Financing higher education

The fiscal woes of the government make the growth in education spending unsustainable. How can the government reorient its focus?


Photo: Hindustan Times
Photo: Hindustan Times

India urgently needs to focus on higher education. The country’s comparative advantage in the service sector and in knowledge-based work depends on it.

The government aims to increase the gross enrolment ratio (percentage of people aged 18 to 23 in higher education) from 19.4% (All India Survey of Higher Education 2013, AISHE) to 30% by 2020-21. This means—accounting for population growth—adding about 19 million to the 28 million currently enrolled in higher education programmes.

As the AISHE and other studies point out, most of this addition will be in professional streams. Engineering and medicine constitute about 21% of total enrolment currently. These and other professional streams, including accounting, management, law, and information technology, are expected to displace the arts and sciences as the preferred higher education choice.

The professional streams are being fuelled by private sector participation. As of 2012, 86% of engineering colleges and 51% of medical colleges were privately managed. The share of the private sector in enrolment had risen from 32.9% in 2000 to 58.9%in 2012.

At the same time, the budgeted total government expenditure on higher education, in absolute terms, grew 23% per year between 2005-06 and 2012-13; on a per-student basis, it grew at 13% per annum.

The fiscal woes of the government make this growth unsustainable. More importantly, the expenditure pattern indicates that the government has failed to recognize that areas such as professional education, where private participation has grown significantly, are best linked to the market, and that its support is better targeted at those streams for which a market may not exist, but which are needed nevertheless for a balanced society. How can the government reorient its focus?

First, private sector participation, wherever it is strong, should be supported by streamlining the paperwork needed, thereby also controlling the corruption that arises when a plethora of approvals is required.

Business proposals for several market-oriented courses of study continue to come in; the non-profit framework that such initiatives have to adhere to has not been a constraint. True, such plans fail sometimes—witness, for instance, the closing down of some management and engineering institutions, but businesses are willing to take such risks.

Making higher education eligible for receiving corporate social responsibility (CSR) funds should generate money for academic chairs, departments, merit and means-based scholarships, and physical infrastructure.

Donations towards merit-cum-means scholarships should be made tax-exempt, addressing concerns about affordability of private sector higher education.

If a private institution not dependent on the government seeks affiliation with a recognized body, it practically loses control over its admissions and fee-charging ability.

If it seeks recognition of its academic courses from a central accreditation agency, it has to comply with a list of physical and human infrastructure demands, implying a floor on costs. A good rating system run by an independent body, and a relaxation of the restrictions on fees could reassure students about the match between fees and quality.

The existing fee controls in grant-in-aid institutions should be relaxed. The Central Advisory Board of Education’s “suggestion” that fee income ideally should not exceed 20% of the total cost often comes in the way of cross-subsidizing deserving poor candidates, a concept that needs to be popularized.

According to a 2015 Associated Chamber of Commerce and Industry of India (Assocham) study, nearly 680,000 students, many of them from the middle classes, go abroad to study, with an annual outflow of $6 billion to $7 billion. So it is not just the rich, but also the middle class that can contribute to cross-subsidization.

Bank finance for professional courses will be critical in the future. While loans increased at a phenomenal annual rate of 26% in real terms (not accounting for inflation) between 2006 and 2010, the annual growth rate dropped to only 3% in the next four years. This was partly due to loan recovery issues; alumni funds can be used to guarantee such loans, with some limits imposed. Currently, less than 15% of the total enrolment in the higher education in the country is funded by bank loans. This should increase to at least 30% by 2020-21, implying annual growth of about 20%.

The government can also encourage insurance companies to design products to be bought by educational institutions to protect themselves against the possibility of potentially jobless graduates not being able to repay their loans.

The above measures assume that fees should be a fair reflection of the costs of higher education. However, the government may provide merit-cum-means scholarships to needy students identified on objective criteria using the so-called JAM trinity (a combination of Jan Dhan Yojana-Aadhar card-Mobile) to subsidize their fee payments.

Alternatively, students can be provided with vouchers for say up to 90% of the fees. Private donors should also be encouraged to offer scholarships to the poor by giving them tax exemption on such donations.

Thus, the government can signal to society the real costs of higher education while ensuring that lack of resources does not come in the way of access to higher education.

Non-professional courses may not attract business proposals since there is limited private willingness to pay for them. The perceived social benefits, on the other hand, may be high enough to justify state support.

The government should follow the grant-in-aid (GIA) model for such purposes. Such institutions should be allowed to charge fees to match the GIA and cover their legitimate costs. As in the case of professional courses, scholarships for needy students can be instituted.

Moreover, the programmes may be offered during the evenings or early mornings so that students are able to combine jobs and studies. These measures should ease the pressures on financing higher education while ensuring balanced development of higher education.

Ravindra Dholakia teaches economics at IIM Ahmedabad; Vijaya Sherry Chand and Rajeev Sharma are with the Ravi J. Matthai Centre for Educational Innovation, IIM Ahmedabad.

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