UNIT 16

EDUCATIONAL FINANCING

Structure
16.0

Objectives

16.1

Introduction

16.2

Linkage of Education with Poverty and Income Distribution

16.3

Sources of Educational Finance

16.4

Expenditure on Education

16.5

Policy Orientation for Private Sector Investment

16.6

Cost Sharing in Higher Education

16.7

Policies of Educational Financing in Other Countries

16.8

Let Us Sum Up

16.9

Key Words

16.10

Some Useful Books

16.11

Answers/Hints to Check Your Progress Exercises

16.0

OBJECTIVES

After studying this unit, you should be able to:

l

explain the underlying considerations of Educational Finance (EF) relating to

resource mobilisation, allocation and its efficient usage;

explain the policy perspective of the Indian government in encouraging the

private sector to invest in the education sector so as to reduce its role in the
matter of EF;

identify the sources of EF for different stages of education in India and the
changing trends over time therein;

appreciate the performance of different states in terms of proportion of education

sector investment to total annual budgetary outlay;

explain the issue of cost sharing in education and the different methods by
which the issue can be addressed; and

provide a comparative profile in different countries of some important indicators

and policies.

16.1

INTRODUCTION

In the previous three units (viz. 13, 14, 15) you have learnt various aspects relating
to the Economics of Education. Specifically, you have studied about: importance of
education in contributing to human capital formation [and how this realisation led
to the recognition that expenditure on education should be viewed as investment
rather than consumption]; the issues governing the demand and supply considerations
of education; and the usefulness of the different techniques for determining the
demand for education in planning for its supply. The present unit deals with the
dynamics of Educational Finance (EF) which is closely related with the education
policies of a country. In particular, we shall study the different sources of EF, the
issue of private sector investment in higher education in the context of education
sector reforms, trends in expenditure among the different stages of education,
different approaches suggested in cost-recovery of higher education along with
their relative merits/demerits, a cross-country profile on some indicators relating to
EF, etc. We will precede the discussion on these aspects/issues, by first making a
brief reference to the linkage of education with two fundamental issues of economic
concern viz. poverty and income distribution.

45

Economics of Education

16.2

LINKAGE OF EDUCATION WITH POVERTY AND

INCOME DISTRIBUTION

We may recall that the four principles governing the establishment of the facilities
for education were identified as: equity, regional parity, quality and efficiency. The
need for according due weightage to these principles may differ in their extent from
country to country depending on the state of development of the economy. To
illustrate this, let us consider the basic features of a developing country like India
where even with five decades of planning more than one-third of its population is
illiterate and close to one-fourth of its total population is below the poverty level.
The situation demands concerted efforts to get the children from poor families
attend school by providing suitable incentives (e.g. free books, mid-day meals, etc.).
Over a fairly long term interval, policies for promoting compulsory education up to
a certain level helps in mitigating poverty. This happens when the income levels of
poor families increase with the education acquired by their children. There is thus
a time gap during which it is necessary to retain the child in the education system
without allowing the child to dropout from the system prematurely. While this is one
direction in which the education policies should aim, policy orientation is also required
for establishing facilities for higher education. This will be required to meet the
demand created for higher education by the middle/high income group families.
Due to the ability of the latter to acquire higher education the gain in their earnings
will actually be larger than that gained by the members of the poorer families. Thus,
in an overall sense, while education contributes to raising the living standards of all
sections of the society, the gap between the income levels of the rich and the poor
may actually widen. What is significant, however, is to note that with education the
quality of life of the poor also improves which in its absence would remain
unchanged.

16.3

SOURCES OF EDUCATIONAL FINANCE

Although the education sector in general receives finances from both the
governmental and the non-governmental sectors, it is important to underscore the
dominant role of the government in respect of its financing. The intervention of the
state in matters of its financing is necessary not only because of the motivations
of the private sector (which places greater emphasis on immediate returns from
investment) but also due to the very nature and characteristics of education.
Recognised as a public merit good, its other characteristics impinging on investment
considerations by the government include: (i) consumer ignorance, (ii) technical
economies of scale, (iii) externalities in production and consumption, (iv) inherent
imperfections in the market like absence of credit market institutions for financing
education, etc.
Central to the objectives of the present unit, it is important to note that the challenges
posed in mobilising the resources for educational finance are distinctly different for
developing economies. To illustrate, let us take the case of India where majority of
its population resides in rural areas. The country also has a very high proportion
of children and youth population. The demands for EF are distinct and dual in this
situation. While the children from poor/rural families require promotion of free and
easily accessible facilities for elementary education, its significant youth population
require facilities for specialised training for skill development. There is a fair
consensus that a minimum of eight years of schooling is required for one to be able
to grasp the requirements of specialised training. The establishment of educational/
training facilities requires massive funds. There is a growing debate on whether the
entire education sector (comprising different stages viz. elementary, secondary,
technical/higher education) should be kept under the ambit of public funding. The
need to encourage the participation/investment of the private sector is being
increasingly felt owing to factors like fiscal pressures leading to resource constraint,
46

perceived higher private benefits for the individuals particularly in case of higher
education, ability/willingness to pay for higher education by sections of people better
off economically, etc. As the economic status of a country changes (i.e. from the
developing to the developed), the underlying considerations in the matter of establishing
and financing the educational facilities will also change. This comes about partly by
increased awareness of the people about the importance of education and partly by
the higher ability of the persons to afford the cost of education. In the meantime,
however, the considerations for achieving the needed balance between the public
and the private sector investment in the education sector along with the issue of
subsidy need to be guided by factors like the socio-economic layers of the society,
demographic features, demand for elementary versus higher educational facilities,
etc.

