Chapter-5 Sources of Finance for Higher Education in...

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

Sources of Finance for Higher Education in India

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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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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


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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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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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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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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,


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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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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


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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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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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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.

Chapter-5 Sources of Finance for Higher Education in...

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