Chapter-5
Sources of Finance for Higher
Education in India
SOURCES OF FINANCE FOR HIGHER EDUCATION IN
INDIA
In order to meet the challenges of the 21st century and to acquire a competitive edge,
the higher education system of India has transform to make it more socially relevant,
technology-oriented, diversified and of high quality. The skills and specialization of
graduates produced by our system should match the real needs of the productive
sectors in the market place and the changing needs of our society. But the main issues
concerning higher education in India is financial stress. The various sources of
finance for higher education in India are like government sector (central government,
and state government) and non-governmental sector (students/parents or families,
corporate) are not able to meet the financial requirements.
However, it should be noted that the Government has made huge investments in
higher education in independent India. But the rate of investment is not able to cope
up with the increasing needs stemming from population growth. India is spending
around 3.8 percent of GDP on education in 2011 and 0.7 percent of GDP on higher
and technical education (as against target of 1.5 percent of GDP) [MHRD, 2011],
which is too small for the country like India. The expenditure on education by the
government is not sufficient especially on higher education.
5.1. SOURCES OF FINANCE
Financing of education is a very crucial component of education system and deals
with different sources of funding it. Sources of financing education have an important
bearing on human development especially in case of developing countries. Financing
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123
of education in India as in other developing countries, broadly speaking is dependent
on two sources:
(a) External Sources of Finance
(b) Internal Sources of Finance
External sources of financing can further be divided into three categories
(1) International institutions: of which the World Bank is the most important, as it
provides finance for various types of educational projects, particularly for
lower levels of education.
(2) Foreign Governments: These are particularly important for financing
specialized courses in higher education, viz., language courses and literature
based on these languages. It also includes various types of scholarships
offered by foreign governments to scholars in India.
(3) International Private Agencies (NGOs): Private trusts are most important in
this category like Ford Foundation, Rockfeller Foundation, etc., which
provides various types of liberal educational grants.
Internal Sources of Finance may broadly be categorized into
(1) Voluntary private sources
(2) Compulsory private sources
Voluntary contributions to education were substantial at the time of Independence as
well as earlier during British rule in India. These include endowments, trust funds,
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124
donations, grants, gifts and other types of voluntary financial help. Such contributions
were generally for construction of buildings, establishment and/or expansion of
library and other facilities, for providing scholarships to students and the like. The
voluntary sources of finance are gradually on a relative decline.
Compulsory private sources include students’ fees and other related charges. Students
are often charged a ‘development fee’ for expansion of various facilities in colleges.
These are compulsory in the sense that if a student is enrolled in any educational
institution, payment of fees and related charges becomes compulsory.
5.2. SOURCES OF FINANCING HIGHER EDUCATION
The higher education system in India has witnessed enormous and unprecedented
expansion since Independence. It is unfortunate that this expansion is not
accompanied by commensurate financial allocations by allocations by government,
both at the central level as well as at the state level. Nor have universities and colleges
been able to raise adequate finances of their own. New universities have been started
without providing additional resources and the universities on their part have not
generated much resources of their own. There has been, as a result, an excessive
dependence on the government for financing higher education. The government, on
its part, is finding it increasingly difficult to shoulder the heavy responsibility of
financing higher education on account of competing demands from other sectors of an
expanding economy. Though the problem existed earlier too, its dimensions were
different. While earlier the needs of universities and colleges were limited to
strengthening of departments and taking up new programs of development, in the
present day scenario the very existence of a large number of educational institutions is
Sources of Finance for Higher Education in India
125
threatened on account of lack of funds. Many universities are finding it difficult to
meet essential expenditures on account of payment of salaries, maintenance of
buildings, purchase of books, journals, equipment, etc.
The sources of finance of higher education can be broadly classified into public and
private sources. Public sources include the Central Government, State Government,
the University Grant Commission, government agencies like Indian Council for
Agricultural Research, Council for Scientific and Indian Research etc., for specific
projects. Private sources include fees, endowments and donations, internal sources of
income like the press, university publications, income from movable and immovable
property, sale of farm produce, etc.
Chart 5.1: Sources of Financing Higher Education
Sources of Finance
Public Source Private Source
Central Government
State Government
UGC (University Grants Commission)
CSIR (Council for Scientific and Indian Research)
ICAR (Indian Council for Agricultural Research)
Fees
Endowments and Donations
Internal income e.g., press, income from property etc.