Educational Financing

The involvement of private sector in elementary education in India is limited. Even

where it is there, it is mostly with budgetary support by the government (i.e. in the
form of grants, both explicit and implicit). It is important to recognise that in respect
of elementary education (classes I to VIII in the Indian context), the social benefits
are larger than the private benefits. This is a factor which calls for greater role
of the government as the motivations of the private sector are usually linked to
short term returns on investment. In higher education, particularly, for professional
courses, it is different. This sector has seen large scale private investment in the
last two to two-anda-half decades in India. The policy perspective which led to
this change and the results experienced need to be analysed in detail. But before
this is taken up for discussion, it is necessary to look at the extent of educational
expenditure, in the aggregate or from a macro perspective, as well as its distribution
by different stages [i.e. elementary (class I to VIII), secondary/higher secondary
(class IX to XII) and higher education (graduate and above courses)] and the
trends in this respect over time. This is done in the next section with the empirical
data used relating to India (which reflects the situation for a developing economy
facing constraints of finance mobilisation, allocation, expenditure, etc.).

16.4

EXPENDITURE ON EDUCATION

It is customary to express the total allocation to education as a percentage of GDP/

GNP and take it as an indicator of the importance accorded by the government to
the educational development of the country. There is also the view that normally,
expenditure on education should grow at double the rate of economic growth in the
early stages of educational development (Tilak, 2006). In view of this, the first
Education Commission (popularly referred to as the Kothari Commission, 1966)
recommended that in the current stages of educational expansion in India (i.e. as
it obtained in the mid-sixties), the government should endeavour to progressively
increase its expenditure on education to reach the level of 6 per cent of national
income over a twenty year time frame. This recommendation was based on
consideration of the factors like: economic growth, population growth, growth in
enrolment, expenditure per student, etc. It was also based on the trends in education
expenditure of some other countries (Japan, USSR, US) which were spending
around 6 per cent of their GNP in the 1960s, progressively increasing their level
from a small fraction that they were spending at the beginning of the century. The
trends in this respect presented in Table 16.1 for India show that the expenditure
on education increased two-fold over the period 1966-86 (from 1.8 per cent of GNP
in 1965-66 to 3.7 per cent in 1985-86). The highest that it could reach in later years
was 4.4 per cent in 2000-01. The growth in aggregate terms can be more realistically
viewed in per capita terms. The decadal growth rate in average per capita real
expenditure on education shows that while there was an increase from 5.7 per
cent in the 1970s to 6.4 per cent in the 1980s, it declined to 4.1 per cent during
the 1990s (Table 16.2). While the decrease can be due to increased student enrolment,
the declining growth in per capita real expenditure on education is also attributed
to the efforts of the government to withdraw from the education sector (particularly

47

Economics of Education

the higher education sector) during the 1990s. It is therefore necessary to look at
the distribution in educational expenditure by level of education.
Table 16.1: Expenditure on Education
as a Per Cent of GNP (in India)* : 1951-2003
Year

Expenditure as a Percentage of GNP

1950-51

1.2

1960-61

2.5

1965-66**

1.8

1970-71

3.1

1980-81

2.9

1985-86**

3.7

1990-91

3.7

1999-2000*

4.3

2000.01**

4.4

2001-02**

3.9

2002-03**

3.8

2003-04** (RE)

3.8

2004-05** (BE)

3.5

Note: * Data in Tables 16.1 to 16.10 relates to India.

Source: Varghese (2006) and Tilak (2006), the latter for the ** marked years.
RE: revised estimates BE: budget estimates

Table 16.2: Growth in Per Capita Real Expenditure on Education

Period

Average Per Capita Real

Expenditure (Rs.)

Growth Rate (%)

1971-72 to 1980-81

142.56

5.7

1981-82 to 1990-91

243.24

6.4

1991-92 to 1998-99

344.22

4.1

Source: Chakrabarti and Joglekar (2006)

Distribution of Educational Expenditure by Level

Distribution of allocation by level of education shows that elementary education
accounts for around 45 per cent of total expenditure on education by the government
(Table 16.3). There is a slight increase in this respect from 1995-96 onwards, which
is at the expense of secondary and technical education sectors (the latter comprising
ITIs and polytechnics). Analysis of recurring (non-plan) expenditure by level shows
that 94.5 per cent of the expenditure on school education is met by the government
sources. The corresponding proportion for higher education (in 1986-87) was 76
per cent with fees and endowments accounting for the rest (both equally around
12 per cent each) [Table 16.4]. There are a few states in which senior secondary
education is imparted in intermediate colleges. The expenditures of these colleges
is mainly met out by fees and endowments. Privatisation of higher education
which was encouraged as a matter of government policy during the 1990s, the
impact of which is not fully reflected in the data presented for 1992-93 here, is
expected to increase the proportion of fees to a much higher level.
48

Educational Financing

Table 16.3: Budgetary Expenditure on Education (per cent)

Year

Elementary

Secondary

Technical

Higher

Total

1990-91

46.3

32.2

4.4

13.4

100.0

1991-92

46.3

33.0

4.3

13.0

100.0

1992-93

45.2

34.3

4.3

12.9

100.0

1993-94

46.2

33.2

4.3

13.3

100.0

1994-95

46.4

33.2

4.4

12.9

100.0

1995-96

48.3

32.8

4.1

12.3

100.0

1996-97

49.1

32.3

4.0

11.8

100.0

1997-98

49.6

32.3

3.9

11.8

100.0

1998-99

49.0

32.6

4.1

11.9

100.0

1999-00

48.1

30.9

3.9

12.7

100.0

2000-01

48.9

30.1

3.9

14.8

100.0

Note: Relates to expenditure incurred by the Department of Education only. The figures do
not add upto 100. The residual needs to be treated under others.
Source: Tilak (2004), p-347.

Table 16.4: Sources of Funds (Recurring) for Education

in India: 1992-93 (per cent)
Level/Source

Government

Local
Bodies

Fees

Endowments Total
etc.

