Today in the econ class when he taught about the education thing, I think I can imagine why Manmohan Singh supports reservation.
Till today a majority of institutions in India have been reputed because of 2 things -
1. Govt funding, so subsidised and therefore attracting a lot of middle class and brilliant students.
2. A better infrastructure also attracts a better faculty

For the 2nd point, only a handful can be given as examples, e.g. IITs. But for the 1st point, the league starts from Primary schools. Where I have done most of my education, I could not find a single reason why my junior college attracts so many good students (I mean I know that they were more liberal, but not academically strong). So good students of one passing batch used to influence the good students of next batch and so the reputation of the school grew. Ditto with RECs. Agreed that RECs have marginally better facilities but ultimately its the students that drive better placements and which stands as a key differentiator. Its the entry criteria to RECs is that I think makes the companies want to come to these campuses.

Let us take a hypothesis where suddenly all these colleges decide to decrease the no of seats. What does that lead us to? Obviously more better students will be forced to go to 2nd/3rd rung colleges in their areas or state colleges or private colleges. Once this starts, word of mouth spreads and you get more bright students opting for these colleges. A similar analogy can be drawn from Pune, where students stick to colleges in the city than venturing out. Economy sustatins it, and local companies make sure that students are absorbed somewhere.

With advent of orkut and other networking websites, alumni networks are gaining importance by the day. In fact in some instances these are driving the development of the institution. My school can be quoted as a good example. We have a .com website on school's name and reunions happen every year which are advertised heavily. Such networks also contribute to better development of the school and increasing awareness.

Now if we just replace that earlier hypothesis of reduction of seats to Reservations, in a long term it might just be beneficial to the society and economy in general. Not only are we creating a place for all the colleges to compete equally, we are giving a chance for the human capital to distribute much more uniformly than it is currently.

There might be counter-arguments, but all I can think of is, well macroeconomics makes you think a lot!!