I Introduction

II Economic Reforms and Changing Educational Policies

In this section, we analyse how the educational policies, particularly pertaining to the higher education sector, have responded to these challenges. Education is financed through both governmental and private resources. However, a major commitment from government is required in financing education because of the positive externalities associated with it. The beneficial impact of education is not restricted to the individual alone but spills over to other members in the community, e g, there is welldocumented evidence of the beneficial impact of mother’s education on health of her children, increased training enhances productivity of not only an individual worker, but has a positive spillover effect on his/her co-workers, etc. Thus, education is widely considered as public good. It is also recognised that while considering the private returns to education, an individual does not take account of these externalities. Hence, provision of education may be suboptimal when left only to market forces and government intervention is required to provide an optimum level of education (taking into account the private as well as the social benefits).

However, when we come to each level of education, it is not clear whether to categorise it as public good or merit good. Elementary education is widely accepted as public good. On the other hand, in case of higher education, it is observed that while it is beneficial to the society, the private returns from higher education are more than social returns. Thus it is generally recommended that the burden of financing higher education should be shifted to private individuals. The liberalisation process feeds this line of thinking. This also gets reflected in our changing educational policies with greater emphasis on generation of additional resources through conventional and non-conventional measures. The national policy on education (NPE) (1986, 1992) as well as the recommendations made by the University Grant Commission (UGC) recognises the need for reducing the role of government in education sector and increasing the role of private sector, particularly in the sphere of higher education.

The NPE was adopted by the Parliament in May 1986. It was further updated in the year 1992. The NPE provides a comprehensive framework including a “plan of action”, assigning specific responsibilities for organising, implementing and financing its proposals. The policy reiterates the constitutional obligation of achieving universal education at the elementary stage through greater access and retention of children up to 14 years in age. It emphasises the need for substantial improvement in quality of education to enable all children to achieve essential levels of learning with greater priority to achieving higher enrolment of girls, SCs and STs. The primary importance (in case of secondary and elementary education) is on programmes aimed at the following: universalisation of elementary education, liquidating illiteracy, equality of access to educational opportunities to all sections throughout the country, enhancing the social relevance, quality and functional effectiveness of educational programmes, generating knowledge and developing technologies in scientific fields crucial to self-sustaining economic development. In this context, it is interesting to note that the policy does not elucidate the role of private institutions for elementary and secondary education.

However, in case of higher education the NPE clearly points out that the non-government sector can play a major role in funding higher education. Note, it is clearly stated in the document that “resources, to the extent possible, will be raised by mobilising donations, asking the beneficiary communities to maintain school buildings and supplies of some consumables, raising fees at the higher levels of education and effecting some savings by the efficient use of facilities” (National Policy on Education 1986, p 35).

Similar measures, in terms of generating resources for higher education through non-government sources, have also been echoed by the UGC. The UGC was formally established in November 1956 as a statutory body of the government of India through an act for the coordination, determination and maintenance of standards of university education in India. The UGC is the only grantgiving agency in the country, which has been vested with the dual responsibility of providing funds and that of coordination, determination and maintenance of standards in institutions of higher education. The UGC, in recent years has documented the need for greater role of private sector in financing higher education [UGC 2003]. Private financing of higher education is advocated on the following grounds: private returns on higher education far exceed the social returns; private sector benefits the most from higher education and public funding for higher education is insufficient to take up the challenging task of expansion and diversification of higher education system to meet the continuously growing demand. On one hand, it assures that providing quality higher education is the primary responsibility of the government and it will not withdraw from this responsibility. However, simultaneously it mentions that industrial houses may be encouraged to be partners with educational institutions directly for the development of human resources dedicated to their interests. The remaining portion of this chapter elucidates how far these changing policies have triggered off changes in actual expenditure pattern of the government on education.

III Pattern of Expenditure on Education

The total (state and central government) educational expenditure expressed as a percentage of GDP gives a good indication of priority given to education in the society. Mid-1980s, i e, the era when human resource development was given top-most priority, we see an increasing trend in educational expenditure as a per cent of GDP (see the figure).

However, with the advent of 1990s, the per cent of educational expenditure started declining. This was due to reform process and government’s efforts to cut down its expenses on social sector. Table 1 shows the growth rates of per capita real expenditure on education for three decades 1970s, 1980s and 1990s.

4.5 4

3.5 3

2.5 2

1.5 1

0.5

than on more productive items, e g, improvement of infrastructure, etc. This becomes evident when we explore the pattern of disbursement of funds under the revenue and capital heads (Table 2).

Expenditure on education can be on recurring items such as salary of teachers, administrative staff, etc, or it can be on capital infrastructure such as school building, libraries, equipment, etc. Expenditure on recurring items comes under the revenue account, whereas that on non-recurring items constitutes the capital account. As can be observed from Table 2, revenue expenditure constitutes major part, around 99 per cent, of total expenditure from 198081 to 1999-2000. On the other hand, the capital account forms

Source: Selected Educational Statistics, 2000-01.

negligible portion of total spending.

