Reforming education financing


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EDUCATION is one of the dominant sectors of the Indian economy in terms of enrolment of children, employment of adults and investment of financial resources. While school education has a broad base, higher education suffers from a narrow base covering only about 5% of the relevant age group population. With the expansion of school education, the pressure on the higher education system to expand is expected to continue in India.

The educational system in India is predominantly a state funded and directed activity. Given the financial constraints, India, like many other developing countries, finds it difficult to cope with the ever increasing financial requirements of an expanding system. Reform measures suggested by international agencies and recommended by various committees appointed by the national government have explored possibilities of additional resource mobilisation to reduce the burden on the public exchequer.

Most of the reform measures recommended in higher education centre around two major propositions – improving efficiency in the functioning of public institutions on the one hand, and mobilising resources from non-governmental sources on the other. The former category of reform measures focus on efficiency in resource use so that more resources are available even when additional resources are not allocated to the sector. Measures like changing the staff-student ratio, increasing the teaching workload, and so on belong to the former category. Measures to diversify the sources of funding or develop alternative arrangements to provide higher education belong to the latter category of reforms. A general trend in these reform measures is to shift the burden of cost from the public to private and household domains.

The report of the Education Commission (1964-66) strongly argued for devoting 6% of the GNP to education. Successive governments in the recent past promised this level of investment but it remains more a political intention than a realised commitment. The Majumdar Committee (mhrd, 1999) recently analysed the financial implications of making elementary education a fundamental right and came to the conclusion that enhancing the share of investment to 6% of the GNP would be sufficient to provide adequate resources at all levels of the education system. India now spends only around 3.7% of its GNP on education, undoubtedly a substantial increase of three times in the share – from 1.2% of the GNP in 1950-51 to 3.7% in the year 1990-91. If the share of education in GNP is increased to 6% it would be sufficient to finance universalisation of elementary education and provide more resources for post-compulsory levels of education.

Public expenditure on higher education as a share of GNP increased from 0.19% in 1950-51 to around 0.56% in 1990-91. It needs to be noted that the expenditure on higher education as a share of GNP increased consistently until the 1980s. In fact, in the late ’70s India was spending almost one per cent of GNP (Table 1) on higher education. This trend changed in the 1980s and its share reduced to 0.56%. From the mid-1980s onwards, especially after the National Policy on Education, the focus of discussions and priority in allocation shifted towards elementary education.

The share of the central government in total education expenditure increased during the post-policy period, i.e., from the late 1980s. A substantial share of this increased expenditure was, however, allocated to elementary education. Expenditure on higher education as a share of total recurring expenditure on education shows a declining trend (Varghese and Tilak, 1991). Higher education accounted for 20% of the recurring expenditure on education in the ’50s which increased to 29% in the ’70s and early ’80s; in the decade of the ’80s it declined to 18%. As of now, the share of recurring expenditure on higher education is lower than what was in the 1950s. This reduced spending on higher education becomes more marked when one looks into allocation to higher education under successive plans.

Plan allocation to education denotes current priorities and the government’s commitment to new initiatives. The Indian evidence shows that allocation to education, in general, declined under successive five year plans. Nearly 7.8% of the total plan funds were allocated to education in the first five year plan. It came down to around 2.7% during the sixth five year plan though it increased to 4.5% in the eighth five year plan. This recent increase is certainly a positive trend.

The first plan accorded a high priority to elementary education and nearly 56% of the allocations were earmarked for this sector. Consequently the share of resources for higher education was only 9%. However, its share in the second plan doubled to 18% reaching a high of 25% in the fourth plan. From the 1970s onwards one finds a consistent decline in the share of allocations to higher education reaching the lowest share of 7% (Table 2) in the eighth plan. The trends clearly indicate that allocation to higher education increased consistently from the first to fourth plans and declined consistently thereafter. However, the argument is not that too many resources were allocated to elementary education; universalisation of elementary education requires more resources than what is currently allocated. With the expansion of school education, the pressure on higher education to expand will continue. Since both sectors require more resources, a reprioritisation in allocation between primary and higher education keeping the same level of public funding will leave both sectors starved.

Did the government succeed in transferring its financial burden to others? An analysis of the sources of funding for education clearly indicates that in the 1950s only 58% of public expenditure on education came from government sources. Over a period of time the share of government in educational expenditure has increased. Currently, nearly 85% of the educational expenditure come from government sources – central, state and local. In other words, during the past three decades the total educational expenditure has increased and more importantly the share of the government to total expenditure has increased.

