MDE-417

DISTANCE
EDUCATION:
Indira Gandhi National Open University ECONOMIC
Staff Training and Research PERSEPECTIVE
Institute of Distance Education

Block

1
ECONOMICS OF EDUCATION

UNIT 1
Conceptual Foundations 5

UNIT 2
Education as Investment 22

UNIT 3
Cost Analysis in Education 49

UNIT 4
Generation and Utilization of Resources 68
MDE-417: Distance Education: Economic Perspective
(New Course in place of ES-317: Distance Education: Economic Perspective)

Expert Committee
Prof. A. Sukumaran Nair (Chairman) Prof. K. Murugan
Former Vice Chancellor Director, School of Humanities
Mahatma Gandhi University Tamil Nadu State Open University,
Kottayam, Kerala Chennai

Prof. O.S. Dewal Prof. S.V.S. Chaudhary

Former Founding Director School of Education
National Open School, New Delhi IGNOU, New Delhi

STRIDE Faculty
Prof. K. Sudha Rao Prof. P.R. Ramanujam
National University of Educational Prof. C.R.K. Murthy
Planning and Administration, Prof. Madhu Parhar
New Delhi Prof. Basanti Pradhan
Prof. P.K. Biswas
Prof. Chandra Bhusan Dr. Sanjaya Mishra
Formerly CIET, National Council for (Now with COL)
Educational Research and Training, Dr. Ashok K. Gaba
New Delhi (Now with SOVET, IGNOU)
Dr. Mythili G.
Prof. Santosh Panda (Convener) Mr. Tata Ramakrishna
Director Dr. Rose Nembiakkim
Staff Training and Research Institute of (Now with SOSW, IGNOU)
Distance Education, Dr. Satya Sundar Sethy
IGNOU, New Delhi (Now with IIT, Chennai)

Course Team
Course Contributors Course Coordinator Content, Format, & Language Editor
Dr. P. Geetha Rani (Units 1, 3) Prof. Santosh Panda Prof. Santosh Panda
Associate Professor STRIDE, IGNOU, STRIDE, IGNOU,
National University of Educational New Delhi New Delhi
Planning & Administration,
New Delhi

Prof. M.M. Ansari (Unit 2)

Former Director,
Distance Education Council,
IGNOU, New Delhi

Dr. M.S. Bawa (Unit 4)

Formerly at University of Delhi, Delhi

PRODUCTION
Mrs. Promila Soni Mr. Manoj Thakur
Assistant Registrar (Publications) Assistant, STRIDE,
STRIDE, IGNOU, New Delhi IGNOU, New Delhi

April, 2019
© Indira Gandhi National Open University, 2019
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Printed and Published on behalf of the Indira Gandhi National Open University, New Delhi by Prof. Madhu Parhar, Director, Staff
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 MDE-417: Distance Education: Economic Perspective
Course Outline
Block 1 : Economics of Education
Unit 1 : Conceptual Foundations
Unit 2 : Education as Investment
Unit 3 : Cost Analysis in Education
Unit 4 : Generation and Utilization of Resources

Block 2 : Economics of Distance Education

Unit 1 : Distance Education and Human Resource Development
Unit 2 : Funding of Distance Education
Unit 3 : Pricing in Distance Education
Unit 4 : Cost and Quality in Distance Education

Block 3 : Costing in Distance Education

Unit 1 : Cost Analysis of Distance Education
Unit 2 : Cost Structures in Distance Education
Unit 3 : Cost Functions in Distance Education
Unit 4 : Costing Technology-Enabled Learning

Block 4 : International Perspective

Unit 1 : Cost Effectiveness of Distance Education in Asia: An overview
Unit 2 : Cost of Distance Education in China
Unit 3 : Costing Open and Distance Education in India
Unit 4 : Costing in Selective Distance Learning Systems: International Case Studies

Block 5 : Readings in Economics of Distance Education

Unit 1 : The Economics of Mass Distance Eduation
Unit 2 : The Distance Education Chameleon: New Technologies and The Changing
Cost-Structure of ODL
Unit 3 : Comparative Cost Analysis in Distance Teacher Education
Unit 4 : The Costs and Costing of Networked Learning
Unit 5 : A System-Level Comparison of Cost-Efficiency and Return on Investment
Related to Online Course Delivery
Unit 6 : Activity-Based Costing Models for Alternative Modes of Delivering On-Line
Courses
Unit 7 : Private Cost of Education: A Comparative Study of Distance and Campus-based
University Students in Nigeria
Unit 8 : Costing of Distance Learning: A Study of the Indian Mega Open University
 INTRODUCTION TO THE BLOCK

As you will notice, the Course on “Distance Education: Economic Perspective” comprises
five Blocks, which is of six (6) Credits, and will require, on an average, 180 hours of your
study time (though you may take time duration, i.e. 20 to 40 hours, to complete each Block
or Module). We have redesigned this course in this form, different from the curse structure
that we had in its earlier version. The first four Blocks deal with various conceptual and
practical aspects of economics of education, and economics of distance education, while in
the last Block we have compiled eight select articles/papers in the area of distance
education written by international expets in this field. We have obtained copyright
permission to reproduce them with reformatting in this Block which is tittled as ‘Readings
in Economics of Distance Education’.

