A Case Against Curtailing Public Subsidises in Higher Education

Nivedita Sarkar and Anuneeta Mitra 

 The contribution of education in economic development
has been investigated since the early 1960s, originating in
the University of Chicago (Schultz, 1961; Becker, 1964), championed
by the Human Capital School – in which expenditure on education is regarded as
an investment. It was argued through the endogenous growth theory (Lucas, 1988;
Romer, 1990) that spending in education is crucial for increasing labour productivity
and accelerating the pace of economic growth. Over the last three decades it
has also been proven beyond doubt through numerous empirical researches that
individual earnings are positively associated with years of schooling along
with the fact that education confers a gamut of positive externalities to the
society. Therefore, the much discussed possibility of market failure associated
with positive externality brings forth the rationale for public intervention in
education. However, public spending in the form of subsidies, on higher
education is often argued to be highly
– advocating a drastic cut in subsidies (Psacharopoulos, 1994; World Bank,
1994). This view has gained currency of late and draws attention to the skewed
distribution of public subsidies in higher education, with its incidence shown
to be distinctly pro-rich. Therefore, spending meagre government resources to
finance the higher education of the rich is considered to be a colossal
inefficient use of public money. Thus,
it is often strongly suggested that scarce government resources should be
redirected in favour of basic/primary education. In this article we attempt to
scrutinize whether curtailing public spending in higher education would help in
achieving the principle of equity? To do this we first investigate how much the
government spends on higher education anyway.

Trend in Government Expenditure in Higher
Education in India

Realizing the potential of Higher Education in
generating myriad positive externalities and a key instrument to inclusive
growth, during the post Kothari Commission (1964-66) period more than 20 per
cent of total (capital) outlay allocated under education was earmarked to
higher education. But with the initiation of new economic policy (NEP) by Government
of India in 1991 a general consensus was built in favour of the withdrawal of State
from every sphere of the economy. Accordingly, a steep cut in budgetary
allocation was inflicted in the Higher Education sector. Educational expenditure  expressed as a  percentage of gross domestic product (GDP)  gives 
a  good  indication 
of  the priority  given 
to education in society. Looking at the proportion of GDP spent on higher
education in India between 1990-91 and 2011-12, it is clear that resource
allocation towards the sector steadily decreased between 1990-91 and 1998-98
from 0.43 per cent to 0.37 per cent of GDP (Figure 1). There was some revival for
two years in 1999-2000 and 2000-01, after which it again started declining. However,
from 2008 onwards it has started increasing; even then, public spending on
higher education is way below 1 per cent of GDP. For technical education, the
situation is even more grave. The expenditure on technical education as a
percentage of GDP dipped from 0.14 per cent in 1990-91 to mere 0.10 per cent in
2007-08 and started recovering only recently. Therefore, the gradual reduction
of public spending to higher education would definitely have negative impact on
per student allocation of government resources. Moreover, this is bound
to impact the quality of education in government institutes along with putting
more pressure on household budget.

Figure 1: Expenditure on Higher education as a
percentage of GDP

Source: Author’s calculation
from Analysis of Budgeted Expenditure, various years

and Economic Survey,

Interestingly, developed
countries spend close to US$10,000 per student per year. While this figure for developing
countries is on an average around US$1000 per student/year, India spends merely
US $400 per student/year (Agarwal, 2006). Thus, it will be interesting to find
out what has been the trend in per student government expenditure on higher
education during the post-reform period.

Figure 2: Per-student
Revenue Expenditure on Higher Education

(Index Number)

Source: Author’s calculation
from Analysis of Budgeted Expenditure and Selected Education Statistics,
various years and All India Survey on Higher Education 2010-11 and 2011-12.

It is evident from the above figure that the per-student
expenditure incurred by government has decreased secularly over the last two
decades, having some occasional increase in 1999-2000 and 2000-01. Therefore, it
is in this context of an already meagre allocation of government resources
towards higher education that the withdrawal of public subsidy from the sector
is argued for.

Subsidies in Higher Education: The Debate

There is a longstanding debate over public subsidy in higher education.
In public finance theory, public subsidy is advocated normally in case of
public goods and merit goods. The aforementioned debate originated from this
issue, as many argue that higher education is pure private good and not a
public good.

On the other hand proponents of public subsidies in higher education
state that, as higher education produces a large number of social benefits
apart from private benefits, therefore, it is at least a quasi-public good, if
not a pure one. Moreover, a large body of literature perceives higher education
as a merit good – consumption of which needs to be promoted. Further, subsidy
of higher education is strongly recommended to provide equality of opportunity;
this is because economists believe that there exists imperfection in the capital
market especially in developing countries and consumption smoothening through
borrowing may not be possible. Additionally, it is also argued that public
subsidies in higher education is instrumental in protecting democratic rights,
national values and promote cooperation instead of competition.
However, those who recommend withdrawal of public subsidies in higher
education characteristically argue that these subsidies are highly regressive
in nature – since its incidence is shown to be disproportionately cornered by
the higher income groups. It is often argued that as education is financed from
government’s tax pool, largely from indirect taxes (around 66 per cent) in
India, therefore equally shared by the poorer sections of society – thus subsidization
in higher education is inequitable in nature (and hence inefficient use of
public money), as it confers high private rate of return to individuals in
comparison to social benefit. Hence, they argue for restraining public subsidy
in higher education and reallocating it towards primary education. There are
also many who believe that higher education is disqualified to become public
good for not having criteria of ‘non-excludability’ and ‘non-rivalry’. In this context
it would be interesting to investigate the incidence of public subsidies in the
Indian higher education sector.