Primary

91.1

7.5

0.0

1.4

100.0

Middle

88.6

8.0

0.0

3.3

100.0

Secondary

93.2

3.0

2.9

1.0

100.0

Higher secondary

84.4

3.6

10.2

1.8

100.0

Intermediate

18.2

0.8

58.8

22.2

100.0

Total school sector

89.5

5.0

2.9

2.6

100.0

Higher education (1986-87)

75.9

0.0

12.6

11.5

100.0

Source: Tilak (2004), Ibid.

Education is largely considered a public good (on par with national defence,
internal security, courts, police, etc.) and is therefore uniquely treated for exclusive
state finance. This treatment is uniformly accorded by all the countries, both
developing and the developed. However, of late, due to fiscal constraints, higher
education is being considered as a quasi-public good (or a merit good) on the
ground that people with higher income only can afford and therefore opt for it. The
trends in the government expenditure under the plan and non-plan heads are presented
in Table 16.5. Plan expenditure indicates non-recurring expenditure made as one
time investment for asset creation while non-plan expenditure indicates expenses of
recurring nature to meet the operational expenses like salaries, maintenance, etc.
As can be seen from the Table, total expenditure on higher education as a proportion
of total budgetary allocation has not increased during the 1990s. Further, between
the two heads, the share of non-plan expenditure has increased. The trends are
indicative of the fact that greater part of governmental spending during the 1990s
has gone for maintenance.
49

Economics of Education

Table 16.5: Expenditure on Higher Education as Per Cent of Total

Expenditure on Education
Year

Plan

Non-Plan

Total

1989-90

7.9

13.4

12.3

1990-91

7.5

12.0

11.3

1991-92

7.1

11.6

10.8

1992-93

6.7

11.6

10.8

1993-94

6.0

12.1

11.0

1994-95

8.0

11.5

10.8

1995-96

6.1

11.3

10.1

1996-97

5.0

11.2

9.8

1997-98

9.2

12.4

11.8

1998-99

7.9

12.8

11.9

1999-00

7.6

13.7

12.7

2000-01

7.9

18.1

14.6

Source: Tilak (2004), ibid.

Inter-Regional Variation in Expenditure on Education

It is logical to expect considerable variation to prevail in expenditure on education
among the different states in a vast country like India. Table 16.6 presents position
of different states in this regard. Some important inferences which can be drawn
from the data therein are: (i) at the all India level nearly 50 per cent of total
spending goes to elementary education followed by secondary education which has
about one-third (34 per cent) share; (ii) two states Assam and Madhya Pradesh
spend substantially higher (35 per cent) proportion of their total budget on education
than the all India average (21.2 per cent); (iii) Kerala and Bihar spend roughly the
same proportion of their total budget on education (23.6 per cent) although in terms
of their literacy attainment the two are widely apart [Kerala 91 per cent and Bihar
48 per cent in 2001]; (iv) the inter-state variation in expenditure on education by
level is also widely different reflecting low priority and lower state of educational
advancement of some states vis--vis others; and (v) Andhra Pradesh is the sole
state whose spending on higher education is above the 20 per cent mark which is
nearly two times the all India average of 11.8 per cent in this respect.
Table 16.6: Expenditure on Education by States/Level: 2002-03
State

50

% of
Exp. of
total
Budget

% or percentage of Total Budgeted Educational Expenditure

of Educational Department on
ElemenSeconHigher Technical
tary
dary
Education Education
Education Education

Others*

Total

Andhra Pradesh

17.7

40.0

34.7

21.8

2.3

1.6

100.0

Arunachal Pradesh

17.0

61.6

26.6

8.9

2.9

100.0

Assam

35.2

60.7

25.5

10.9

1.1

1.8

100.0

Bihar

23.6

65.4

19.5

12.6

0.9

1.6

100.0

Chattisgarh

21.3

70.5

14.9

11.2

2.9

0.6

100.0

Delhi

28.6

22.2

65.3

3.3

4.6

4.6

100.0

Goa

12.1

24.2

55.1

11.3

6.6

2.8

100.0

Gujarat

17.4

54.5

31.3

9.6

2.9

1.7

100.0

Haryana

18.7

49.9

32.4

13.8

3.4

0.6

100.0

Himachal Pradesh

20.5

58.0

33.2

7.2

0.8

0.9

100.0

Jammu & Kashmir

17.4

48.6

35.4

12.0

2.7

1.4

100.0

Jharkhand

26.9

75.2

11.2

8.9

4.4

0.2

100.0

Karnataka

19.0

52.5

29.6

13.3

2.3

2.3

100.0

Kerala

23.7

44.5

35.4

15.0

3.9

1.3

100.0

Madhya Pradesh

34.8

66.4

16.0

12.7

4.4

0.6

100.0

Maharashtra

23.1

46.3

37.7

11.9

2.9

1.2

100.0

Manipur

20.0

49.3

25.6

19.6

1.1

4.4

100.0

Meghalaya

17.7

54.2

26.2

12.0

2.8

4.8

100.0

Mizoram

18.9

51.7

23.1

10.3

6.4

8.5

100.0

Nagaland

14.5

63.9

21.6

6.8

3.9

3.7

100.0

Orissa

18.3

57.0

26.9

13.9

1.3

0.9

100.0

Punjab

15.5

34.0

54.1

10.0

1.2

0.8

100.0

Rajasthan

21.2

56.7

33.8

6.9

1.2

1.5

100.0

Sikkim

8.2

57.5

35.9

2.7

0.7

3.3

100.0

Tamil Nadu

20.8

43.4

37.6

13.1

2.9

3.1

100.0

Tripura

25.4

50.3

34.8

4.7

0.9

9.3

100.0

Uttaranchal

23.5

52.8

35.7

7.2

3.5

0.8

100.0

Uttar Pradesh

18.3

56.7

32.3

8.3

1.3

1.5

100.0

West Bengal

23.5

32.8

50.2

13.2

1.8

2.0

100.0

Total*

21.2

50.1

33.9

11.8

2.4

2.4

100.0

Educational Financing

Note: (i) Total includes the data for many union territories;
(ii) Others include adult education, language development and other general
educational programmes.
Source: Manpower Profile 2004, IAMR, p-99.