In Block 1 you will find four units that provide for conceptual foundation to enable further
study of ‘economis of distance education’. These deal with the meaning of economics of
education and concepts associated with it; education as consumption and investment,
including earnings, wastage, and production function in education; various types of costs
and cost analysis in education; and generation and utilisation of resources for education.
Block 2 is devoted exclusively to the study of ‘economics of distance education’ – human
resource development, funding, pricing, and cost and quality – the last two being
exclusively new areas of study within this field. In Block 3, we have focused entirely on the
cost aspect of distance education and technology-enabled learning. We have provided
international perspectives on this field through some case studies in Block 4. Further, you
will find the eight selected readings in economics of distance education given in Block 5
useful to your current comprehensive understanding of this field, as also for your future
research work in this area, including the project work for MDE-320.

We have tried to make the units as presentable as possible; and hope you find them
interesting to study. All the best indeed.
 Conceptual Foundations

UNIT 1:
CONCEPTUAL FOUNDATIONS
Structure
1.1. Introduction
1.2. Learning Objectives
1.3. Introduction to Concepts
1.3.1. What is economics of education?
1.3.2. Public good and private good
1.3.3. Consumption and investment goods
1.3.4. Social good and merit good
1.4. Human Capital Theory
1.4.1 Rates of return approach to education
1.4.2 Education as a screening or credentialism hypothesis
1.5. Education and Economic Growth
1.5.1 Growth accounting framework
1.5.2 Endogenous growth theory
1.6. Contemporary Economic Reform Policies and their Effects on Education
1.6.1 Privatization of education
1.6.2 Internationalization of education
1.7. Let Us Sum Up
1.8. References/Further Readings
1.9. Model Answers to Activities

1.1 INTRODUCTION
This is the first Block of the Course on “Distance Education: Economic Perspective”,
and provides the foundation to the study of economics of distance education with
conceptual clarifications. Besides conceptual foundations/clarifications given in Unit
1, the subsequent three deal respectively with education as consumption and
investment, various educational costs and cost analysis in education, and how
resources are utilized within/for education.

With the foundational clarity provided in this Block, you will be equipped better to
appreciate the detailed study of economics of distance education in Block 2, costing in
distance education in Block 3, and international perspectives in Block 4 on costing in
distance education which are contributed by international experts in the area of
economics of distance education; and the critical study of select papers given in Block
5 shall expand the horizon of your understanding of this area, as also facilitate you to
take up research studies of your own in future, as also for your project work within the
Masters programme.

5
Economics of Education

1.2 LEARNING OBJECTIVES

After going through this unit, you should be able to:

 Define ‘Economics of Education’.

 Differentiate between public and private good; investment and consumption
goods; and social good and merit good.
 Explain the human capital theory with a critique on it.
 Examine the relationship between education and economic growth.
 Explain the endogenous growth theory.
 Examine the contemporary economic reform policies and their effects on
education, such as privatization and internationalization of education.

1.3 INTRODUCTION TO CONCEPTS

1.3.1 What is economics of education?
‘Economics of Education’ is a branch of Economics which applies various economic
theories, principles and models to the issues and problems of education. Economics of
Education was born as a formal area of study only about five decades ago, with ‘the
human investment revolution in economic thought’ created by Theodore Schultz in his
Presidential Address to the American Economic Association in 1960. It builds
powerful interface with theories of growth, labour economics, international
economics, public finance, welfare economics, micro economics, household
economics, and simultaneously going deep into the ‘basic tenets’ of Economics of
Education. To begin with, the interests of economists in the field of education have
centered chiefly on four topics: (a) measurement of the economic cost and benefits of
education, (b) educational planning, (c) efficiency criteria, and (d) adequacy of
revenue sources.

Further, three major economic approaches to educational planning, viz. i) rate of

return analysis, ii) manpower planning, and iii) social demand analysis have vastly
contributed to better understanding of several economic dimensions of education.
These have also influenced considerably the boundaries of the theories of growth,
labour economics, and development economics. Research studies that examined
private and social demand for education have made significant dents into
‘Development Economics’, necessitating broadening the framework of studies on
poverty, inequality, household consumption, and levels of living. For its own
development, Economics of Education has drawn heavily from Economics, and in turn
influenced heavily the development of Economics too. It has become a specialized
branch of Economics and also a separate area of Educational Studies. The other major
components of human capital, viz. health and migration also branched out of it as
important areas of study.