So far we have looked into the changing pattern of total public expenditure on education and growth rate pre- and postliberalisation. However, one of our primary interests is to analyse the devolution of funds for higher education vis-à-vis the other

The growth rate of per capita real expenditure has increased from

5.65 per cent in 1970s to 6.37 per cent in 1980s. Thereafter growth rate has decreased to 4.48 per cent in 1990s. The efforts of the government to withdraw from the education sector have resulted in the declining growth rate of per capita real expenditure on education.

Not only is the public funding on education declining over the last few years, but also the available resources are expended on meeting functional expenses, i e, payment to teachers, etc, rather

Period Average Per Coefficient of Growth Rate Capita Real Variation Expenditure

1971-72 to 1980-81 142.56 18.70 0.0565 1981-82 to 1990-91 243.24 19.50 0.0637 1991-92 to 1998-99 344.22 10.98 0.0408

Note: Growth rates are calculated with log-linear model. Source: Calculated from the Analysis of Budgeted Expenditure on Education.

Year Revenue Percentage Capital Percent-Total

1980-81 22730.40 99.22 177.83 0.78 22908.23 1985-86 50273.44 98.89 564.88 1.11 50838.32 1990-91 111666.54 98.84 1306.15 1.16 112972.68 1995-96 201467.27 99.17 1684.16 0.83 203151.44 1999-2000 374241.74 99.23 2917.60 0.77 377159.34

Source: Analysis of Budgeted Expenditure on Education (selected years).

levels of education. To address this issue, we have looked into the public spending on education at a more disaggregated level in Table 3. The greater priority to elementary and secondary education as compared to higher education is envisaged from the fact that as early as in 1974-75 approximately 45 per cent of total funds were allocated for elementary education, 30 per cent for secondary education and around 17 per cent for higher (inclusive of technical) education. The share of elementary, secondary and higher education has all declined marginally during reform period, but started picking up during mid-1990s. However, the pace of change has been more for elementary education as compared to higher education.

State-wise Expenditure on Education

As discussed in Section II, the state governments have borne the lion share of expenditure on social services. Education sector is not an exception. Note, after education was brought into the concurrent list from the state list through the 42nd Constitutional amendment, it was expected that the share of the central government would increase considerably. In reality, the share of the central government continues to be low and even in the secondhalf of 1990s, the central government’s share in total revenue expenditure on education has remained at around 14 per cent [Tilak 1995]. However, the proportion of state income allocated for meeting education expenses shows a far from uniform trend. This becomes clear when we explore the proportion of current net state domestic product (NSDP) spent on education for 15 major states over the decade prior to and after the introduction of new economic policies (refer to the Appendix). In 1990-91,

Table 3: Expenditure on Education by Levels

(Rs lakh)

Source: Calculated from the Analysis of Budgeted Expenditure on Education (various years).

Economic and Political Weekly April 15, 2006 the share of current NSDP allocated for education has declined compared to the corresponding proportion in 1985-86 for Andhra Pradesh, Haryana, Karnataka and Maharashtra. Prominent decline is observable in 1995-96. Comparing the percentage share of total education expenditure (to state income) for 1995-96 and 1990-91 we find that the requisite proportion has declined for all of the 15 major states except Assam and Rajasthan. This downward trend in the expenditure is somewhat reversed in the second-half of 1990s, where education sector has been given relatively more importance by state governments (refer to Appendix).

IV Determinants of Public Expenditure: Panel Estimates

The primary interest is to estimate the magnitude and significance of variation in state real per capita income in determining the spending pattern of public education. In addition to this we shall also investigate the impact of liberalisation and privatisation on government spending after controlling for broad demographic and economic indicators at state level. Further, grants from centre also play a major role in financing state expenditure. Grants on an average have accounted for around 12 per cent of total state spending for the period 1980 to 2000 [Lalvani 2004]. The impact (if any!) of grants for expenditure on education per se is worth investigating.

Few studies, primarily based on developed nations, have analysed the factors governing public expenditure on education at local [Poterba 1996], state [ibid; She 2004; Verbina and Chowdury 2002] and national level [Strawczynski and Zeira 2003]. The variable of particular interest, i e, real per capita income is positively associated with expenditure on education. Moreover, in all of the above-mentioned studies, income elasticity was less than one indicating that education spending is inelastic to changes in income. No such consistent result emerged so far as the demographic indicators are concerned. A negative significant relationship was established between per child (or per capita) education spending and proportion of population in school-going age group (five to 17) using macro level data from the US [Poterba 1996; She 2004] and Russia [Verbina and Chowdury 2002]. However, no such significant relationship was found by Strawczynski and Zeira (2003) who unlike the other studies had

Table 4: Trends in State-wise Real Per Capita Expenditureon Education

Period Mean Coefficient of Variation

1980-81 to 1984-85 193.44 29.89 1985-86 to 1989-90 256.98 25.88 1990-91 to 1994-95 302.33 20.81 1995-96 to 1999-2000 364.29 27.95

Source: Calculated from Analysis of Budgeted Expenditure on Education.