There is a lack of data needed for assessing the initiative of private sector in
educational finance. However, as stated earlier, even where there is private sector
investment, they are supported by substantial government subsidy. Data in this
respect by level of education is presented in Table 16.7. The trends therein reveal
that, notwithstanding variations over the years, more than one-fifth of the government
expenditure on elementary education goes in the form of subsidies to private schools.
The corresponding proportion at secondary level of education is 50 per cent and at
higher education it is 40 per cent. This subsidy is said to be helping private institutions
at the cost of government institutions with the phenomenon getting described as
private enrichment and public pauperisation.
Table 16.7: Budgetary Assistance to Private Institutions (%) by Level
Year

Elementary

Secondary

Technical

Higher

1990-91

25.9

51.7

18.3

45.0

1991-92

26.4

51.8

18.4

45.2

1992-93

17.4

52.0

19.4

44.1

1993-94

16.3

51.1

20.9

44.7

1994-95

19.1

51.3

19.7

46.2

1995-96

23.0

50.6

19.7

47.5

51

Economics of Education

1996-97

22.6

48.8

17.8

46.2

1997-98

20.9

47.6

20.0

43.7

1998-99

23.0

47.0

16.7

46.1

1999-00

18.8

50.7

17.9

44.1

2000-01

20.0

44.8

19.4

48.1

Note: Figures denote per centage of Total Expenditure on given level of education
Source: Tilak (2004), ibid.

Sarva Shiksha Abhiyan

Article 45 of the Directive Principle of Constitution states that the State shall
endeavour to provide within a period of ten years from the commencement of this
Constitution, free and compulsory education for all children until they complete the
age of fourteen years. However, notwithstanding the efforts and the achievements
made in this direction over the five decade long period (i.e. up to the year 2000),
significant number of children in the age-group of 6-14 years have continued to
remain out of the school system (89.6 million children in 1995-96). In order to
rectify this situation, a time-bound programme [under the title of Sarva Shiksha
Abhiyan (SSA)] was launched during the Ninth Five Year Plan in the year 2000.
The programme aims at meeting the larger objective of education for all, and in
particular, achieving universalisation of elementary education (UEE). SSA in India
is launched to meet the following two specific goals/targets set by the United
Nations (UN) under its millennium development goals (MDG) [Table 16.8].
Table 16.8: Millennium Development Goals/Targets
for Education Sector
Goals

Target

1. Achieve Universal Primary

Education

Ensure that by 2015, children

everywhere, boys and girls alike,
will be able to complete a full
course of primary schooling.

2. Promote gender equality and

empower women

Eliminate gender disparity in

primary and secondary education
preferably by 2005 and in all levels
of education no later than 2015

Source: Human Development Report, UNDP, 2003, p-92.

In keeping with MDG targets, the SSA programme targets 100 per cent enrolment
of children in the primary schools by 2003 and 100 per cent retention to be
achieved immediately thereafter. The observations in the Mid-Term Appraisal of
the Tenth Plan on the progress of the programme (having a bearing on the financial
aspects of the same) are relevant in this regard.

52

The fiscal implications of SSA, especially for State finances, do not seem to
have been factored in adequately. Unless this is done and the Twelfth Finance
Commission or the Planning Commission provides adequate support, the
programme is likely to run into financial constraints rapidly.

Since elementary education has been declared a Fundamental Right, there is

always the possibility of the Courts intervening, which could prove disruptive.
In order to forestall such a possibility, it is necessary to clearly lay down the
roll-out plan and to adhere to it strictly. This will require close coordination
between the Centre and the States.

If the SSA succeeds, it would place heavy demands on the secondary school

system. This concern remain valid even though the progress of SSA has been
slower than planned.

Educational Financing

The above observations indicate that the issue of funding a crucial programme like
that of universalisation of elementary education is also beset with uncertainties on
the financial front. Besides, it also points to a lack of coordination between the
centre and the state governments. Further, many of the states are yet to have
enabling legislation to make primary education a fundamental right. It is estimated
that the programme entails an additional Rs. 53,000 crores annually as a contribution
by the central government alone. In order to expedite the enactment of the legislative
provisions on this front, the Eleventh Plan is proposing to adopt a discriminating
share in the ratio of centres contribution to the SAA programme: 50 per cent for
those states which will amend their education laws and 25 per cent for others.
The funds for the programmes are being generated by the introduction of an
education cess. The issue of generation of funds for meeting the cost of SSA was
also mooted in the Free and Compulsory Education Bill (2004). The bill proposed
a distribution of responsibilities between the union and the states in the ratio of
85:15 in the first five years, 75:25 in the next five years and 50:50 thereafter. The
draft bill also made a reference to public-private partnership in providing elementary
education. However, these moves are criticised on the ground that elementary
education in general and the cost of SSA in particular should be totally funded by
the centre. Another area of importance is the rising budgetary needs of secondary
education following the achievements of SSA. The pattern/trends of funding seen
earlier in Table 16.3 indicate prioritisation of funding for one level of education at
the cost of the other. There is a general consensu that the share of education in
plan outlay should be increased to the widely recommended level of 6 per cent of
GNP. It is justifiably argued (vide Tapas Majumdar Commiittee, MHRD, 1999) that
with this increase, which is likely to pose less of a burden with the likely growth
of the economy by more than 7-8 per cent per year, not only the financial needs
of compulsory elementary education but even the needs of the post-compulsory
education (including higher education) can be easily met by the government.
Check Your Progress 1
1) What are the two major directions in which developing economies are compelled
to focus their attention in the matter of educational financing?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
2) Mention the two important areas in which progressive policies of educational
financing can benefit the society in the long run explaining the same briefly in
50 words.
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
3) What are the four characteristics of education which necessitate dominant role
for the government in financing of education?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................