In 1950-51, the expenditure on higher education was shared equally by the government and private sources. More importantly, fees accounted for nearly 37% of the total recurring expenditure on higher education. However, in 1985-86 (the latest year for which information is available) more than 80% of the expenditure came from government sources. Correspondingly, there was a decline in other sources of funding for higher education. For example, student fees accounted for 36.8% of the total expenditure in the 1950s (Table 3). Over a period of time the income from fees as a share of total resources for higher education declined and in 1985-86 it accounted for only 14.4% of the total recurring expenditure. This implies that the share of fees in total expenditure declined from over one-third in the 1950s to nearly one-seventh in the 1980s. A similar trend is visible in case of endowments and other sources of income to the universities. Nearly 14% of the total expenditure on higher education came from these sources in 1950-51; it declined to 4.5% in 1985-86.

It is interesting to note that even when there was a decline in public funding for higher education, the nonprofessional courses were more adversely affected than the professional ones (Varghese, 1987). The trends in the financing of higher education in India show that: (i) the share of the government in total educational expenditure has increased; (ii) the share of higher education in the total public education expenditure has declined, both in plan allocation and in recurring expenditure (This shows a reduced public priority and resource commitment towards higher education, especially in the late 1980s); and (iii) student fees and endowments as a share of total resources for higher education have declined. Consequently, the share of government expenditure in total spending on higher education has increased. By the ’90s, the government, which is the dominant partner in funding, found it increasingly difficult even to maintain the same level of funding for higher education. Therefore, mobilising resources from non-government sources became important even to sustain the system of higher education at its present level of operation. Most of the committees appointed during this period have made various suggestions in this regard.

The 1980s was a period of economic crisis in many developing countries. During this period many countries resorted to extensive external funding, primarily through the structural adjustment programmes. Studies have shown that countries which received structural adjustment loans showed declining public expenditure on education (Lewin, 1986, Berstecher and Carr-Hill, 1990; Sanyal, 1992). It was primarily due to the fact that structural adjustment necessitated a redefinition of the role of government and envisaged a reduced government intervention in all sectors, including education.

The reform measures suggested (World Bank, 1994) for developing countries include: (i) encouraging greater differentiation of institutions of higher education, including development of private institutions; (ii) cost-recovery mechanisms in-cluding cost-sharing with students; (iii) redefining the role of the government by evolving a policy framework to make the sector more market friendly and public institutions more autonomous; and (iv) prioritising investments towards quality improvement.



During periods of structural adjustments, public expenditure declines in general and that on social sectors, including education, declines in particular. In India too, allocation of resources to higher education declined during the period of adjustment (Tilak, 1993). For example, during the period between 1989-90 to 1994-95, the share of higher education in plan expenditure decreased from 12.6% to 6% whereas the same in non-plan expenditure declined only from 14.2% to 11% (Tilak, 1996). The effort of reforms in India was to further reduce the financial burden of the government to provide education, especially higher education.

In the Indian context, two important committees were appointed to recommend measures to respond to the demand for funds for education. The Swaminathan Committee (aicte, 1994) looked into possibilities of resource mobilisation in technical education, essentially through cost-recovery from students. The committee’s recommendations include: (a) the creation of corpus funds in institutions; (b) establishment of an Educational Development Bank of India (edbi) with an initial capital of Rs 3000 crore; (c) reducing the share of salaries in recurring expenditure from the present level of 80% to 60%; and (d) enhancing fees to recover at least 20 per cent of the recurring expenditure.

The Punnayya Committee (UGC 1993) looked into the funding of central universities. Its recommendations include: (i) maintenance grants, dearness allowance to be provided by the government; (ii) subsidies on many of the other items of maintenance grant to be reduced and maintenance grants to be stabilised at a certain acceptable level; (iii) maintenance grant to be based on unit costs; (iv) universities to mobilise funds – at least 15% of the total recurring expenditure at the end of the first five years and 25% at the end of 10 years; (v) creation of corpus funds to meet infrastructure development; (vi) increase in student fees keeping in view the rate of inflation; (vii) scholarships to at least 20% of students; and (viii) soft loan scholarships from nationalised banks.



The reform measures suggested in the reports of both committees have two distinct aspects, namely, improving efficiency in the functioning of institutions of higher education to reduce waste and saving resources and mobilising them from sources other than the government. The report on technical education strongly advocates the possibility of rationalising teaching workload so as to reduce the salary bill. It also advocates reducing the share of regular faculty to 60% and appointing the remaining 40% of the staff on a part-time and contract basis. It further suggests reducing the staff-student ratio from 1:10 to 1:15 in degree courses and from 1:11 to 1:20 in diploma courses. Similarly, it advocates promotion of distance mode of education and to base the grant transfer on a per unit basis. These steps, no doubt, will be helpful in saving resources and make more funds available to the sector without additional public investment.