Table 5: Trends in State-wise Real Per Capita Expenditure on Different Levels of Expenditure

Elementary Secondary Higher Technical Period Mean Coeff Mean Coeff Mean Coeff Mean Coeff of Var of Var of Var of Var

1980-81 to

1984-85 78.17 30.32 55.91 44.24 39.01 79.76 9.6 102.72 1985-86 to

1989-90 108.03 24.83 71.34 47.31 37.29 75.18 8.53 94.34 1990-91 to

1994-95 126.24 22.66 85.32 39.64 32.7 80.09 7.41 81.54 1995-96 to

1999-2000 155.83 31.16 106.64 49.94 32.34 80.14 7.79 109.27

Source: Calculated from Analysis of Budgeted Expenditure on Education, Coeff of Var denotes coefficient of variation.

51.49 per cent in 1999-2000 and that for medical colleges increased from 12.07 per cent to 17.58 per cent in the interim period (not shown in Table 6).

Empirical Results

The results for the aggregate education expenditure is presented in Table 7 and that for expenditure at primary, secondary and higher level is reported in Tables 8, 9 and 10, respectively. The results are discussed under the broad classifications specified earlier. Economic variables: States with higher per capita income was found to spend more on education. This is evident from the positive significant coefficient of “income” for both the fixed effect as well as the generalised least square estimates (Table 7). The income elasticity at 0.242 and 0.219 respectively, is significantly less than one. This implies that aggregate expenditure on education is inelastic to changes in income. This is not surprising given that we have used only public expenditure on education. One would usually associate education expenditure being needbased and hence a necessity.

To get a better understanding of the impact of these socioeconomic level at a more disaggregated level, we have also looked into the determinants of education expenditure for elementary, secondary and higher education. “Income” has a significant positive impact on public expenditure on education irrespective of the level study. Moreover, income elasticity at each level, i e, elementary, secondary and tertiary education is found to be less than one. The result is surprising for higher education because although there is a change in classification with higher education no longer being considered as a purely public good but actual expenditure pattern reveals that the former is yet to be considered as a “luxury” item (Tables 8, 9 and 10). The magnitude of income elasticity is highest for secondary education (0.838 and 0.507), followed by higher (0.276 and 0.269) and elementary education, respectively (0.137).

Further, grants from centre induce a positive significant impact on public expenditure on education both at aggregate level and also individually at elementary, secondary and higher level (Tables 7 to 10). The effect is highest in case of secondary education followed by elementary education.6

Box

Table 6: Descriptive Statistics of Variables Used in the Panel Regressions

Variable Mean Std Dev Minimum Maximum

Education expenditure

in real per capita terms 279.257 96.875 75.946 727.760 Elementary education

expenditure in real

per capita terms 117.068 43.603 24.029 299.217 Secondary education

expenditure in real

per capita terms 79.800 42.046 1.498 288.321 Higher education expenditure

in real per capita terms 35.639 14.588 5.335 85.872 Real per capita NSDP 7217.511 2669.100 3330.858 14997.940 Proportion of private

engineering colleges 0.430 0.334 0.000 1.000 Proportion of private

medical colleges 0.146 0.222 0.000 0.810 Grants as proportion

of current NSDP 0.024 0.017 0.005 0.117 Percentage of SC population 15.901 5.664 6.820 28.800 Percentage of ST population 7.927 7.367 0.000 23.270 Percentage of rural population 75.074 8.309 57.111 90.120 Proportion of population in age

group of five to nine 0.129 0.018 0.055 0.160 Proportion of population

in age group of 10 to 14 0.120 0.012 0.047 0.141 Proportion of population

in age group of 15 to 19 0.096 0.010 0.034 0.118 Proportion of population

in age group of 20 to 24 0.089 0.01 0.031 0.107

Table 7: Determinants of Expenditure on Education

Fixed Effects Model Fixed Effects GLS Model Column (1) (2) (3) (4) (5) (6) Variable Coef Std Err P>|t| Coef Std Err P>|t|