53

Economics of Education

4) What are the two governmental and non-governmental sources of funding by

which data on educational finance is classified? What are the proportions of
non-governmental sector funding generated by the four levels of education as
per the latest year for which data is available?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
5) What do the abbreviated terms UEE, SSA and MDG stand for? In terms of
their broad objectives/goals, what are the common aspects of these programmes
in the education sector.
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
6) What consequent budgetary constraints are expected by the successful
achievement of the goals of SSA? Indicate the widely prevailing and rational
view on meeting the budgetary needs of this situation.
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................

16.5

POLICY ORIENTATION FOR PRIVATE SECTOR

INVESTMENT

The policy perspective in the matter of funding is undergoing a steady transformation

aimed at according an increasing role to the private sector. The emphasis in this
respect is varied between the different stages of education. It is pointed out that
the positive or the beneficial impact of education is not restricted to the individual
but spills over to the entire community and the society at large. For this reason,
education is generally regarded as a public good and policies of even developed
countries favour keeping the sector under the public domain. However, in the
changing circumstances of fiscal constraints owing to adoption of economic reforms,
there is a move to keep only the elementary education under the public sectors
(i.e. solely the governments) domain and progressively increase the role of the
private sectors involvement in meeting the funding needs of the secondary sector
and beyond. The higher education sector, in particular, was proposed to be treated
as a non-merit good in which phased increases in cost-recovery (to bring it to a
level of 50 per cent of the cost) was proposed to be levied. By this measure, the
burden of financing higher education was to be shifted gradually to the private
corporate sector and the private individuals of the household sector. This policy
initiative was a sequel to the choice of such policy courses expressed by national
policy documents/bodies on education [e.g. the national policy on education (NPE;
1986, 1992) and the UGC] with the objective of reducing the role of the government
in the higher education sector.

54

Policy measures aimed at reforming education financing was made with two major
propositions, viz. (i) improving the efficiency in the functioning of public institutions
on the one hand, and (ii) mobilising resources from the non-governmental sources
on the other. The first proposition seeks to improve the efficiency in resource use
with the objective of increasing education sectors output without employing additional
resources. Measures like changing the staff-student ratio, increasing the teaching

workload, etc. are adopted to achieve this. The second proposition aims at diversifying
the sources of funding by developing alternative arrangements to meet the costs of
providing the education. The trend in achieving this is to shift the burden of cost
from the public to the private and household domains. Consequent to the adoption
of structural adjustment programmes, the reforms suggested by international funding
agencies (World Bank, 1994) particularly for developing countries include: (i)
encouraging greater differentiation of institutions of higher education including
development of private institutions; (ii) cost-recovery mechanisms including costsharing 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.

Educational Financing

In India, two important committees were constituted to recommend measures on

resource mobilisation for education. The Swaminathan Committee (AICTE, 1994)
looked into the possibilities of resource mobilisation in technical education essentially
through cost-recovery from students. The committees recommendations included:
(i) creation of corpus funds in institutions; (ii) establishment of an Educational
Development Bank of India with an initial capital of Rs. 3000 crores; (iii) reducing
the share of salaries in recurring expenditure from the existing level of 80 per cent
to 60 per cent; and (iv) 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 included: (i) maintenance grants
to be based on unit costs; (ii) maintenance grants to be stabilised at a certain
acceptable level; (iii) governments funding to be limited to dearness allowance and
maintenance grant; (iv) universities to mobilise funds, at least 15 per cent of the
total recurring expenditure at the end of the first five years and 25 per cent at the
end of 10 years; (v) creation of corpus funds to meet the infrastructure development;
(vi) increasing the student fees keeping in view the rate of inflation; (vii) subsidies
on many items to be reduced; and (viii) soft loan scholarships from nationalised
banks to be made available. The reform measures suggested in the reports of both
the committees had two distinct aspects, viz. improving efficiency in the functioning
of institutions of higher education to reduce waste and saving resources and mobilising
resources from sources other than the government.
Table 16.9: Growth of Institutions and Enrolment
Year

OU

DEI

DTI

Enrolment (as a % of total enrolment)

1962

1971

2.1

1975

22

22

1976

2.6

1981

5.7

1982

34

35

1985

38

40

1990

46

51

1991

11.5

2000

70

79

2002

24.0

2004

11

104

115

2007

33.0 (estimated)

Note: OU-open university; DEI-distance education institutions; DTI-distance teaching

institution
Source: Kulandaiswamy, V. C. (2006), pp 33-34.

55

Economics of Education

Reforms relating to mobilisation of resources and reduction in public spending

include promotion of distance learning, encouragement of private sector and costrecovery methods. Access to higher education through non-institutionalised structures
like the open learning system has expanded in India (Table 16.9). 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 has increased in
India during the 1990s. It however 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 promote the involvement of private sector in higher education, which
in fact started even in the early 1980s, have yielded mixed experiences in India.
In the 1980s, a large number of institutions particularly in professional courses were
set up. The growth of these private institutions was typically characterised by the
charging of high capitation fees. Such institutions contributed to the creation of
two types of distortions: (i) they encouraged only certain type of courses which
were in demand; and (ii) they adversely affected equity considerations in education
as admissions were based more on the ability to pay than merit. The criticisms
about their admission policies and fee structure led to litigation. The experience of
capitation fee institutions demonstrated that unrestricted privatisation of higher
education sector was undesirable as they respond more to the market consideration
rather than national and social concerns. It is also argued that privatisation leads
to promotion of certain courses at the expense of other courses while also promoting
the better-off sections of society at the cost of economically poorer section of the
students.
Check Your Progress 2
1) Mention the two major propositions which are part of the suggested reforms of
educational finance. Give one or two examples on how these are proposed to
be met.
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
2) Mention the four directions in which reforms in educational finance were
suggested by international financial institutions.
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
3) Which were the two important committees constituted by the government to
suggest measures by which resources can be mobilised for educational financing
in India? Give any three important recommendations made by each of these
two committees.
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................