1.3.2 Public good and private good

Public good is a good which has the twin characteristics of non-rivalous and non-
6 excludability nature. In Paul Samuelson’s words, public good is “good, which all enjoy
in common in the sense that each individual's consumption of such a good leads to no Conceptual Foundations
subtraction from any other individual's consumption of that good...”. Public goods
are goods or services that can be consumed by several individuals simultaneously
without diminishing the value of consumption to any one. This key characteristic of
public goods that multiple individuals can consume the same good without
diminishing its value is termed as non-rivalry. Non-rivalry characteristic is the one
which most strongly distinguishes public goods from private goods. A pure public
good also has the characteristic of non-excludability, that is, an individual cannot be
prevented from consuming the good whether or not the individual pays for it. For
example, fresh air, a public park, national defense. Education, more broadly defined as
knowledge or ideas as postulated in the modern growth theories (discussed later), has
the inherent nature of non-rivalness (Romer, 1994).

On the contrary, private goods are exclusive and rival in nature. Exclusiveness means
once the good or service is bought, the buyer owns it and consumes. Rivalness means
the competitiveness -that is once a good is sold off, it is not there for other people to
consume. For example, food, clothing, toys, cars, etc. In the recent periods, education
is also argued as a private food, but has immense positive externalities. Externality
means the benefits of education that is conferred on the society, which further means
the benefit the society receives as the people are educated. Examples include
cleanliness, better health practices, etc. Similarly, education has the characteristics of
both consumption and investment goods.

1.3.3 Consumption and investment goods

Goods in economics can be categorized as consumption and investment goods.
Consumption good or service is one that is used (without using it for further
transformation in production) for the direct satisfaction of individual needs or wants
or the collective needs of members of the community. Investment good is a good
which enables further production of goods which is also called as capital goods.
Capital goods are generally human-made, and do not include natural resources such
as land or minerals. For example, plant, machinery, tools, equipments, etc.

The nature of education is such that it possesses both consumption and investment
characteristics of good. However, since 1960s, education has been recognized as an
investment for both the individual and the society. Education is both investment as
well as consumption. There is no method of estimating in what proportion these two
contribute to education. In primary education, the investment component is lesser
than consumption component. In secondary education both the components may
more or less equal and in the case of higher education, investment benefits are much
higher than consumption benefits. Moreover, whether education is a consumption or
an investment good needs to be examined from both the private and social point of
view.

1.3.4 Social good and merit good

Social goods are distinguished as those goods to which exclusion principle cannot be
applied. In other words, it is a good or service that benefits the largest number of
people in the largest possible way. Some examples of social goods are clean air,
clean water and literacy. Merit good is a socially desirable good whose distribution of
benefits is the maximum. In the case of merit goods, people do not realize the true or 7
Economics of Education actual size of benefit. For example, people underestimate the benefits of education
such as the scientific innovations and the benefits of using them like the benefits of
using vaccinations.

Activity 1.1

Write, in your own words, brief statements on each of the following with an example for each:

i) Public good:

ii) Investment good:

iii) Social good:

1.4 HUMAN CAPITAL THEORY

After the conceptual introduction, let us turn to a very important aspect of economics
and economics of education, i.e. human capital.

The human capital theory postulates that education is an investment activity that
increases skills, and hence labour productivity and the lifetime earnings of individuals
(Schultz, 1963; Becker, 1964; Mincer, 1974). A simple description of this process is
illustrated in Figure 1.1 which depicts that investment on education leads to enhanced
skills which in turn lead to higher productivity which in turn causes higher earnings.
The higher wages and salaries in turn lead to higher economic growth.

Investment Enhanced Higher Higher

on Skills Productivity Earnings
Education

Figure 1.1: Process of education as investment

Human capital theory brought out that education is a major source of acquired
abilities. It brought out the distinctive attributes of education as human capital
distinguishable from that of from physical capital:

i) The stock of knowledge is embodied in human capital unlike in physical capital.

ii) In acquiring human capital, the individual must invest both of his/her time and
8 resources.
Another important facet of human capital theory deals with investment in on-the-job Conceptual Foundations
training and the criteria for determining who will pay for such training and who will
benefit there from. Based on the pioneering work of Becker (1964), a distinction is
made between general and specific training. That the accumulation of human capital
occurs through both formal instructional programs and through informal ways such as
the cumulative experience on a job, in which one learns by doing. General training
refers to training that provides valuable knowledge and skills to workers useable both
within the present employment and in other employments. On the other hand, specific
training has value only within the current employment and is totally irrelevant for the
workers’ productivity in other firms. The distinction between general skills in terms of
portability and specific skills in terms of non-portability are important. The general
skills defined in terms of portability have a central place in both learning and at work
as parts of an integrated theory of human capital.

Applying the criteria who will pay for the cost and who will benefit from what kind of
training (general or specific) can result in four alternatives as shown in Figure 1.2.