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126
Though a significant contribution can be made from these sources, the universities
have not displayed enough dynamism in exploiting these sources to their advantage.
As for endowments and donations, their importance as a significant source of income
has dried up. This may be on account of inflationary trends, a change in the attitudes
of the public towards charity, less significant tax advantages and so on. Their
difficulties of inelastic sources of own income have led the universities to an
unconditional and helpless dependence on the government and its agencies.
Government funding has thus increased both in absolute and relative terms. There is
also a strong justification of public financing of higher education. University
education is a merit good with large spillover benefits to society both in the present as
well as in the in the future. Besides, non-rivalness in its consumption and non-
excludability also render it fit for public provision. Thus allocative efficiency as well
as distributional consideration also justifies public funding of higher education. The
sources of financing higher education can be broadly classified into
(1) Government Grants
(2) Tuition fees and other charges
(3) Student loans
(4) Part-time employment
(5) Entrepreneurial Activities undertaken by the institutions and their faculty
members.
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127
5.2.1. Government Grants
In India till recently higher education was receiving uninterrupted flow of grants from
government. However, most of the governments including Central government have
been facing financial crunch and thus are resorting to reduce the quantum of grant.
Not only this, even the agreed funds are not released in time. The managers of higher
education have spent lot of time in corridors of administration to get the money
released. Continuous reduction in funds and bureaucratic bottlenecks in the release of
agreed funds are not healthy developments in the field of higher education. The state
universities in particular are in greater financial difficulties. While introducing
economic reform in 1991 the government justified its withdrawal from various
spheres particularly economic spheres with a view to release the funds saved from
these areas to social sectors particularly education and health. The post-economic
reform period has faced a paradoxical situation. The government is raising money
from its withdrawal particularly from privatization instead of investing the raised
money funds to the social sector.
5.2.2. Tuition Fee and other Charges
The relative share of tuition and other fees in the budgets of institutions of higher
learning has declined drastically overtime. For example, in the beginning of 1950s the
tuition and other fees met 15-20% of the total expenditures of higher education. The
share has come down to 2-3% in the early 1990s. At present, it ranges between 5 and
10%. Relatively low contribution of fees in the education budget has attracted the
attention of policy makers and managers of higher education and they are now
emphasizing on a hike in tuition and other fees as an important method of financing
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higher education. We are witnessing in India “massification” of higher education with
a large number of first generation learners entering the higher education stream. It is
being viewed as a means of vertical mobility in society. A steep hike in fee is not
advisable. Making education expensive would ultimately exclude lower middle class
and poor from higher learning. This exclusion will increase social and economic
disparities in the society.
According to Venkatasubramanian, “the share of tuition and other fees ideally should
not exceed 15% of revenue expenditure. He also suggested that the fee should be
enhanced in a phase manner spread over 10 years”. The general rule suggested by the
Punnayya committee was also 15%. In advanced countries also tuition and other fees
do not constitute a major proportion of budget. For example, it is less than 14% of the
total expenditure in Britain. In USA even in private universities contribution of tuition
and other fees towards total expenditure is around 40%.
In case of charges other than fees, it is suggested to move gradually towards full cost
recovery. These charges include hostel, canteen, transport charges, etc. it may be
mentioned that only a small % of students can pay more than what they are already
paying and would face exclusion if a full cost fee structure is adopted.
5.2.3. Students loans
Education loans have not been particularly popular in India. A National Loan
Scholarship started by the central government in 1963 was discontinued in 1991
because of its dismal performance, very low rate of recovery, unrealistic rate of
scholarship and thin spread. Several commercial banks had been operating education
loan schemes on their own. Almost all loans needed security, and the amounts were
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small while the rates of interest were high. Thus, the number of students taking loans
was negligible. On the Supreme Court’s intervention, the central government, in
consultation with the Reserve Bank of India and India Banks Association, framed a
comprehensive education loan scheme in 2001. In pursuance of this, several banks
have started their own student loan schemes and now most public sector banks have
student loan schemes broadly based on the model scheme with minor variations. The
scheme was further revised in 2004-05. Currently, loans up to Rs. 1 million (revised
in 2007 from 750,000) for studies in India and up to Rs. 2 million (revised from Rs.
15 million) for studies abroad are available.