56

4) What are the two distortions created by the policy of promotion of private
institutions in higher education sector in India? Indicate how this move contributed
to erosion of equity values/principles in the education sector.

Educational Financing

.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................

16.6

COST SHARING IN HIGHER EDUCATION

As already mentioned, reducing the burden of educational finance by adopting

reforms in generation of resources has been the thrust of the government. One way
of doing this is to reduce the subsidy to institutions. Although the desire to take
recourse to this move has been expressed by the government in its various policy
statements of intentions even for elementary education, the idea of cost sharing is
popularly effected (even in developed countries) mainly in respect of higher/
professional education courses/programmes. Cost sharing is thus a method by which
the burden of financing the educational programmes is passed on to the beneficiaries
like households, industries and the recipients (i.e. students) themselves. Depending
on the group to which the method targets, the recovery pattern of the cost of
education is spelt out. The important methods which have been popularly debated/
tried are the following.
Increasing the Fees
A commonly suggested cost recovery method is to increase the fees charged for
the courses in higher education. The share of fees in the total expenditure in higher
education has declined over time (Table 16.10). This has happened because the
fees for courses in higher education was kept undisturbed for a long time even
though the cost of providing education increased. This resulted in an increasing
cost-fee disparity. It is rightly argued that most of the students who pursue higher
education generally belong to families belonging to the higher income strata whose
ability to pay is higher. Subsidies in education for such families is thus ill targeted.
The justifiability for increasing the fees at the tertiary levels of education is therefore
generally agreed in principle. Many ways of increasing the fees are suggested.
These include: (i) a uniform increase in fees for graduate and post-graduate courses;
(ii) increasing the fees based on the cost of provision of courses; (iii) giving autonomy
to colleges for deciding on the fees to be charged for courses offered, etc. In all
these cases, students opting for similar courses are levied the same fee, either at
the college or university level. In other words, this does not discriminate between
those with ability to pay and others who may not be able to afford. The approach
is thus held to be against the equity considerations.
Table 16.10: Funding for Higher Education by Source (Per Cent)
Year/Source

Government

Local Bodies

Fees

Others

Total

1950-51

49.1

0.3

36.8

13.8

100.0

1960-61

53.1

0.4

34.8

11.7

100.0

1970-71

60.4

0.5

25.5

13.5

100.0

1980-81

72.0

0.8

17.4

10.8

100.0

1985-86

79.7

1.4

14.4

4.5

100.0

1986-87

75.9

12.6

11.5*

100.0

* includes local bodies. Source: Varghese (2006) and Tilak (2004)

57

Economics of Education

Discriminatory Fee Structure

This method discriminates between courses and the economic condition of the
family to which the student belongs. The cost of providing the education for each
course is linked to the ability of the family to pay based on their income level. Thus,
under this approach, those from the lower socio-economic strata are levied less
burden and upper income groups are made to pay the highest. The method is
pointed out to be a good way for mobilising higher resources to the institutions
without affecting the equity considerations in educational provision. It thus helps to
reduce the perverse effects of public subsidy system.
Graduate Tax
Another commonly suggested measure is to tax the employers employing educated
manpower. The case for this method is made on the ground that the employers get
the benefit of educated workforce while not paying for their supply in any way.
However, the method has a weakness in terms of the possible effect of substitution
i.e. employers opting to recruit less educated persons in place of educated ones.
This may aggravate the already high incidence of unemployment among the educated
youths. However, it is also felt that the benefits of employing the educated workforce
will be duly weighed by the employers as higher order works which are
technologically superior can be performed only by them. In view of this, even
though some substitution effects may be expected to prevail, the rationale of taxing
the employers based on the type of manpower employed is advocated for its other
positive attributes.
Student Loans
The method is popular as it directly targets only those who are the recipients of
the benefits of higher education. It may be recalled that both the committees
constituted by the government of India had recommended this approach. The
method is however criticised for creating the following distortions. First of all, the
method leads to promotion of those courses having a higher value in the employment
market. Thus, although some of the courses may be important from a societal
angle, the lack of employment prospects would make the financial institutions and
the students desist from opting for the courses with less market value. Second, it
is argued that the educational credit market in India is still not sufficiently developed
for the system to work well. Also, as the recovery of loan is dependent on uncertain
future employment prospects, it is felt that the banks may insist upon some collateral.
This would lead to a situation in which the benefits of the method would go to only
those who are economically well-off (i.e. those who can meet collateral requirements)
leaving out the aspirants from the weaker sections of the society. The method is
thus pointed out to have adverse equity implications.

58

The system of higher education is said to cover only a small per centage of the
relevant age-group population. By some estimates, access to higher education in
India is said to be no more than 6.9 per cent which the Tenth Plan was targeting
to raise to 10 per cent by 2007. This proportion is very low when compared with
the levels of some developed countries e.g. U.S. 59 per cent, Canada 54 per cent,
Israel 30 per cent, U.K. 22 per cent. It is also argued that the benefits of higher
educated persons would reach the community at large in which respect it is more
like a public good. By these arguments, it is felt that even higher education, like
in many developed countries should be totally funded by the government. The long
term needs of the economy are also considered to be properly met by this vision
that the government alone can carry. The externalities of publicly financing higher
education are said to be widely varied which includes improvements in health,
reduction in population growth, reduction in poverty, improvement in income
distribution, reduction in crime, rapid adoption of new technologies, strengthening of
democracy, ensuring of civil liberties, etc. The benefits are said to include even
technological externalities which are necessary for technical progress and economic

growth and to arrest diminishing marginal returns in productivity. As education helps

in the fulfilment of all these externalities, it is argued that the public funding of
higher education would contribute to the welfare of all groups (i.e. privileged and
under-privileged) and thereby the society as a whole. A brief review of policies
pursued by other countries would therefore be helpful in getting a balanced view
on the issue.