Individual Employer

General Cost, Additional cost,

spread over benefit similar benefit
Specific Additional cost, Cost,
benefit specific to a firm additional benefit

Figure 1.2: Who pays for training

The alternatives are the following.

i) For general training:

a) The individual would be willing to bear the cost as the benefit is spread
over to more than one employment opportunity.
b) But, for the employer, it would be an additional cost for no additional
benefit.
ii) For specific training:
a) For the individual, it is an additional cost and the benefit is specific to a
particular firm.
b) For the employer it is an additional cost and would bring in additional
benefit.

Among these four alternatives, one can deduce the two desirable ones as: i.a) The
individual would be willing to bear the cost for general training as the benefit is spread
over to more than one employment opportunity, and ii.b) For the employer it is an
additional cost for a specific training but would be benefiting more from that cost of
specific training.

Mincer (1974) applied empirically to separate out-the-schooling and on-the-job

training components of earning streams by the interpretation of the concave shapes of
earning paths over a person’s life. Hence, the rates of return to education are
estimated using the age-earnings profile or Mincer’s earning function. We will briefly
discuss these two methods of estimating rates of return to education as follows.

9
Economics of Education 1.4.1 Rates of return approach to education
The economic returns to education can be measured by the internal rate of return to
education, which is the interest rate that equates the present value of the costs incurred
for education to the present value of additional lifetime earnings attributable to
education. It is the profitability or rate of return on investment as a measure of the
expected yield of investment in terms of future benefits, or income stream generated by
capital compared with the cost of acquiring the capital asset. The rate of returns to
education can be measured for both the individual (private) and social rates of returns.
The private rate of return is used to explain the demand for education. It can also be used
to assess the equity or poverty alleviation effects of public education expenditures, or the
incidence of the benefits of such expenditure. The social rate of return summarizes the
costs and benefits of the educational investment from the state's point of view, i.e., it
includes the full resource cost of education, rather than only the portion that is paid by
the recipient of education, i.e. the student or the trainee.

Private Rate of Return

The costs incurred by the individual are his/her foregone earnings (since he/she may
have earned in a job if had not gone for further education) while studying, plus any
education fees or incidental expenses the individual incurs during schooling. The private
benefits amount to what a more educated individual earns (after taxes), above a control
group of individuals with less education. The private rate of return to an investment at a
given level of education in such a case can be estimated by finding the rate of discount (r)
that equalizes the stream of discounted benefits to the stream of costs at a given point in
time.

Social Rate of Return

The main difference between private and social rates of return is that, for a social rate of
return calculation, the costs include the state's or society's at large spending on education.
Gross earnings (i.e., before taxes and other deductions) is used in a social rate of return
calculation, and such earnings also include income in kind where this information is
available.

Since the costs are higher in a social rate of return calculation relative to the one from the
private point of view, social returns are typically lower than a private rate of return. The
difference between the private and the social rate of return reflects the degree of public
subsidization of education.

Adjustments

Estimating the returns to investments in education, as for any other sector, involves an
implicit projection of anticipated benefits over the person’s or society’s lifetime. Since
only the past earnings are observed, or, most commonly, only a snapshot of the relative
earnings of graduates of different levels of schooling is observed, adjustments have been
used in the literature to provide a realistic projection of earnings of graduates. The most
common adjustments refer to the anticipated real growth in earnings, mortality,
unemployment, taxes and innate ability.

10
Earning Function Conceptual Foundations

‘Mincerian method’ or earning function involves the fitting of a function of log-wages,

using years of schooling, years of labor market experience and its square as
independent variables (Mincer, 1974). Often weeks-worked or hours-worked are
added as independent variables to this function as compensatory factors. We call the
above a "basic earnings function." In this semi-log specification the coefficient on
years of schooling can be interpreted as the average private rate of return to one
additional year of schooling, regardless of the educational level this year of schooling
refers to.

1.4.2 Education as a screening or credentialism

hypothesis
Many economists particularly Arrow (1973), Spencer (1973) and Stiglitz (1975) among
many others have argued that education remained as a screening or filtering device.
The skepticism of human capital theories have led to development of alternative
theories such as Screening theories and labeling mechanisms. This hypothesis
contends that education or investment on education is not productive by imparting
necessary knowledge and skills, but simply acts as a screening device, which enables
employers to identify individuals who possess either superior innate ability or certain
personal characteristics such as attitudes towards authority, punctuality, or
motivation, etc. Rather, education screens, labels and identifies the higher credentials
in people and leads to higher earnings (see Figure 1.3).