By September 2007, more than 1 million students had availed of education loans and
education loan portfolio stood at Rs. 145 billion. Though growth in new loan accounts
at 35-40% is robust, yet less than 15 students avail of education loans. Thus, financing
through students loans is still small. In comparison, 85% students in UK and Sweden,
50% in USA and Canada 77% in Australia had availed of students loans in recent
years. Tax concessions are available against interest on education loans. Its impact,
however, is not significant.
I-Tenable, a market research company, conducted a comprehensive study of the
students’ loan performance in the country. The study covered more than 350 branches
of 78 banks covering public and private sector banks including foreign and
cooperative banks in 20 cities in Maharashtra and Delhi. The study showed that more
than half of the banks did not offer students loan at all. In the remaining banks, the
student loan portfolio was only about 3.77% of their entire portfolio. The major part
of the total portfolio constitutes personal loans, automobile loans and home loans. On
analysis of the 7,751 students’ loan cases of various banks across the state; it was
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found that the average loan amount was around Rs300, 000 and the interest rate at
about 12.5%. The majority of students who availed these loans were pursuing
professional degree programmes with 46.17% studying engineering, 22.64% pursuing
MBA and 12.17% doing medical programmes. Around 12.1% of the students took
loans to pursue higher studies abroad. Only about 19% of the students who took loans
were females.
5.2.4. Part-Time Employment
Each institution of higher learning particularly universities has part-time vacancies in
the library, administrative office and deans’ office poor-com-meritorious students
should be offered these part-time jobs. The institutions of higher learning should also
tie up with corporate and other sector for part-time jobs to poor students during lean
period. The money earned through part-time employment would help to neutralize the
adverse effect of fee hike.
5.2.5. Entrepreneurial Activities Undertaken by the Institution and their
Faculty Members.
The contribution of higher learning has started that over dependence on government
grants is a risky proposition. With a view to deal situation originating from dwindling
government grants, some of the institution of higher learning has taken
entrepreneurial initiatives to raise resources. The entrepreneurial initiatives include
consultancy, training, starting of job-oriented courses during lean period, earning of
research funds, lending of infrastructure to other agencies during lean period etc.
universities in Russia, China, Mexico, South Africa have already undertaken
entrepreneurial activities in the form of sale of service, offering of specialized courses
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131
to institutions, consultancy etc. The role of entrepreneurial activities towards funds
rising is likely to gain momentum in the coming year. It is therefore, suggested that
each institution of higher learning should set up an Entrepreneurial Cell.
5.3. FUNDING FROM THE UGC
The UGC was set up on the pattern of the University Grants Committee in England. It
is the main funding agency of the central government. Around 42 technical
institutions are funded by the central government directly, all others are funded
thorough the UGC.
Nearly 65% of the budget of the UGC is meant for meeting the operating expenses of
the central universities and the Delhi colleges. The remaining 35% plan budget is
spent for the system at large. With only Rs. 6 billion for about 5,500 institutions, the
level of funding is insignificant.
Only about 14,000 colleges come under the purview of the UGC system, UGC assist
only 40% (5,625) of the colleges the meet its minimum eligibility norms, mostly in
terms of physical facilities and infrastructure. Only 130 institutions of higher
education get recurrent grants from the UGC or the central government. On an
average, a college gets merely around Rs. 0.2 million or so each year whereas a
university gets Rs. 5 to 7 million per year as a development grant.
5.4. SHARE OF EDUCATION IN GNP
Share of education in gross national product is the most standard indicator of
national efforts on the development of education in a given society. This
reflects the relative priority being accorded to education in the national economy.
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This indicator is also found to be superior to several other indicators. On the
recommendation of the Education Commission (1966), the Government of India
(1968) quantitatively fixed a target of investing six percent of national income
in education from the public exchequer by 1986. A glance at the figures on
expenditure on education as a proportion of GNP given in table 5.1 shows that
over the years it has increased remarkably. At the inception of planning (1950-
51) India was spending 1.2% of GNP, and by 1998-99, it increased to 3.9%,
even though the growth is not smooth, this is indeed a remarkable increase.
But the goal has not been achieved even twenty years later.