16.7

Educational Financing

POLICIES OF EDUCATIONAL FINANCING IN

OTHER COUNTRIES

The policies of educational financing in India can be contrasted with the approaches
of other countries in two major respects: (i) the public education sector spending
as a proportion of GNP; and (ii) earmarking of funds for education. These are
discussed below.
Public Spending on Education as a Proportion of GNP
It is generally acknowledged that the proportion of public spending on education in
India has tripled from 1.2 per cent in the early 1950s to more than 3.5 per cent in
the early 2000s (in two years it crossed 4 per cent mark: vide Table 16.1). A
comparative profile of various countries on education expenditure (Table 16.11)
shows that India is among the low spending countries. Although used as a standard
measure, its actual significance depends on the value of per capita GDP. For that
reason, per capita expenditure on education capita average is a better indicator. By
that measure, rich countries which are spending higher than 5-6 per cent of their
GNP on education, would be spending a far higher amount in per capita terms. This
fact needs to be borne in mind when interpreting the data given in the table.
Table 16.11: Education Expenditure as a Percentage
of GNP (1998-2000)
Sl. No.

Country

Per cent

Sl. No.

SAARC

Country

Per cent

Africa

Bangla Desh

2.5

16

Ghana

4.1

Bhutan

5.2

17

Kenya

6.4

India

4.1

18

South Africa

5.5

Maldives

6.4

19

Uganda

2.3

Nepal

3.7

20

Zambia

2.3

Pakistan

1.8

Sri Lanka

3.1

Other Asian and

Pacific

North America
21

Canada

5.5

22

USA

4.8

China

2.1

South America

Malaysia

6.2

23

Argentina

4.0

10

Philippines

4.2

24

Brazil

4.7

11

Rep. of Korea

3.8

12

Thailand

5.4

25

France

5.8

13

Australia

4.7

26

Germany

4.6

14

Japan

3.5

27

Russian Federation

4.4

15

New Zealand

6.1

28

U.K.

4.5

Europe

Source: Manpower Profile 2004, p-317.

59

Economics of Education

Earmarking
Earmarking refers to setting aside and using the funds generated by a special cess/
tax for the particular purpose for which it is collected. The programme of Sarva
Shiksha Abhiyan is also adopting this method for meeting the major part of its
funds. An important aspect of this kind of a tax is its ready social acceptance.
When the benefits by a tax is properly communicated to the masses, they are
readily accepted. Many countries, both developed and developing, have adopted
this course to generate funds for educational purposes. For instance, earmarked
taxes have been used for education in US at the state level e.g. in Indiana,
Arkansas, Tennessee, and South Carolina in the 1980s. While Indiana levied a tax
on the corporate and personal income to fund the governors programme of
educational excellence, the latter three states raised the resources through sales tax
of 0.01 per cent to mobilise significant resources for funding school educational
needs. Likewise, introducing a five-year education tax on liquor, tobacco, interest
and dividend income, and on the banking and insurance industries, South Korea
could generate 15 per cent of the education ministrys budget during the 1980s.
This tax generation method was continued later for another five years. Nepal,
Phillipines, Pakistan have also generated funds for educational programmes by
special cess levied for the purpose (Mehrotra, 2004).
The case of Brazil, with 27 states and 5559 municipalities, which generated earmarked
revenue to a tune of over one-third of total government spending by levying a 2.5
per cent salary tax on the wages of employees in the private sector to finance
exclusively its primary education programmes is more relevant to the Indian situation.
Which level of government (centre/state/municipalities) is appropriate to levy tax is
an important issue in earmarking ventures. For instance, in India, despite the increased
commitment, to the cause of elementary education in the country, the performance
of states with respect to enrolment and literacy in the 1990s was highly inconsistent.
In other words, there is a need for better equalisation of per capita resources for
elementary education across states. The educational fund in Brazil (FUNDEF),
helped in the equalisation of expenditure capacity in education between the poorer
and the richer states. With the aim to reduce pay inequalities across the states and
within the education sector (a factor having the potential to contribute to quality in
teaching), 60 per cent of the resources spent on primary education were earmarked
for wages and salaries and the remaining 40 per cent to finance capital outlays and
operation and maintenance.
Critique on Earmarking
Studying the working of earmarking in many OECD (organisation of economic
cooperation and development) countries, Potter and Diamond (1999) pointed out
that to ensure comprehensiveness and transparency, it is necessary to design a
budget system with three key characteristics, viz. annuality, unity and universality.
They point out that these three characteristics are essential to ensure that all
proposals for government expenditure are forced to compete for resources. A
positive point which emerges from this argument is that efficiency in expenditure
should be ensured by proper targeting among the fund seeking institutions and
establishments. By this argument, funding is given not as a subsidy but as an
earmarked grant targeted to ensure efficient spending. The characteristic of anuuality
requires that the budget should be prepared every year, covering only one year,
which is voted and executed every year based on performance and efficient spending.
However, it is also criticised that the three principles are derived mainly from the
macroeconomists concern for budgetary control with the fear that extra-budgetary
funds (EBFs) into which earmarked funds are placed might diminish the governments
ability to control resource allocation. The guidelines of two major international
financial institutions (IMF and World Bank) note that EBFs generally refer to
accounts of government transactions that are not included in budget totals and
usually do not operate according to budgetary execution procedures. In other words,

60

they are often set up and used for reasons not consistent with the principles of good
governance. Nonetheless, it is conceded that the case for earmarking is strong as
it is not the existing financial resources that are earmarked, but new resources that
are mobilised for the sake of primary education.