Investment Higher Higher

on credentials earnings
education

Figure 1.3: Education and earnings relationship

Arrow (1973) noted in his filter argument that higher education not really adds up to
productivity but adds to some information to the extent that it identifies higher
credentials in people. However, the screening hypothesis is important as it focused the
attention on education and other forms of investment in human capital which
influence productivity. It served as a reminder that education does far more than
imparting knowledge and skills. The educational process helps to shape and develop
those attributes. This restates that the concept of human capital is still valid that it
must be extended to include activities which affect personal attributes as well as skills,
and it must recognize that such activities increase workers’ productivity in complex
ways.

11
Economics of Education Activity 1.2

Distinguish between ‘Rates of Return Approach to Education’ and ‘Education as a Screening Hypothesis’.
Write within 100 words in the space given below.

1.5 EDUCATION AND ECONOMIC GROWTH

The relationship between education and economic growth has been one of the major
tenants of economics of education. This relationship has been examined by
economists under two theoretical frameworks: i) The growth accounting framework
which Solow, Dennison and other followed; ii) The modern or endogenous growth
theories, which Romer, Arrow and Lucas have contributed these two frameworks are
discussed as follows.

1.5.1 Growth accounting framework

During 1950s, growth had been extraordinarily rapid and in reflecting on this
experience, economists began to recognize what Tinbergen had shown in 1942 itself
that conventionally specified Cobb-Douglas aggregate production functions left a large
part of observed growth in national income per capita unexplained. This fact was
rediscovered in 1950s in Norway, Finland and in U.S. The residual was given many
designations as technical change, human factor, and measure of ignorance. However,
it was generally agreed that education is a vital element in economic development. The
discovery that increases in physical capital and labor did not, by themselves, explain
economic growth led to an analysis of the factors determining the "residual," in
particular the role of education and technical knowledge. One of the first attempts to
measure the contribution of education to growth was made by Denison (1964), who
argued that about 23 percent of recent increases in U.S. national income during the
period 1929 to 1982 were due to the increased education of the labor force. In
Denison’s accounting the effects of scale economies were arbitrarily assumed and the
residuals were simply supposed to reflect the effects of advance in knowledge with no
explanations of how scale economies work and how human knowledge advances.

Harrod and Domar are the earliest exposition of growth models. The rate of growth in
12 the economy is determined by the ratio of rate of savings (s) to capital output ratios
(v). The assumption made in the First Five Year Plan in India was that rate of savings Conceptual Foundations
is equal to investment in the economy, which is not necessarily the case. If the rate of
growth is lower, it results in cumulative unemployment. It is important to recognize
that the strategy to promote economic growth by forced savings was based on the
assumption of a special production function. The peculiar nature of this production
function is evident from the specification that only capital but not labor is included as
a factor of production. It also assumes that labor and capital are not substitutable in
production and hence output does not increase by applying more output for given
stock of capital. The warranted rate of growth is referred as knife-edge, and it is also
the unstable growth path. The dynamic question on how fast the economy should
grow is not addressed in the model. This model does not concern about how the
variation in growth rate occurs across space and time.

Using the neoclassical production function, Solow and Swan in 1956 advanced a very
different perspective from the Harrod-Domar model on the relationship between
capital accumulation and economic growth. Unlike in Harrod-Domar, the labour and
capital ratios were allowed to change by Solow and Swan. It can be derived from this
model that both capital input per worker and output continue to grow at the same
rates as the rate of increase in the efficiency of labor resulting from technological
progress. Thus, it implies that the growth of income per capita cannot be sustained
without continuous technological progress. However, Solow’s convergence keeps on
growing at the same rate and does not allow for any difference across space or time as
in Harrod-Domar. An important contribution of the neo-classical growth model of
Solow-Swan was to elucidate the decisive role of technological change in economic
growth. However, the problem was treating technological progress as exogenous in the
growth model.

1.5.2 Endogenous growth theory

An attempt to incorporate the effects of scale economies and endogenous
technological progress into the growth theory is called endogenous growth models
pioneered by Paul Romer (1986, 1994), Kennth Arrow (1973) and Robert Lucas
(1988). These models try to explain the mechanism of how new knowledge is created
through economic activities, giving rise to scale economies. Its basic assumption is
that new knowledge to improve economic production accentuates bit by bit through
the efforts of individual firms to design and construct more efficient machines and
factories in their investment activities. It is assumed that certain useful knowledge
created by a firm sooner or later becomes usable by other firms despite the firm’s
efforts to prevent other firms from using it. According to Romer, an inherent
characteristic of ideas or such knowledge is that they are non-rivalrous. But they vary
substantially in their degree of excludability. Excludability indicates the degree to
which a good is excludable, i.e. the degree to which the owner of the good can charge a
fee for its use.

As discussed earlier, non rivalrous goods that are essentially non-excludable are called
public goods. On the contrary, a rivalrous good must be produced each time they are
sold; goods that are non-rivalrous need to be produced only once. That is non-
rivalrous goods such as ideas involve a fixed cost of production and zero marginal cost.
An example is Thomas Edison and his lab to produce the first commercially viable
electric light. Additional lights could be produced at a much lower per-unit cost. Once
13
Economics of Education the product is developed, each additional unit is produced with increasing returns to
scale under imperfect competition.