Table 5.1: Share of Education in GNP (%)
Year % of GNP 1950-51 1.2 1955-56 1.8 1960-61 2.1 1965-66 2.4 1970-71 2.7 1975-76 2.8 1980-81 2.8 1985-86 3.0 1990-91 4.1 1995-96 3.6 2000-01 4.2 2004-05 3.54
Note: 1984-85 onwards government expenditure only. Source: Education in India, Analysis of Budgeted Expenditure on Education and Selected Educational Statistics
However, it needs to be underlined that this proportion is less than
(a) The requirements of the education system to provide reasonable levels
of quality education to all the students enrolled presently,
(b) The requirements of the system to provide universal elementary
education of eight years for every child of the age-group 6-14, and
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consequent growth in secondary and higher education, as
universalisation of elementary education in a comprehensive sense,
includes universal provision of resources, universal enrolment, and
universal retention,
(c) The recommendations of the Education Commission (1966), the resolve
made in the National Policy on Education 1968, reiterated in the
National Policy on Education 1986 (Government of India, 1986), and
the revised Policy (1992) to invest six percent of GNP in education,
and
(d) The proportion of GNP invested in education in many other developing,
leave alone developed, countries of the world, including Africa.
According to the Human Development Report 2001, India ranks 104th with
respect to share of public expenditure on education in GNP, among 143
countries for which such data are available. India was devoting 3.2% of her GNP
to education (1995-97). In comparison a large number of countries spend more
than six percent, some more than eight percent and few more than ten percent.
Some of the countries, which spend more than four percent of GNP on
education, include countries, which are economically poorer than India. India had
set a long time ago a target of six percent of GNP to be spent on education.
This target still eludes, and may continue to elude in the near future. The need
to raise this proportion considerably needs no overemphasis.
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5.5. SHARE OF HIGHER EDUCATION IN GNP
Ever since the recommendation of the Kothari Commission in 1966, and National
Policy on Education (1968), the government has promised repeatedly to increase the
allocation to education so that it reaches at least 6% of national income. However,
currently only 4% of the gross national product (GNP) is being spent on education.
The Common Minimum Programme also promises the same. Even though there is no
sanctity of the 6% norm, this has been regarded as a modest goal to be reached soon,
so that education sector does not suffer from paucity of resources. According to some
earlier estimates, we may indeed require much more than 6% of GNP to provide
reasonably good quality education.
Table 5.2: Share of Higher Education in GNP (%)
Year % of GNP 1990-91 0.46 1991-92 0.42 1992-93 0.41 1993-94 0.40 1994-95 0.39 1995-96 0.37 1996-97 0.35 1997-98 0.35 1998-99 0.43
1999-2000 0.47 2000-01 0.49 2001-02 0.39 2002-03 0.40 2003-04 0.37
Source: Report of the CABE Committee on Financing of Higher and Technical education
In terms of relative priorities, higher education suffered severely. The relative
priorities accorded to higher education can be measured in terms of the share of
higher education in the GNP. In 2003-04 0.37% of GNP is being spent on higher
education (table 5.2), while many developed countries invest between 1.0% to 2.5%
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of their respective GNP. Even some of the developing countries in the Asian region,
which are economically not better off than India, seem to be spending more than India
on higher education.
After discussing financing of higher education we find that a significant growth in
financing is critically needed for quantitative expansion, for improvement in quality
and excellence, and for preserving and promoting equity in higher education. There is
a need for preparing a detailed perspective plan for the development of higher
education including detailed estimates of resource requirements. State funds for
higher education have been on decline in the recent years, though it is increasingly
realized that state financing of higher education is important and that state should
make a firm commitment to finance higher education. Generous state funding of
higher education is important. After all, it is the practice in most countries. The
government- union and the state- must make a firm commitment to sustained funding
of higher education institutions, in such a way that basic teaching, research and
extension activities are not affected in their quality and quantum due to paucity of
financial resources.
Thus, keeping in view the paucity of financial resources some policy measures are
needed to be taken to overcome this. So, below are some policies of financing higher
education.
5.6. POLICY OF FINANCING HIGHER EDUCATION
The question of the financing of education is basically a question of who should bear
the burden of education of the people. Either the state, or by the receiver of education,
or by the user of education manpower, i.e. employers and what should be their
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respective shares? Answers to all these questions lie in the economic framework of a
nation and the place accorded to education in that particular framework.
The economic framework in the world can be broadly categorized into three types,
namely, capitalist, socialist and the mixed economy. In the capitalist framework,
means of production and distribution are owned by private individuals though the
state intervention has also increased over a period of time.
The other type is the socialist framework. In a socialist framework, production and
distribution of resources are owned by the State. Decision with regard to economic
and social activities is taken by the State. This in turn depends on the goals of the
State and the economic planning and strategies pursued to achieve these goals.