Educational Financing

In an inter-country comparison on the tuition fees charged by different countries,

Johnstone (2003) estimates that the cost of higher education in terms of tuition fees
charged is far less in India than in many other countries (Table 16.12). It, however,
needs to be noted that it does not reflect for the recent increases in the fees
charged by institutions of higher learning. In addition, there is the more important
factor of accessibility of higher education which is limited to about 7 per cent of
relevant age-group in the Indian context. It is argued that developing countries
require a rapid growth of good quality higher education for their very survival in the
highly competitive globalised world. In this context, it is generally accepted that only
those countries which are able to ensure a 20 per cent enrolment in higher education
could become economically advanced. However, such an expansion backed only by
low quality private funding (as in the case of most South American countries) has
worked against the interests of development. It is relevant to note that even in a
country like U.S. which is a high income market economy, expenditure on higher
education to the extent of 80 per cent is made by public funding. In several other
advanced countries, higher education is supported by the state to the extent of 5593 per cent of the total expenditure. For example, UK, Germany, Italy, Denmark,
Austria, Netherlands and Sweden met more than 90 per cent of the expenditure on
higher education in 1995. Canada, France and Hungary met between 80 to 90 per
cent of the cost on higher education and Australia, Ireland, Spain, Mexico and Israel
met between 70 to 80 per cent. As noted in Table 16.10, in the late 1980s, in India,
the corresponding proportion was between 75 and 80 per cent.
Table 16.12: Range of Tuition Fees (US $) Charged in
Institutions of Higher Education
Country

High Tuition

Low Tuition

Austria

746

746

Canada

5000

1366

China

2591

518

Japan

2974

2974

India

85

20

Mexico

1159

178

Russia

12026

South Africa

3293

1085

United States

6000

1600

UK

1565

1565

Note: Estimates relate to first degree course and to year around start of 21st century.
Source: Johnstone, 2003, p-359.

Check Your Progress 3

1) What is cost sharing? With what objective is it practiced? What are the four
methods of cost-sharing generally adopted in different countries in higher
education?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................

61

Economics of Education

.....................................................................................................................
2) Do you think the indicator proportion of education expenditure to GNP is a
good indicator for making an inter-country comparison on the status of educational
finance. Explain your answer in 50 words.
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
3) What does earmarking mean in the context of educational finance? Explain in
50 words.
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................

16.8

LET US SUM UP

The unit began by making a brief reference to the linkage of educational development
to poverty and income distribution. It then addressed the issue of public versus
private funding in education. The pattern of educational expenditure in India was
discussed next. The trends in policies of education finance which reflect a gradual
shift towards resource mobilisation and privatisation was then discussed followed
by an outline of the principle and methods of cost sharing. A brief comparison of
inter-country practices on raising resources for education by a special tax and using
the same for specified or earmarked purposes was discussed next. The argument
that raising the educational expenditure to 6 per cent of GNP would serve the
needs of all the levels of education well was based on the analysis and expert
opinions of researchers and planners in the field.

16.9

KEY WORDS

Annuality

Budget is prepared every year. It is one of the

three key characteristics of earmarking

Cost Sharing

Passing on a part of the cost of an educational

course to the beneficiary.

Earmarking

A tax or cess imposed with the rider that it will

be used explicitly and only for the intended
programme or purpose

Subsidy

Part of cost shared by the government which

is not paid by the beneficiary.

Unity

Revenue and expenditure (and borrowing

constraints) are considered together to
determine annual budget targets

16.10

SOME USEFUL BOOKS

Varghese, N. V., (2006), Reforming Education Financing, Seminar, http://

www.india-seminar.com/2000/494.
Tilak Jandhyala B G, (2006), On Allocating 6 per cent of GDP to Education,
Economic and Political Weekly, February 18.
62

..(2005), Higher Education in Trishanku: Hanging Between State and

Market, Economic and Political Weekly, September 10, 2005.

Educational Financing

.(2004), Public Subsidies in Education in India, Economic and Political

Weekly, January 24.
Mehrotra Santosh (2004), Reforming Public Spending on Education and Mobilising
Resources: Lessons from International Experience, Economic and Political Weekly,
February 28.
Chakrabarti, A and Joglekar R (2006), Determinants of Expenditure on Education:
An Empirical Analysis Using State Level Data, Economic and Political Weekly,
April 15.
Johnstone, D. B. (2003), Cost Sharing in Higher Education: Tuition, Financial
Assistance, and Accessibility in a Comparative Perspective, Institute of Sociology,
Academy of Sciences of the Czech Republic, Prague.
Manpower Profile India Yearbook 2004, Institute of Applied Manpower Research,
New Delhi.

16.11 ANSWERS / HINTS TO CHECK YOUR PROGRESS

EXERCISES
Check Your Progress 1
1) Expanding the facilities for elementary education (classes I to VIII) and skill
development training to increase the employability of students by imparting
marketable skills.
2) The two important areas in which progressive policies of education can help in
the long run are: reducing poverty and bringing about a more equitable distribution
of income in the society.
3) The four characteristics are: consumer ignorance, technical economies of scale,
externalities in production and consumption, and inherent imperfections in the
market like absence of credit market institutions for financing education etc.
4) The two governmental sources are centre/state government and local bodies.
The two non-governmental sources are fees and endowments. For the proportion
of non-governmental funding received by the four levels/stages of education see
Table 16.4 and answer.
5) See section 16.4.3 and answer. Note that the millennium development goals
identifies providing of only primary schooling by 2015. However, the MDG
includes certain other objectives as also the SSA. Thus, convergence includes
only primary schooling.
6) Higher demand for secondary education. The view prevailing is to raise the
budgetary provision/allocation to 6 per cent of GNP. Note also that GNP is
higher than GDP.
Check Your Progress 2
1) See section 16.5, second Para.
2) See section 16.5, second Para.
3) See section 16.5, third Para.
4) See section 16.5, fifth Para.
Check Your Progress 3
1) See section 16.6 and Sub-section16.6.1 to 16.6.4.
2) See Sub-section 16.7.1.
3) See Sub-section 16.7.2.

63