The number of opportunities in both jobs and universities whose degrees are meaningful is far less than the number of people. And the consequences of not getting one of those opportunities is much bigger than say, in the US.
Students and their parents would need to plan out a career path assuming they don't get into the best schools. They could still spend time and money on education and personal development, but it wouldn't be singularly directed at test prep. Instead, there'd be more focus on developing the foundational knowledge, critical thinking, and diligent habits that promote career success.
These top colleges (in India) are literally a pathway to economic betterment of extended families as they're very affordable (lower income families essentially pay no fees), reasonably good and pretty much guarantee an upper middle class exit. I think introducing any shade of unfairness into this process even if it reflects underlying unfairness of life will damage soceital cohesion.
Source: studied in these colleges and know personally several classmates of very modest means whose extended families benefited from their success. Also personally know a few people in China who have equivalent stories.
We need these things for good reasons, but the skill premium is here to stay. Both in the West and even more so (because differences are so vast, and redistributing incomes is not exactly feasible) in developing countries like China and India.
And as you point out, if it's all or nothing, or massively increasing returns then the people near the cutoff/bend in the curve fight like hell to stay on the right side of the line instead of rebalancing the incentives.
Basically turns education into a lottery where everyone spends lots of money to buy a lot of tickets because there's no sensible alternative. So appropriate that one of the solutions is to run an actual lottery that you can't buy more tickets for.
Banning tuition seems like a surprisingly far-sighted move, wonder what else they'll come up with and how it'll work out.