The third type is the mixed-economic framework. In this framework, means of
production and distribution are owned both by private individuals and the state. The
State positively intervenes in the economy with a view to achieving certain desired
goals.
In India, with a socialistic pattern of society, the State intervenes in economic and
social activities with a view to:
(1) Removing disparities in the distribution of economic resources so as to ensure
economic justice.
(2) Planning the process of economic growth in order to achieve the ends of social
justice
(3) Securing an equitable standard of life for all.
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The instruments used for achieving these objectives are:
(1) Mobilization and redistribution of resources through taxation, expenditure and
fiscal policy.
(2) Undertaken production and distribution so as to achieve the above goals.
(3) Enacting laws to promote desirable activities and discourage undesirable ones.
Education- a basic input in the development of human resources, which constitutes an
important instrument in the development of a nation, is considered a matter of prime
importance in all the three types of framework. However, the provision of education
and its financing varies from one type to another.
In a capitalist framework the State intervenes in educational activities because it
contributes to national development and leaving education to the market forces might
restrict the entry of those who cannot afford the market price. This in turn may affect
the growth of education and thereby hamper future development of the nation. Hence,
whether the state intervenes partially or fully depends on the need felt by it. Education
in this framework is considered as a ‘merit good’ where the society and individual
both benefit. Therefore, both take part in financing and managing the education
system.
In a socialistic framework, education forms a part of its economic and other social
activities. Education is a ‘social good’ the financial resources allocated to education
are determined by the requirements indicated in the economics and social plan.
In a mixed economy framework, with an objective of socialistic pattern of society- the
State positively intervenes in education. Here the provision of education becomes, a
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part of an overall development plan. Here education is considered as ‘Social-Merit
Good’, a concept distinct from the concept of ‘merit good’ in the capitalist
framework. In the latter, the State intervenes to correct the failures of market forces,
whereas in the former it forms a part of the avowed national development objectives.
The concept of education as ‘social-merit good’ is distinct from the concept of
education as ‘social good’ in the socialistic framework. In the former, expression of
individual or group choices is allowed for promoting education whereas in the latter,
the state’s intervention is total. Hence, the policy of financing education in a mixed
economy framework with a socialistic pattern of society becomes much more
complex than in capitalist and socialist framework.
5.7. FINANCING POLICIES
As discussed earlier, the mixed economic socialistic pattern of society dictated
positive intervention of the state so as to reduce the disparity in distribution of
resources through its tax and fiscal policy. Therefore, tax and fiscal policies are
required to be such that they help in mobilizing resources from the rich and
transferring them in favour of the poor through an expenditure subsidy policy.
As we all know that, all indirect taxes are regressive in nature. Since the bulk of
resources come from indirect taxes, it is the poor and the middle class, being large in
numbers, who pay for the major part of state expenditure. As the greater part of the
funds for education come from the State, it is the poor and middle classes who pay for
education. This also holds true of all governmental expenditure on other social and
economic activities. Thus, a large proportion of government expenditure on education
and on social and economic activities, which are being paid for by the poor and the
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middle class goes to benefit the rich and upper middle class. In this process a reverse
transfer of resources from the poor and the middle class to the rich and the upper
middle class is taking place.
5.8. LOW FEE RATE POLICY
The constitution of India provides for fee and compulsory education up to the age of
14 years i.e., up to 9th or10th standard. Thus as far as school education is concerned,
in conformity with constitutional provisions, no fees or a very nominal fee from
students could be charged. This provision is obviously made to encourage people to
have at least a minimum level of education. Thus, the country’s policy envisaged a
free or almost free education to all irrespective of their income levels. As private
aided and unaided schools were also allowed to operate within the system, some
schools charged varying fees from their students. A few of them even charge fees
from approximately the full cost of education. A large proportion of government
schools both in rural and urban areas, which charged either no fee or low fee, were
inadequately provided with funds, and therefore they imparted relatively low quality
education. Hence, the two types of institutions were identified as better and poor
quality institutions.
Rich people sent their children to high fee charging better quality institutions and the
poor and the middle class to the low fee charging and poor quality institutions. The
gradation of fees for poor and rich took place in the form of different types of schools.