This process can be viewed as production with a fixed cost and a constant marginal
cost, which exhibits increasing returns to scale (see Figure 1.4). Ideas are very
different from other economic goods. Ideas are non-rivalrous and also non-excludable
after some time at least in the medium term. Once an idea is invented, it can be used
by one person or by one thousand people, at no additional cost. That the size of the
economy–its scale–plays an important role in the economics of ideas.

Increasing Imperfect
Non- returns competition
Ideas rival

Figure 1.4: The process in endogenous growth

In particular, the non rivalry of ideas implies that production will be characterized by
increasing returns to scale. In turn, the presences of increasing returns suggest that we
must move away from models of perfect competition. It is because the inventor
expects to be able to charge a price greater than marginal cost and earn profits.

It is important to understand that the technical progress in machines and equipments

is embodied, whereas in labour it is disembodied. In the production function of goods
and services, the constant returns to scale operate, whereas in the stock of knowledge
function the increasing returns to scale operates. However, the rate of knowledge
accumulation depends upon the initial stock of knowledge. Higher the stock of
knowledge, the more one can add to it. This proposition gets accentuated under the
contemporary economic policies.

Activity 1.3

Establish the relationship between education and economic growth by briefly explaining the two
frameworks – growth accounting, and endogenous growth. Write in about 150 words in the space
given below.

14
1.6 CONTEMPORARY ECONOMIC REFORM
Conceptual Foundations

POLICIES AND THEIR EFFECTS ON

EDUCATION
Knowledge is the driving force in the rapidly changing globalised economy and
society. Quantity and quality of highly specialized human resources determine their
competence in the global market. It is now well recognized that the growth of the
global economy has increased opportunities for those countries with good levels of
education and vice versa (Carnoy, 1999; Stewart, 1996). It is also widely recognized
that to the extent globalization and macro economic reforms intensify competitive
pressures, it correspondingly de-emphasizes the redistributive strategies and push
governments away from equity-driven reforms (Bowles, 2001).

India is no exception to this global phenomenon. As a part of globalization, economic

reforms initiated in India in the beginning of 1990s consisting of structural
adjustment and stabilization policies. Further, the second generation of economic
reform policies especially the Fiscal Responsibility and Budget Management (FRBM)
Act, notified on August 2003, aims to eliminate the revenue deficit by 2008-09. With
economic reforms and other pressures of the government, higher education has been
listed as non-merit good. Following the structural adjustment policies and later the
macro economic and fiscal policies, a fiscal squeeze is experienced in all social sector
investments, which has trickled down to public expenditure on education in general,
and higher education in particular.

Economic reforms initiated in India in the beginning of 1990s consist of structural

adjustment and stabilisation policies. Following the structural adjustment policies, a
fiscal squeeze is experienced in all social sector investments, which has trickled down
to public expenditure on education in general, and higher education in particular. On
account of the cut in the budget for higher education, there are severe pressures for
the higher education system to mobilise resources from non-governmental resources.
Simultaneously, the demand for higher education has been growing rapidly with
comparatively faster growth in enrolment in higher educational institutions 1 than the
growth in number of higher educational institutions.

On account of the cut in the budget for higher education, there are severe pressures
for the higher education system to mobilize resources from non-governmental
resources. As a consequence, augmentation of resources by higher educational
institutions covering either a larger portion of cost of higher education or full cost
recovery even in public higher education institutions has become the order of the day
through introduction of self-financing courses and seats in tune with liberalisation
policies2. The emerging alternatives on various financial reforms/innovations

1
It pertains to public higher educational institutions. However, there is no comprehensive
information available on growth of private higher educational institutions and number of
students enrolled therein.
2
Certain number of students in each department pay full cost fee, while the rest of the students
pay normal (subsidised) fees. It is to be noted that the normal fee itself has been increasing,
besides the full cost fees. 15
Economics of Education including hike in student fees, student loans and privatization in public higher
education institutions along with increasing private sector participation.

1.6.1 Privatization of education

Private higher education is one of the most dynamic and the fastest-growing segments
of post-secondary education at the turn of the 21st century. A combination of
unprecedented demand for access to higher education and the inability or willingness
of governments to provide the necessary support has brought private higher education
to the forefront. Private institutions, with the long history in many countries, are
expanding in scope and number, and are increasingly important in parts of the world
that have relied on the public sector (Altbach, 1999.). This transition process in higher
education is primarily on account of the new goals, policies, and practices of neo-
liberal market principles. There has been a paradigm shift in the attitude towards the
role and efficiency of state per se and financing of any public services (including
education) in particular. India is no exception to this global transformation especially
during 1990s.

