There is a shortage of skilled labour in India. Wages for skilled staff are rising sharply, and staff turnover has risen. The universities are in deep distress, and so far, reforms of government policies in higher education have not begun.

Yet, the situation on skilled labour is likely to improve significantly.

The United Progressiva Alliance government has undertaken many initiatives on higher education. These include raising the number of seats in universities and starting new universities. But my sense is that these do not achieve high-quality education.

An essential gap in universities lies in recruitment, compensation, and incentives. A good PhD in most fields now commands a global market. The wages in Indian universities lag far behind the prices available elsewhere in the world and in the Indian private sector. This has sharply curtailed the supply of good researchers who are willing to work in universities.

There is a selectivity bias where the best people are leaving universities or not joining them at all.

The UPA approach of focusing on quantities (more seats, more universities) does not address these fundamental difficulties. Announcing more seats at the IITs or building new IITs will not solve the recruitment crisis that the IITs face.

India needs to move closer to the carrot and stick of the top universities of the world, where high wages in universities are accompanied by powerful incentives to perform. Universities need to be much more flexible in starting and shutting down departments and programmes, and innovative in processes, so as to respond to the needs and opportunities of a fast-changing country.

So far, there is no sign of movement on these issues. Hence, I share the widespread sense that higher education in India is fundamentally broken and that there is no light at the end of the tunnel. However, there are five other aspects in the picture which suggest that the crisis in staffing will abate.

The first point is about the business cycle. We are at an unprecedented moment in Indian history with high GDP growth and an incipient investment boom. Everywhere in the world, the labour market is tight in the high of the business cycle and soft at the bottom. To some extent, what we are seeing is a cyclical phenomenon and not a structural one.

The second issue concerns job matching. In a fast-growing economy, where numerous new firms and completely new industries are taking root, matching the right job to the right person at the right wage is legitimately difficult. In an old-fashioned static environment, job matching was much easier.

But in the present rapidly changing environment, there will be many situations where the right job is not matched up to the right person at the right price. This inevitably induces high staff turnover. Acute staff turnover is perhaps a feature of this unique moment in India, where so many things about firms and markets are changing rapidly. In a few years, more stability is likely to come about.

My third proposition is that college degrees are less important than meets the eye. A lot of extremely successful people in the world have a college degree in fields like history or the liberal arts, where no tangible technical skills were learned. A lot of top CEOs frankly say that their MBA education was useless. An extensive research literature finds remarkably little impact of either elementary or higher education on GDP growth.

Universities may play a role in socialisation and in screening but the education that is imparted there is much less important in the working years than is presumed to be. In other words, the Indian model of having difficult entrance examinations coupled with no teaching has its strengths, for it achieves the things that matter (screening and socialisation) while skimping on the things that matter less (learning history or economics in an undergraduate programme).

If learning does not happen in universities, then where does it happen? What appears to dominate is "learning by doing", the learning that is acquired at the workplace. People learn inside firms, and their learning is best when the firm is in a brutally competitive and globalised market.

In this respect, there is something of great importance which has been going on in India from 1991 onwards. For 16 years now, we have been building a new cadre of individuals who have learned inside competitive firms with an increasing degree of globalisation. Trade barriers have come down, capital controls have eased, and a middle manager in Tata Steel [Get Quote] today is competing in the world market for steel. Ten years of experience in Tata Steel is worth more in building top-quality staff for running a steel company than any university education that I can think of.

India fares well by world standards in producing a large number of good-quality students at the 12th standard. The quality of English, mathematics and physics at the Indian 12th standard, particularly with the CBSE, ICSE and those taking the IIT entrance exam, is very good by world standards. In urban areas, more than half the enrolment is in private schools; and in rural areas also, enrolment in private schools is roughly a quarter. Hence, the supply of good 12th standard students is very large and growing rapidly.

If the gentle reader is sceptical about the potential for 12th standard students to grow into complex knowledge workers, I only have to point to the example of India's IT industry. In the early 1990s, if someone had talked about a million people being employed in the IT sector, this would have seemed impossible. Universities giving out degrees in IT on this scale just did not exist--and still do not. How did India do it? Bright 12th standard kids with an indifferent college education picked up a few months' vocational training and learned on the job. The experience that has been picked up in export-oriented firms has been a marvellous teacher for this million-strong workforce.

The last element which is in India's favour is that wages at the high end are now attractive enough to pull a thin cream of Indians and foreigners who have careers abroad to relocate to India. A fairly small sprinkling of such people can be very useful in diffusing knowledge in their surroundings, and thus assisting the process of learning on the job.