Income 0.242 0.093 0.010 0.219 0.068 0.001 SC -0.031 0.017 0.079 -0.045 0.016 0.006 ST -0.020 0.013 0.129 -0.023 0.012 0.058 Rural 0.008 0.009 0.364 0.016 0.008 0.036 Grants 0.129 0.027 0.000 0.080 0.020 0.000 Pop 5-9 -1.441 1.757 0.413 0.856 1.474 0.561 Pop 10-14 -1.903 3.654 0.603 -10.007 4.250 0.019 Pop 15-19 6.494 5.504 0.239 14.300 6.382 0.025 Pop 20-24 -1.943 4.351 0.656 -3.451 4.159 0.407 Sexratio -0.004 0.001 0.001 -0.003 0.001 0.052 Engginst 0.014 0.022 0.532 0.008 0.021 0.696 Medinst -0.037 0.030 0.219 -0.017 0.029 0.554 Reform -0.162 0.026 0.000 -0.122 0.019 0.000 Time 0.049 0.004 0.000 0.048 0.003 0.000 Constant 7.587 1.661 0.000 5.729 1.835 0.002 R-square (within) 0.863 Wald

χ2(28) 3648.170

Prob > χ 2 0.000

Table 8: Determinants of Expenditure on Elementary Education

Prob > χ2 0.000

V Conclusion

In this paper, we have explored government financing of education in India over a span of 1980-81 to 1999-2000 across the 15 major states of the country using macro-level indicators. Our focus has been on analysing if there exists a structural break in pattern of expenditure pre- and post-economic reforms. Economic reform has certainly affected public expenditure on social sector in general and that on education sector in particular. Particular interest was to assess the income effect and that induced by liberalisation and commercialisation of higher education. The panel-based regressions are robust to both model specifications as well as to how we have defined educational expenditure. Income, with elasticity less than one, is found to significantly enhance educational expenditure at aggregate, elementary, secondary and higher level. Moreover, contrary to general perception, education expenditure at all levels has been significantly lower after liberalisation vis-à-vis pre-economic reform era. This is particularly detrimental for the vulnerable sections of the population, i e, for females and backward social groups. States with a higher proportion of population belonging to SC, ST and with higher female to male ratio are any case found to incur significantly lower expenditure on education. In addition to this, we find that even after controlling for the economic reform process, privatisation exerts a negative significant impact on higher education. In other words, government’s commitment towards meeting higher educational expenses is lower in those states where proportion of private engineering and medical colleges is relatively higher than the national average rate.

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Email: anindita@tiss.edu

Notes

[This paper is a part of a research project entitled ‘Expenditure on Higher Education in India: Role Played by the Government and Household’ funded by the Board of Research Studies, Tata Institute of Social Sciences. The first author acknowledges their support.]

1 www.education.nic.in

2 Mean real capita expenditure on education is calculated by taking the average across the 15 major states for the requisite time periods.

3 Op cit.

4 Sex ratio is defined as proportion of female to male population.

5 See Greene (2003) for better exposition.

6 In addition to this we have also tried an alternative specification to ascertain whether there exists any flypaper effect in terms of education expenditure of the state governments. As pointed out by Lalvani (2004) “A test of the flypaper effect would show if grants exerted greater stimulatory effect on expenditures of state government than would an equivalent increase in income”. In this context, we have replaced total grants by “lump sum grants”. Lump sum grants are defined as total grants (given by the Finance and Planning Commissions) excluding grants given by the centre under the category “central sector and centrally-sponsored schemes” (see Lalvani 2004 for further details). The panel estimates reveal that lump sum grants does not induce any significant impact on public expenditure on education, either at aggregate level or for elementary, secondary and higher levels. Change of specification also does not alter the sign and level of significance of the other explanatory variables.

References

GoI (Selected Years): Analysis of Budgeted Expenditure on Education, Ministry of Human Resource Development.

Greene, W H (2003): Econometric Analysis, Pearson Education, New Delhi.

Lalvani, M (2004): ‘Flypaper Effect: Evidence from India’, Public Budgeting and Finance, 22(3), pp 67-88.

Poterba, J M (1996): ‘Demographic Structure and the Political Economy of Public Education’, NBER Working Paper Series No 5677, US.

Rani, G P (2004): ‘Economic Reforms and Financing Higher Education in India’, Indian Journal of Economics and Business, 3(1), pp 1-30.

She, C M (2004): ‘Determinants of Public School Expenditure in Elementary and Secondary Education’, mimeo, Indiana University.

Strawczynski, M and J Zeira (2003): ‘What Determines Education Expenditure in Israel?’, Israel Economic Review, 1, pp 11-33.

Tilak, J B G (1995): ‘Costs and Financing of Education in India: A Review of Issues’, Problems and Prospects, UNDP Research Project, Centre for Development Studies, Thiruvananthapuram, Kerala.

– (2004): ‘Public Subsidies in Education in India’, Economic and Political Weekly, pp 343-59. UGC (2003): ‘Higher Education in India: Issues, Concerns and New Directions’, mimeo, University Grant Commission, India.

Verbina, I and A Chowdury (2002): ‘What Determines Public Education Expenditures in a Transition Economy?’, United Nations University, Discussion Paper No 2002/60.