The rich paid more fees and got better education and the poor low fees or no fees but
poor education. The product of poor quality institutions even though with same level
of education attainment were placed at a disadvantaged for further education as well
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as in the job market. These different types of schooling perpetuated the prevailing
economic inequalities and went against the basic principles of social justice and
equality opportunity.
This is not to suggest that institutions imparting quality education should be closed.
The point is to stress that low fee charging institutions should not be viewed merely as
charity institutions. They should be given adequate funds to improve their quality of
performance and helped to come to compete with high quality institutions. As
discussed earlier, the resources that the State allocated to education are basically paid
for by the poor and the middle sections of society. Therefore, if more resources are
allocated to benefit poor people, it will not amount to any extra favour to them. It
would be merely giving them what is their due.
5.9. FEE RATE IN HIGHER EDUCATION
As far as higher education is concerned the issue of the rate of fees becomes more
complex. Unlike school education, there are no private universities at the level of
higher education. Private unaided colleges are also few in number and so as to enable
every section of the society to benefit from higher education, the fee charged by them
is also regulated and kept low.
Under this policy, even those coming from higher income groups who could afford
higher fees also pay a low fee. Thus, this policy transfers resources in favour of the
rich, and the upper income groups. This is particularly because a very high proportion
of students in higher education come from the upper income groups. This takes place
at the stage of development of human resources.
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At the next stage, the employment of human resources- the investment incurred is
utilized both in the private sector and the public sector. As far as the employment of
such persons in the public sector is concerned, this investment is turned back to
benefit the public at large. But the private sector, since it pays only maintenance cost
in the form of wages to human capital and not the interest on this capital, makes a
profit out of this investment.
Investment in the education of persons, for example, engineers, lawyers, medical
practitioners, is incurred by the public, because the instructional cost of their
education is met out of the tax paid by the public at large. When these persons are
employed in private firms they add to the productivity and development of the firm.
The firm makes a profit out of the human capital and does not pay any return on this
investment but they pay maintenance cost as well as interest on the capital. This
surplus between maintenance cost and interest on human capital is retained by the
firm which adds to its profit.
In cases where a person is self-employed, he charges a fee at the market rate from the
public. This fee invariably includes the maintenance cost and interest on the
investment in human capital. This amount is also retained by private practitioner,
whereas the investment on their education has actually been incurred by the public.
Hence, the resources do not turned back to the public. Therefore it is the public
resources that support the wealth of firms and private practitioners. In this process
reverse transfer of resources from the poor and the middle class to the upper class and
the rich takes place.
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Hence the policy of low fee rate on the one hand has helped the upper middle class
and rich people to benefit from subsidized higher education and secure a relatively
higher maintenance wage, on the other it has helped private firms and individual
practitioners to profit out of public investment.
From above discussion we can come to following conclusion
(1) Most of the finances for education have come from the state. As the state has
mobilized most of its resources (86%) from indirect regressive taxation and as
the size of the poor and the middle class are larger and each one of them
consumes the items which are taxed, the burden of state resources is borne by
the poor and the middle class.
(2) There exist private high fee-charging schools in the system and indirect
gradation of fees has taken place at the level of school education. As adequate
resources are also available with these institutions, they are able to provide
better quality education whereas the low fee-charging government schools,
patronized by the poor and the middle class people are poor. Though the state
mobilizes most of its resources from these classes in the form of indirect
taxation, it inadequately supports the education of the poor and the middle
class. This difference in quality of education on institutions supported by the
State and by private bodies has put the poor and the middle class people in a
disadvantageous position and has perpetuated the inequalities of opportunities
for higher education and in the job market.
(3) As University education is highly subsidized, the investment on human capital
is done at the public cost and when this capital is employed in private firms
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and high income of private practitioners. Thus the surplus between the
maintenance cost and interest on human capital is retained by private firms
and private practitioners who should have normally been turned back to the
State to help the public at large.
In a capitalist economy, where investment on human capital is paid to a large extent
by the receiver of education, the salary a person receives or the fees he charges,
covers interest on the investment in his education, and this could be justifiably
received by him. But in a mixed economy, since the investment is made by public at
large, interest on the capital should be turned back to the public. However, owing to
the effective use of taxation and fiscal instrument, resources which should have been
turned back to the public are retained by a small section to a mass wealth at the
expense of the poor and the middle classes.
An alternative policy of financing education is therefore needed to correct this
distortion as well as to mobilize more resources for education.