Reforms relating to mobilisation of resources to reduce the public cost include promotion of distance learning, encouragement of private sector and cost-recovery methods. Access to higher education through non-institutionalised structures like the open learning system has expanded in India. Open universities have been established both at the national and state levels. The open university system reduces recurring expenditure on account of salaries and non-recurring expenditure on account of institutional arrangements for imparting education. Therefore, one of the strategies adopted in India to meet the increasing demand for higher education is through the open university system and correspondence courses. Enrolment in higher education in the non-institutionalised sector (open universities and correspondence courses) has increased in India during the 1990s. It needs to be noted that this sector does not necessarily cater to the age group which normally attends courses in universities and colleges.



The efforts to privatise higher education in India by encouraging private agencies to set up institutions of higher learning have enjoyed limited success in general education. In the ’80s a large number of institutions offering professional courses were set up in the private sector. Such ‘capitation fee colleges’ (Tilak, 1992) represent a case of totally leaving the responsibility to the private sector. The growth of private sector has led to two types of distortions: (i) it encourages only certain courses, especially professional courses; (ii) it adversely affects equity considerations in education, since admissions are based more on the ability to pay principle than on merit. The criticisms about capitation fee colleges both in terms of admission criteria and their functioning have led to litigation. Consequently, the government is now trying to regulate the operation of these colleges. In other words, the experience with capitation fee colleges shows that unconstrained privatisation of higher education sector is perhaps not a desirable solution to finance higher education in India. The private sector may respond more to the market processes than to national and social concerns. It can be argued, and that too rightly, that privatisation may lead to promotion of certain courses at the expense of other courses and promotion of better-off sections of society at the cost of meritorious but economically poor students.



Cost-recovery implies a reduction in subsidies in higher education. The best way to reduce subsidies is to diversify the sources of funding for higher education. This could be done by shifting the incidence of the financial burden either to the beneficiaries (students) or to their users (employers). Student loans, graduate tax and enhancing fees (Woodhall, 1989; Tilak and Varghese, 1991) are some of the suggestions made in this regard.

Student loans are mechanisms envisaged to shift the burden to the beneficiaries of education. Under this scheme individual students are expected to meet the cost of higher education. One advantage of the student loan scheme is that it is provided to those students who take advantage of higher education and is recovered from the same group of students. In other words the incidence of liability is confined to those persons who take advantage of the public provision. Another advantage with the student loan scheme is that the loan is recovered only after the loanee completes studies and starts earning. Both the committees (Swaminathan and Punnayya Committees) recommended student loan scholarships, either through the proposed Educational Development Bank of India or by commercial banks at concessional rates.

A student loan scheme can create two types of distortions. First, only those courses which enjoy a premium in the employment market will be preferred, both by the providers of loans and borrowers. The professional courses may get priority at the expense of others which are important from the point of social and national concerns but do not enjoy a premium in the labour market. Second, the educational credit market in India is not well developed. When banks try to provide educational credits to students they look for surety and security deposits which poor students are not in a position to provide. Ultimately, loan scholarships may lead to a situation whereby these opportunities are taken advantage of primarily by children from well-to-do families. This may have adverse equity implications.



Another commonly suggested measure to recover the cost of higher education is through a graduate tax. The graduate tax is an education specific tax levied on those who use educated manpower. The paradoxical situation in India is that while the expenditure on education is borne by the government, the products of the educational system are used by the public and private sectors. The educational sector in India provides manpower to the production sectors and they generate profits which are beneficial to the employers. However, employers seldom contribute to the education sector on a regular basis. There is, therefore, a strong case for levying a tax on every graduate who is employed in an organisation. An employer can be asked to pay an annual tax to the government for each graduate recruited. The amount of tax to be levied should be based on the cost of education at that particular level. The duration of the tax can be determined so as to recover the total cost of education.



This seems logical and hence a desirable proposition. The major drawback with the scheme is that it may work as a disincentive for many employers in recruiting university graduates; they may use lower level educated manpower as a substitute. This may exacerbate the already aggravated situation of unemployment of the better educated in India. The substitution possibilities may be lower in those organisations where the burden of taxation can be shifted to individual employees. Nevertheless taxing employers based on the type of manpower they use has a good rationale even if it leads to substitution.

A commonly suggested cost recovery method in higher education is to increase fee rates. The share of fees in total-expenditure on higher education has declined over time. This happened because the amount of fee levied remained almost unchanged over a long time , while the cost of education increased. This has resulted in an increasing cost-fee disparity in education. Therefore, there is a justifiable case for increasing the fee to be levied from students of higher education.