Incidence of
Public Subsidies in Higher Education

us look at the incidence of subsidies across different income groups.
Table 1, drawn upon the unit level
data of National Sample Survey 64th round (conducted in the year
2007-08), depicts the incidence of subsidies across income groups (proxied by
monthly per capita consumption expenditure) for three levels of education. It
is evident from the data that
for elementary education the incidence of public subsidy monotonically
falls with rising levels of income, which is a clear sign of progressiveness,
thus the subsidy in elementary education is pro-poor. However, for secondary
education it is less pro-poor and for higher education the 2007-08 data seem to
suggest that it is pro-rich.

Table 1:
Distribution of Subsidies across Income Groups for Different Levels of
Education (in per cent)

argument for curtailing public subsidies in higher education and reallocating
the same towards other levels of education is forwarded by drawing attention to
these results. Now the reason behind such regressive distribution of government
subsidies in higher education becomes clear once we look at the distribution of
enrolments (in government institutions) from different income groups across
three levels of education.

Table 2: Distribution of Enrolments across Income Groups for Three
Levels of Education (in per cent)

The data clearly shows that lower
income groups have higher representation in elementary education in government
institutions which consistently falls with rising levels of education. At
higher education level 44 per cent of total enrolment belongs to the top 20 per
cent income group. The most proximate reason for such skewed representation
lies in the fact that higher education entails huge amount of out-of-pocket
expenditure on the part of household, often making it impossible for lower
income households to bear such costs. Additionally, the high opportunity cost of
pursuing higher education in terms of forgone current income places lower
income households in a disadvantageous position vis-à-vis high income groups.
Question arises should public subsidies from higher education be withdrawn on
the basis of evidence on current
distribution of subsidies depicted in Table 1.


Let us imagine for a moment that
this is actually done yielding to the demands of those who argue for curtailing
government expenditure in higher education. In that case, as the out-of-pocket
expenditure in pursing higher education is certainly going to increase and the
opportunity cost for pursuing higher education are likely to remain the same –
such a policy move is certainly going to increase
the total cost (direct + indirect) of pursuing higher education. Evidently, the
lower income groups would ill afford higher education in such a scenario and
this would unambiguously manifest itself in a further skewed distribution of
participation in higher education presented in Table 2. 


Thus, those who argue in favour of
curtailing government expenditure from higher education are actually myopic and
only evaluating the public subsidies from the point of view of static efficiency. It is true that the current distribution of public subsidy in
higher education is regressive, but on this basis if public expenditure on
higher education is withdrawn (which is anyway as meagre as 0.59 per cent of
GDP), it will create more perverse representation of poor income groups. This comes
out most clearly if we see the current spending incurred by an average Indian
household on higher education. According to 2007-08 NSS data the average out-of-pocket
expenditure on higher education incurred by a household is around Rs. 7,360 per year per child for general higher
education and as high as Rs. 32,112 for
technical/professional education (NSS report no 532, p. H-3); whereas
per capita income for 2007-08 was only Rs. 33,299 – claiming a whopping 22
per cent and 96 per cent respectively of the household budget
. And this is so, even when the
government, in whatever measure, is subsidising higher education. Thus, any
withdrawal of public subsidies would be an effective way of excluding the lower
income groups from accessing higher education in future; as Central Advisory Board of Education (CABE) report (2005)
has rightly pointed out that
though “…distribution of
enrolment in Higher Education is skewed in favour of the affluent section of
the society, public subsidization of Higher Education benefits the rich more at
the cost of poor. While this is true, the alternative, viz., reducing public
subsidies and levying of high rates of fees would accentuate the degree of
skewness in distribution; it further reduces access of poor to Higher
Therefore, the call for withdrawal of public subsidy in
higher education on the basis of
static efficiency seems to be analogous to complete dismantling of caste based
reservation on grounds that the opportunities are cornered by the relatively
well-off in the caste group. However, any society committed to equitable
representation of people (irrespective of their initial economic positions) at every level of education in the long run – thus providing true
opportunity for upward social mobility and respects merit – must continue to
subsidize all levels of education.
Confining oneself to the static efficiency argument would result in an
inequitable system in the long run and
hence prove to be dynamically
in estimating the optimal amount of subsidies, policy makers can think about introducing
discriminatory pricing structure (
Verghese et.al, 1985) along with extending specific subsidies like
scholarship, free or subsidised hostel facilities etc, as there is no trade off
between public subsidies and targeted cost recoveries in case of higher


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National Sample Survey Organisation
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New Delhi: Department of Statistics,
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Authors are Research Scholars at the National University of Educational Planning and Administration (NUEPA), New Delhi.

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