5.10. PRIVATE FINANCING Vs PUBLIC FINANCING OF HIGHER
EDUCATION
Indian higher education system has undergone massive expansion in post-independent
India with a national resolve to establish several Universities, Technical institutes,
Research Institutions and Professional/Non-professional Colleges all over the country
to generate and disseminate knowledge coupled with the noble intention of providing
easy access to higher education to the common Indian. The public initiatives played a
dominant and controlling role in this phase. Most of the Universities were public
institutions with power to regulate academic activities on their campuses as well as in
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their areas of jurisdiction through the affiliating system. Even the private institutions
enjoyed large-scale financial support in the form of grants from the public exchequer.
Private funds as well as individuals played key roles in the cause of higher education.
With the public funding being no more in a position to take up the challenging task of
expansion and diversification of the higher education system in the country to meet
the continuously growing demands of higher education, there is little option other
than to bring in private initiatives in a massive way to meet the various challenges.
The increased role of the private sector is raising question among students and parents
in many countries. They view higher education as a public service that should be
subsidized for the following reasons.
(1) Higher education benefits the society through economic growth, increased tax
payments from graduates, greater flexibility in the labour force, higher
consumption, social cohesion, higher social mobility, lower crime rates,
increased capacity to adapt to new technologies and higher social and political
participation, among other benefits to the members of the society other than
the students.
(2) State subsidies are needed for equity consideration, to equalize entrance
opportunities for students from different socioeconomic backgrounds. Left to
the private sector, student from disadvantaged groups may not be able to enter
higher education institutions and the gap between rich and poor will widen.
(3) Disciplines and programmes which are strategic for sustainable development
of the country in the long term (for example art, literature, natural science,
Sources of Finance for Higher Education in India
145
ethical and moral education) but not economically attractive in the short term
will have to be promoted by the government.
Higher education benefits the individuals pursuing it monetarily through higher
productivity and net earnings, better job opportunities, higher savings and personal
and professional mobility; and non-monetarily through educational enrichment, better
labour conditions, higher personal status, better job satisfaction, better health and life
expectancies, more hobbies and leisure activities and personal development.
The debate surrounding around the issues with financing of higher education is
primarily because education is considered to be a quasi-public good. It is a public
good because the benefits out of it largely affect society through human capital
formation and knowledge. However, it is also considered to be a private good because
it provides a platform for the individual to generate regular income themselves
through their skills.
In the past, the financial burden of education was borne by both sate and Central
Government. But the amount of expenditure spent on education sector by the
Government has been falling over the years, which has created a huge investment gap.
This trend in public expenditure has serious policy implications. Firstly, the reduction
in public expenditure has forced institutions, both public and private to increase the
cost per students in the form of hike in tuition fees. Secondly, there is rise in self-
financing institutions which charge tuition fees on full cost-recovery basis.
A serious implication of increase in cost of higher education and the imbalance in the
fee structure of private and public education is the fact that it deepens the
development divide. Obtaining higher education is typically coupled with the ability
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146
to earn higher income in future. Therefore, increase in cost of higher education might
not be problematic if there is a structured credit market in place which bridges the gap
between increase in cost and people pursuing higher education. However, credit
markets in the education sector are fairly narrow in the sense that credit is given to
only those belonging to the middle or high income families, thereby neglecting the
base of pyramid class and creating inequality. This is the primary reason why
government’s role is important in financing higher education. (Misha Sharma, 2012.)
University Grants Commission (UGC) 2008 report suggest that while developed
countries are able to link hike cost to per student to greater productivity and quality
delivery of higher education, developing countries like India are not able to do so due
to various system failures. This creates further resistance in change in cases of hike in
tuition fee etc.
Various studies suggest that a major issues that is revolving around public expenditure
is the ‘crowding out’ public financing of higher education for elementary education.
A lot of money was invested by both State and Central Government in elementary
education programmes. Government has devoted huge amount of money in promoting
elementary education by investing in flagship programmes like Sarva Shiksha
Abhiyan (SSA) to achieve the target of universalisation of education among children.
Elementary education benefits out of it but on the other hand Government is forced to
spend less on higher education.
To sum up, declining public expenditure in the education sector, increasing cost per
student without the support from credit markets and dominance of private sector in
higher education worsen the problems of finance in higher education. Government of
Sources of Finance for Higher Education in India
147
India should play a pivotal role in financing higher education on the one hand while
on the other hand heavy public subsidization of higher education could lead to
unequal distribution of welfare, since public expenditure on higher education is made
out of general taxes, which essentially means transfer of resources from poor to rich.
