A Fundamental Question About National Education Policy 2020: How To Finance Higher Education?

The National Education Policy (NEP) has laid out a grand vision about what education in India should be like over the next 50 years. Most of the commentary about NEP 2020 has focused on the many changes to teaching, learning and regulatory framework of primary, secondary and higher education. As far as higher education is concerned, consolidation of regulators at the central level, more academic and administrative freedom for colleges and universities, and a more liberal education system would be welcome reforms.  However, the commentary and the NEP itself avoid answering the biggest and perhaps most fundamental question about education in India: how do we fund it? 

The NEP in 1968 envisaged investing 6% of GDP in education. However, public expenditure on education in India was just around 2.7% in 2017-18, falling far short of expectations. In contrast, Bhutan, Zimbabwe, Sweden, Costa Rica and Finland spent around 7%, while the U.K., Netherlands, Palestine, Malaysia, Kenya, Mongolia, Korea and USA spent around 5% (OECD & UNESCO, 2017). It is universally agreed that India, with a huge youth population, needs a substantially larger expenditure on education. In spite of this, the NEP has not put forward any critical analysis as to why public education has not been provided with adequate funding even after years of political commitments.

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However, going forward there is a strong commitment from the NEP to increase expenditure as a percentage of GDP on both education and research. There is also the promise of establishing a National Research Foundation (NRF) with sufficient funding that will provide research grants to institutions. Both of these will be excellent reforms if implemented in letter and spirit. It is also essential that entities such as the NRF treat both private and public institutions on par with each other. 

Currently, the Indian government’s existing expenditure on higher education goes extensively toward a small group of elite centrally funded institutions. A vast majority of the graduates of these institutions end up living and working outside India, contributing little to the growth and development of the country. The NEP has also introduced the four-year undergraduate degree instead of the three-year degree to ensure that students can easily transfer their degrees and credits to universities abroad. 

Fortunately, the gap over funding since the 1991 economic liberalization has been met by private educational institutions. According to the 2015-16 survey of higher education, 78% of colleges are privately managed, and 68% do not receive any aid from the government. This means that a vast majority of Indian students are educated in private colleges that are entirely funded by their tuition fees. The prevailing view among policy makers and the judiciary is that education remains a non-profit and should still be funded via philanthropic contributions; tuition fees paid by the students and parents should be kept at a minimum. This sentiment is again echoed in NEP 2020. 

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However, this philosophy has led to a huge quality deficit in the private education system; colleges have not been able to raise sufficient funds via philanthropy nor increase their tuition fees to improve the quality of education. Even in the best of times, philanthropic contributions are unreliable and cannot be the main source of funding for any educational institution. 

In addition, non-profit institutions have to comply with the regulations of the Foreign Contribution Regulation Act (FRCA) when trying to raise philanthropic funds from their alumni abroad. Although the current government has greatly simplified FCRA compliance, smaller institutions will still find complying with the government regulations difficult. Relying on philanthropy has led to huge disparities among private institutions, and only a few are able to provide quality education to their students. 

Instead of acknowledging this fact, the NEP doubles down on a strategy that has failed and continues to say that private educational institutions should only raise their funds via philanthropy. The NEP cites western private universities that are able to raise vast amounts of funds via philanthropic contributions as a reason for why this model can work in India. What the NEP fails to mention is that barring the few elite institutions, most universities in the US still rely on exorbitant fees from students as their primary source of income, and many graduates are drowning in debt by the time they graduate. Forbes has estimated that US student debt has reached a whopping 1.6 trillion dollars, second only to home loans in the consumer debt category. This includes students who study at elite private universities in the US. 

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The result of all of this is that educational entrepreneurship in India is limited to coaching institutions that operate with little or no regulation and encourage rote learning and exam taking. The NEP further suggests that admission to all higher education programmes should be based on standardised test scores conducted by the National Testing Authority. This again encourages coaching classes and rote memorisation, further eroding the value of examinations and assessments conducted by the schools, colleges and universities. 

Another important issue not addressed by the NEP is the obsolete way in which India taxes its educational institutions. To give some context, institutions in the US are permitted to maintain large endowment funds that can be used to further their educational mission. Elite institutions such as Harvard and MIT hold stakes in large multinational corporations directly and indirectly through their endowments, all the while retaining their non profit status. Endowment funds support research, infrastructure, teaching, and community service missions of these colleges and universities, and they have a lot of flexibility in how they raise, invest and save these funds.

In contrast, private educational trusts and societies in India simply cannot build up a corpus or an endowment without attracting the attention of tax officials. They risk losing their tax exempt status if they have such holdings. This discourages institutions from investing in or holding stakes in startups, or from actively promoting innovations that may spin out of their institutions. In addition, tax laws incentivize institutions to spend the majority of their income within the same financial year it was earned, or else they would be accused of “commercialising education” or “profiteering”. This leaves institutions with little or no savings that can be used for improving infrastructure, conducting research or managing various crises or natural disasters. 

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The Covid-19 pandemic has heavily exposed the weaknesses of the financial model promoted by the NEP. With philanthropic contributions negligible and fee collections grinding to a halt, many institutions are now in a crisis and are unable to pay their faculty, service their loans or meet the routine day-to-day expenses. This again illustrates the need to allow educational institutions to create a liquid corpus fund that can be invested and saved, and one that can be used during difficult times. 

The primary goal of the NEP is to ensure that all Indians can receive a quality education at an affordable price. The greatest success of NEP 2020 is that it recognises the need for fewer regulations, more autonomy, better teaching and learning methods, better teacher training and more meaningful exams; essentially, it has given India a vision for the future. However, it has not provided a realistic way in which private institutions can raise funds to meet the needs of their students and their communities. 

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The NEP is not a law in itself; rather, it is more of a framework for creating laws. The government will need to pass legislation to enable various aspects of the NEP, and lawmakers will need to strongly consider how private funding of education can be improved. They can either allow for much greater flexibility for institutions to raise, invest and create a corpus fund that can be used for research and educational purposes, or they should consider allowing private for-profit investment in education. Only then we can be closer to realising our goals of better quality education for all. 

(The author is the COO of Mahatma Education Society. He has served as a founder and mentor for many startups in India. He has a PhD in Mechanical Engineering from Massachusetts Institute of Technology. Views are personal.)