investment case crashes if you’re not able to meet the first two or three years of enrolment,” Mr Garga explains.

Moreover, this increase in supply has coincided with a period of economic slowdown in India, with pressures on corporate hiring and remuneration discouraging people from applying to business schools.

Weakness in the wider economy is undoubtedly affecting graduates’ earning power. Crisil Education Grading, which evaluates management education programmes across India, says more than half of those on its list reported a decline in the percentage of students recruited by banking and financial services companies since 2011 and a marginal decline in placements in the IT sector, two of the most popular industries among MBA graduates.

There is a clear distinction in India between top-end business schools and their lower-tier brethren.

Compared with the west, the Indian market for business education has a very small number of premier institutions. While highly regarded colleges such as the Indian School of Business and the 13 Indian Institutes of Management (IIMs) remain oversubscribed and place most of their students, poorer-quality institutions are being forced to fold.

“There is a huge demand in India for higher education but that demand-supply gap is for quality, higher education,” says Dhiraj Mathur, executive director at PwC in India. “That’s the fundamental reason why schools are closing down.”

The Indian School of Business has increased its intake by about 200 students with the opening of a campus in Mohali, Punjab, and these additional graduates are securing plum jobs. Similarly, there were more than 500 applicants per place at IIM Ahmedabad this year, where just 380 students were accepted.

“The simple rule is: if you have quality you will survive, if you don’t you will perish,” says SS Mantha, chairman of AICTE.

Excluding the top 20 colleges in India, only 10 per cent of business school graduates are placed immediately after graduating, down from 54 per cent in 2008, according to a report from the Associated Chambers of Commerce and Industry of India released earlier this year.

As well as poor quality, there is a discernible pattern in the location of many of these failing business schools. Mr Mantha says that most of the unfilled places are in rural colleges where it is difficult to find trained staff and there are few employers nearby.

Of the 162 schools that closed in the past two years, 58 were based in the vast state of Andhra Pradesh, while 22 were in the desert state of Rajasthan and 20 were in the largely rural and relatively under-developed Uttar Pradesh.

“They are not close to a city or town, so their linkages with industry are poor,” says Mr Mathur. “They have issues getting good faculty.”

There will be hard-hitting consequences for the wider society, as India produces a mass of unemployable graduates.

The number and quality of MBA graduates India produces affects hopes for a so-called “demographic dividend” – the much-maligned theory that a young, working population will drive the growth of Asia’s third-largest economy. And analysts at Kotak Securities, the Mumbai-based brokerage, point out that India is not only wasting resources but also generating a pool of frustrated young people unable to secure a job they consider commensurate with their qualifications.

As a wave of closures follows a period of excess the hope is that India’s business education industry is now in the midst of consolidation.

“It is basically a case of a little bit of a bubble, a rush of easy money into education where the industry is not easily understood, and the market then stabilising,” says Bibek Banerjee, director of the Institute of Management Technology in Ghaziabad.

Nonetheless, questions around quality checks remain. In a typical year about 600 or 700 engineering and MBA colleges are approved by AICTE, according to data from Parthenon, but that figure climbed to more than 1,300 in the 2009 and 2010 academic years.

“Fundamentally, what’s missing is a reasonable level of accreditation for higher-education schools,” says Mr Garga. He acknowledges, however, that monitoring quality is particularly difficult in a vast and varied market such as India where the industry is highly fragmented.

“I’m just surprised that so few [business schools] have failed,” says Mr Rangnekar. “I would have expected the clean-up to be more.”

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