5.11. ALTERNATIVE SOURCES OF FINANCING EDUCATION
In a socialistic pattern of society, education is considered a key input for economic
and social development. Therefore, the policy for financing education should be such
that it does not accentuate disparities and the same time helps to mobilize resources
for education.
The purpose of education is to prepare people to contribute to the economic, social
and cultural development of society. Therefore its financing should have a close
bearing on types and quality of education that help to promote this objective. As we
discussed earlier, of the four types of education namely, education to prepare people
for State administration, business and economic administration, values of social co-
existence and professional skills. The first and the second types to some extent have
received greater importance both in the form of the number of educational institutions
and contents of courses. Some emphasis has also been given to high order
professional skills like Medicine, Engineering, Law, Agriculture, etc. but the
education of middle order skills which are needed in every vocation have not received
due attention.
Similarly, when a self-employed person charges the market rate as his fee, it also
covers interest on investment in his education (the case of doctors, lawyers, engineers,
businessmen) and thus he retains the interest amount with him as profit. This surplus
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148
amount should have actually gone to the public. Therefore, it is suggested that a tax
may also be levied on the professionals who are engaged in private practice or in self-
employment. The rate of taxation may be worked out on the basis of the value of
public investment on that person. Alternatively, a social rate of fees may be fixed for
the services of these professionals. Similarly, the salary of those in self-employment
may be fixed at the public wage rate. In the same way, professionals migrating to
other countries on private employment may be made to pay for investment on their
education.
5.12. POLICY OF TAX REBATES
Private contribution for education has been encouraged by giving tax rebates to the
donors. Private donation to institutions should be welcomed but the policy of tax
rebate should keep the following principles in view:
(1) The amount of donation received from individual and firms should be more
than or equal to the revenue foregone by the state.
(2) The tax rebate for donation should be linked to the institutions and for the
subject of studies most desired for the development of the economy and
society. For this purpose a detailed plan of location of institutions, both at the
school and higher education level and the subjects of studies which need to be
promoted, have to be worked out by the State and made available to
authorities giving the tax rebate to the public at large.
(3) The tax rebate should be given only when the donation is meant for
institutions which have broad-based governing bodies which include a fair
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149
representation from the government, eminent educationist of the area and local
representatives. This is necessary for avoiding any undue influence by the
donors in the governance of educational institutions.
Thus, the instrument of tax rebate should be used to promote the right kind of
education and at the right place.
5.13. FEE RATE POLICY
The constitution of India provides for free and compulsory education up to the age of
14, which by and large covers education up to 9th or 10th class. Therefore, in principle,
a fee rate cannot be suggested. But this would be valid only when income distribution
is fair. Since income distribution is not fair and there exist a disparity in provision of
educational facilities and in the rate of fees charged by different institutions, the
matter of fee rate becomes more complex. The principle guiding the fee rate should be
such that poor and middle class students are able to benefit from education and at the
same time the education of the rich is not subsidized. This principle indicates a graded
fee structure.
If a grade fee structure is not feasible, then, the best course would be realizing the
resources from the employer of the educated people. But, with a view to making the
students accountable and serious towards their studies, a nominal fee should be
charged. And for those who cannot afford even a nominal fee as well as their
maintenance charges, special financial provisions should be made to support their
education.
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There are high fee charging and better quality institutions, and also the nominal fee
charging and poor quality institutions. The nominal fee charging institutions may be
given adequate funds so that they are able to provide better quality education and
remove the disparity that has been caused by the difference in the quality of
education.
From above discussion, we can conclude that, the present education financing policies
are contradictory to the paradigm of a mixed-economic socialistic pattern of society.
On the one hand, they have transferred resources in favour of rich and upper middle
classes from the poor and middle classes and, on the other, made inadequate financial
provision for education. These policies are also not tied up with proper education,
developmental programmes.
The alternative policy of financing should, therefore, correct these distortions and
make adequate provision for education through
(a) allocation of a certain portion of the funds for education out of the total funds
earmarked of development of various sectors of the economy.
(b) mobilizing resources from the private employer of educated people and private
practitioner.
(c) charge low fees or charge nothing providing adequate funds to such
institutions.
(d) making adequate provision for students for the weaker sections of the society.
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