Most of the students who go in for higher education are from economically and socially better-off families whose ability to pay is higher than what they are actually charged. A continuation of the present levels of subsidy benefits a segment of the population that does not deserve it. Therefore, there is scope for increasing fees to mobilise resources. Such possibilities are higher at the post-compulsory and tertiary levels of education.

There are many ways in which fees may be increased. One can argue for a uniform increase in fees for graduate and postgraduate courses which implies that fee rates will remain the same in a university. A second alternative is to increase fees based on the cost of provision of different courses. In this case the fee for a particular course will remain the same in a university but the rates for different courses will vary. A third alternative is to give autonomy to colleges to charge fees based on the cost of courses that they offer. In this case charges for the same course may vary between different colleges within a university. In all these cases, students opting for similar courses are levied the same fee, either at the college or university level. The downside is that it does not discriminate between those whose ability to pay is higher or lower. A discriminatory fee structure, on the other hand, takes into account the ability to pay principle.



A discriminatory fee structure implies that fee will be charged according to the paying capacity of the student, the fee to be levied based on the cost of providing education for each faculty or subjects on the one hand and paying capacity of individual students on the other. Needless to add, those belonging to the highest socioeconomic households will pay the most, close to the full pricing of education. Students from the lowest social and economic households will pay the least which indirectly helps target subsidies in favour of the poor. One can argue that discriminatory pricing may lead to an increased income for higher education without adversely affecting equity considerations in educational provisions. In this sense, a discriminatory fee structure will reduce the perverse effects of the existing public subsidy system.

Student fees have recently been enhanced in all types of universities in India. The management and technical institutions provided a lead in this direction. Fees remain the main source of income for private institutions, where parents are willing to pay. Though enhancing fees in public institutions is often resisted in India, recent experience shows that it is possible even in public institutions. However, a uniform increase at times goes against equity considerations. A discriminatory structure based on the ability to pay principle increases income without adversely affecting equity concerns.



All reform measures attempt either to save resources by improving efficiency in the operation of educational institutions or mobilise resources from non-government channels. There is scope for doing both in India. Improving the efficiency of educational institutions cannot be effected through policy reforms at the national level; it needs changes at the institutional level (Sanyal, 1995). The internal management of institutions needs to be strengthened. Perhaps, this requires giving more autonomy and greater authority to the head of the institution. Public policy needs to create a legal and conducive environment to initiate changes at the institutional level. It also demands that the government play a more regulatory than controlling function.

There is scope for reducing subsidies in higher education. Unlike at the primary level, a majority of students in higher education come from better-off families and hence can pay more. Perhaps, keeping fees at lower levels in the name of equity benefits the better-off sections of society. More importantly, a high level of public subsidy reduces the scope for the government to mobilise additional resources, leading to privatisation of the sector, though only the state can provide a long-term perspective and focus on social concerns in promoting higher education. There is thus a need to strengthen the state which cannot be done while maintaining high levels of subsidy. On the other hand, an indiscriminate reduction in subsidies may leave the sector to the vagaries of market forces. Therefore, what is argued for is targeting subsidies to students from poorer sections of society. It also needs to be emphasised that enhancing fees may not generate the level of resources required for the sector.

Finally, the system of higher education in India covers only a small percentage of the age-group population. Given the efforts to universalise elementary education, one may expect the pressure on higher education to increase in the years to come. The situation in India, like in all developing countries, is that the country needs to invest more resources both at the primary and tertiary levels of education. Hence, reallocating resources from higher to elementary education is no solution; it lies in increasing governmental expenditure.



If the public authorities commit to the recommendations made by various committees from the 1960s onwards to devote 6% of the GNP on education, the sector as a whole will be better-off and the resources sufficient to provide a comparable level of education at all levels. Therefore, discussions on resource mobilisation need to focus more on this measure rather than on changing priorities and allocation favouring higher education at the cost of elementary education. An increase in allocation to education as a share of the GNP, accompanied by a better targeting of subsidies, can both mobilise resources and promote equity.



Expenditure on Education


Total Education

Higher Education


Rs in Millions



% Recurring Exp


























Sources: (i) Education in India (various years); (ii) Annual Reports of the Ministry of Human Resource Development.



Plan Allocations to Education (%)


Total education

Higher education

I Plan



II Plan



III Plan



IV Plan



V Plan



VI Plan



VII Plan






Source : Five Year Plan Documents



Sources of Funding for Higher Education (%)



Local Bodies


































Source: Education in India (various volumes). *Refers to recurring expenditure only.



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