There's a new business opportunity opening up in India that could become as big and popular for investors as telecoms and retailing. It is education, which is one of the biggest blockages to India's growth and development because standards are currently so bad.

Even poor families spend 20% of disposable income on private schools and universities, rather than expose their children to 950,000 mostly ill-equipped and under-staffed government schools. Independent surveys have suggested that absenteeism by teachers averages 25%, rising to more than 40% in the poorest and least regulated states. Absenteeism by children is also high – 20% among those aged between 15 and 16.

The availability of secondary education is vastly below demand, and many graduates are ill-equipped for employment. Only 7% of young adults between the ages of 18 and 24 go to universities compared with 16% in China and far more in the United States and Europe. Many that do go emerge ill-equipped for employment. NASSCOM, India's software trade organization, said in 2006 that only 25% of graduate engineers and 10-15% of ordinary graduates applying for IT jobs were employable, echoing statistics in a 2005 McKinsey report. Kiran Karnik, who was then NASSCOM's president, primarily blamed obsolete curricula and equipment

Although there are a few signs that school attendance is improving, this dismal record shows that India risks missing its widely trumpeted “demographic dividend” — 40% of its 1.2 billion-population are under the age of 18. There's not much point in having one of the youngest populations in the world if they are under-educated.

Technopak, a Delhi-based investment consultancy, estimates that the current private-education market is worth US$40 billion a year, and that this could roughly triple to US$110-120 billion in ten years' time. The potential is attracting foreign companies such as Pearson Education (PSO), part of the UK-based publishing group, and McGraw-Hill (MHP), as well as private equity firms that include Blackstone (BX), New Vernon, and Deutsche Securities, part of Deutsche Bank (DB).

Government regulations, however, restrict what Indian and foreign private-sector companies can do. For-profit investment in schools and universities is banned, but it is allowed by charitable trusts, which run some 50,000 schools. Many of the trusts have been formed by companies that theoretically accrue the profits, though many siphon money into other businesses. One of the largest companies, the family-controlled Amity University, has 50,000 students across the country.

There are also about 50 for-profit schools, which are allowed to slip through the controls because they are affiliated with international bodies like the International Baccalaureate (IB) examination program. Some private-sector groups run a profit-making IB programs alongside (notionally) Indian-affiliated nonprofit programs.

Real estate companies have also found a way into the country's education business by linking up with firms like Educomp (considered to be India's biggest education provider) and foreign firms to equip and run charity-registered schools for children of families that buy their homes.

There's a debate in the government about whether formally to allow private-sector companies to investment in education for profit – instead of facing these sorts of loopholes – but the idea has been blocked by Leftist Communist-led parties, which oppose limiting the role of the public sector.

This leaves two major areas where the private sector is not restricted. One is vocational training, which is attracting several major Indian companies like Larsen & Toubro, the Singhania family-controlled JK group, and Bharat Forge, the world's second-largest forgings company. These companies are not after profits so much as a steady stream of young people who are educated and trained in urgently-needed subjects and skills. They have found that the only way to fill the void left by the public sector's failures is to act themselves, supplying colleges with appropriate curricula, and guaranteeing jobs for successful students.

Bharat Forge has an engineering college on its factory campus in Pune that runs a masters degree program with Britain's Warwick University. It also has a bachelors' program run with an Indian institute that, says Baba Kalyani, the chairman, “enables workers to become engineers.” Below that there is a “talent pipeline project” with technical colleges in small rural towns, developing work-related courses and identifying bright students to work in his company during vacations.

The second major area for private-sector investment is providing educational systems and support services to schools and colleges of all types. This is the opportunity that has attracted international companies such as Pearson and McGraw-Hill, as well as universities like Oxford from the United Kingdom and the Georgia Institute of Technology from the United States. The services range from teaching aids to teacher training, examinations, and language tuition.

Indian companies are also active. Delhi-based Educomp, founded in 1994, is the Indian market leader. For five years starting in 2000, it had a small private-equity investment from the Carlyle Group. It has 4,000 employees and is boosting teaching standards in Indian private schools by providing a range of IT-based distance-learning aids. It also provides learning labs for 6,000 Indian government schools. It has just bought Learning.com in the United States, which gives it access to two million American students, and has expanded in Asia, including China, through a link-up with Raffles Education Corp of Singapore.

So there are plenty of companies with the skills and the interest in boosting India's education. Since there is little chance of government schools and colleges improving significantly on their own, the only sensible course is to open up the system to the private sector. But for that to happen, the government needs first to recognize that there is a real risk of losing what it grandly calls its “demographic dividend.”