Historically, private sector participation in education in India is not a new

phenomenon. In India, over the years, there have been private initiatives in education
initially for philanthropic reasons and more intensively during 1990s, in professional
and even in general higher education not only to meet the growing demands but also
to realize the huge and quick profit potential. Such a rapid growth of private higher
education institutions is also on account of the policy changes at the macro economic
level and also at the micro or sub sectoral level, i.e. higher education. This is primarily
the impact of economic reforms initiated during the beginning of 1990s. The five
major components of the new economic policy initiated in the beginning of 1990s
include: liberalisation, globalisation, privatisation (called LGP), currency
convertibility, and reduced role of state.

These reform packages imposed a heavy compression on the public budgets on

education sector, more specifically so on higher education (see Figure 1.5). With
macro economic reforms leading to severe cuts on the education budget resulted in
several policy directions. Such policy changes have paved way to several alternatives,
including student fees, student loans and privatization in higher education. The
increased role of market is manifested by the expansion of private sector education
industry (i.e. marketisation).

16
 Conceptual Foundations

60

50

40

30

20

10

2006-07(BE)
1970-71

1975-76

1981-82

1985-86

1990-91

1995-96

2000-01

2001-02

2002-03

2003-04

2004-05
% elementary % secondary % higher others

Source: Based on Analysis of Budgetary Expenditures on Education in India

Figure 1.5: Sectoral allocation of public expenditure on education by levels of

education in India (in %)

1.6.2 Internationalization of education

Until late 1980s, education was thought to be essentially a non-traded service. Under
General Agreement on Trade and Services (GATS) in January 1995, education has
become a tradable service. Since then, internationalization of higher education gained
momentum. Internationalization of higher education is seen as one of the ways the
country responds to globalization, while maintaining the individuality of the nation.
Knight (2002) defines internationalization of higher education as the process of
integrating an international/intercultural dimension into the teaching, research and
service functions of the institutions. There are several key concepts in this definition,
e.g., the idea of internationalization being a dynamic process and not a set of isolated
activities, integration or infusion contributes to the sustainability of the international
dimension. Finally, the definition refers to the primary and universal functions of an
institution of higher education, namely teaching, research and service to the nation.

Internationalization of higher education is pursued via four modes (see Table 1). The
first important mode, Cross-Border Supply, corresponds to the normal form of trade
in goods and service which crosses the border. Cross-border supply of educational
services might grow rapidly in the future through the use of new information
technologies for distance learning (cable and satellite transmissions, audio and video
conferencing, PC software, CD-ROMs, and the Internet). In particular, the Internet is
seen as a promising tool for distance learning. A number of private companies and
universities have launched recent initiatives in this area.

17
Economics of Education Table 1.1: Main modes of international supply of educational services

Modes Explanation Examples Size of Market

1.Cross-border The provision of education of a Distance education; on- Currently a relatively
supply service where the service crosses line education; virtual small market
the border(does not require the universities Seen to have great
physical movement of the potential through the
consumer) use of ICT
2.Consumption Provision of service involving the To students who go to Currently represents
abroad movement of the consumer to another country to study the largest share of
the country of the supplier the global market for
education services
3.Commercial The service provider establishes Local branch or satellite Growing interest and
presence or has presence of commercial campuses strong potential for
facilities in another country in Twinning future growth
order to render service Partnerships Most controversial as
Franchising it appears to set
arrangements with local international rules on
institutions foreign investment
4.Presence of Persons travelling to another Professionals, Teachers, Potentially a strong
natural country on a temporary basis to researchers working market given the
persons provide service abroad emphasis on mobility
of professionals

Note: The different modes of services trade according to the GATS classification
Source: Knight (2002)

The second mode of Consumption Abroad refers to a situation where a service

consumer moves to another country to obtain the service in question (e.g. a student
who travels abroad to study). International flows of students in higher education
constitute at present by far the largest share of the global market for education
services. The third mode of Commercial Presence of educational services refers to the
commercial establishment of facilities abroad by education providers, e.g. "local
branch campuses" or partnerships with domestic educational institutions. There is a
growing interest through this mode and has a strong potential for growth. The last
mode of Presence of Natural Persons consists of a natural person (e.g. professor,
researcher, teacher etc.) travelling to another country on a temporary basis to provide
an educational service (see Table 1.1).

Under GATS, there are both conditional and unconditional obligations (see Knight,
2002). These obligations in a broader sense favor the developed nations than the
developing nations. In brief, we can say that it makes a similar platform for unequal
partners and hence poses many challenges for the developing nations. For instance in
India, many foreign universities and institutions have been allowed to come into the
country and establish franchise centers in the country, offering degrees or diplomas,
which are not necessarily recognized by the parent universities in their own countries.
The regulatory framework in developing countries is yet to be developed or even if
exists, is yet to be strengthened.

Activity 1.4

Is privatisation of education any way related to internationalization of education? In what different

ways economic reforms have affected education in recent times? Write in about 150 words in the space
given below.

18
 Conceptual Foundations

1.7 LET US SUM UP

You have learnt what is meant by Economics of Education, that it is a branch of
economics evolved during 1960s, but an area growing tremendously. You also
understood some key and basic concepts of the subject such as investment and
consumption goods; human capital verses physical capital, and public good, merit
good, etc. Further you learnt how education contributes to the economic growth under
two streams of studies – one focusing on human capital theory and the recently
developed endogenous growth theories. With this basic foundation knowledge, you
would have appreciated the contemporary economic reform policies and their effects
on education especially on privatization of education and internationalization of
education.

1.8 REFERENCES/FURTHER READINGS

Altbach, P. (Ed.) (1999). Private Prometheus: Private Higher Education and
Development in the 21st Century. USA: Boston College Center for
International Higher Education and Greenwood Publishing Co.
Arrow, Kenneth (1973). Higher Education as a Filter. Journal of Public Economics, 2,
193-216.
Becker, Gary S. (1964). Human Capital: A Theoretical and Empirical Analysis, with
Special Reference to Education. New York: Columbia University Press.
Blaug, M. (1970). An Introduction to Economics of Education. England: Penguin
Books Ltd.
Bowles, S. (2001). Globalisation versus Redistribution: Egalitarian Policies in a
Competitive World Economy, Indian Economic Review, 36(2), 315-339.
Carnoy, M. (1999). Globalisation and Educational Reform: What Planners Need to
Know. Report No.63, International Institute of Educational Planning, Paris.
Knight, Jane (2002). Trade in Higher Education Services: The Implications of GATS.
The Observatory of Borderless Higher Education, London, UK.
Mincer, J. (1974). Schooling, Experience and Earnings. New York: National Bureau of
Economic Research.
Romer, Paul M. (1994). The Origins of Endogenous Growth, Journal of Economic
Perspectives, American Economic Association, 8(1), 3-22.
Schultz, T.W. (1963). The Economic Value of Education. New York: Columbia
University Press.
19
Economics of Education Spencer, M. (1973). Job Market Signaling, Quarterly Journal of Economics, 87(3),
355-374.
Stewart, F. (1996). Globalisation and Education. International Journal of Educational
Development, 16(4), 327-33.
Stiglitz, Joseph E. (1975). The Theory of Screening, Education, and the Distribution of
Income. American Economic Review, 65(3), 283-300.

1.9 MODEL ANSWERS TO ACTIVITIES

Activity 1.1:

i) Public good is the consumption of any good provided by any public representative for consumption
by each member of the society, where such consumption by any one does not reduce the value of
consumption of the same good by another. Educational facilities provided by public authorities free
to all are enjoyed by each member of the society equally.

ii) Investment good is one which facilitates further production of goods, and is considered as
investment. Education is generally considered as investment good, i.e. higher the education higher
shall be the benefits accrued to that individual.

iii) Social good is such that it provides equal opportunity for each one to benefit from. Generally, social
goods are merit goods which provide maximum benefits to citizens over the non-merit goods.

Activity 1.2:

Both the approaches find out the economic rates of return to education. The ‘Rates of Return
Approach’ finds out to what extent the present value of expenditure of education per
student/graduate (i.e. per unit) is equal to (or more or less than) the present value of additional
learning in the whole lifetime that one will accrue due to more education – both individual rate of
return, and the social rate of return. Perception of higher rate of return leads to more demand for
education, and vice versa.

On the other hand, unlike the human capital theory which postulates that higher the education
higher is the earnings, others do believe that higher education leads to screening the best – i.e.
those who get higher knowledge and skills are better or more skilled than those with lower
education, and therefore are to earn higher earnings than the latter.

Activity 1.3:

Education is directly related to economic growth. There are two frameworks which account for
this – i) growth accounting framework, and ii) endogenous growth framework.

The growth accounting framework explains that over a period time, one may find out through
analysis of data over that period that higher the education and training higher is the average
earning per capita. In the Harrod–Domar model, given the knowledge and skill of a labour, higher
capital (input) shall lead to higher output (though this model did not take into account the increase
in skills during process of production). Alternatively, the Solow–Swan model suggests that due to
technological progress, during the process of production, the efficiency of labour increases leading
to increase in both capital input and output per worker.

On the other hand, the endogenous growth framework suggests that due to technological growth,
one can also innovate in the process of production. Once a novel idea or new innovation is
conceived by one, other only scale it up by using that idea, thereby resulting in increasing returns to
scale.

Activity 1.4:

Privatization of education refers to private participation in education induced largely by neo-liberal

market principles. Though in early stages, private participation in education was mainly due to
philanthropic reasons, of late this has been considered as an investment in education for expansion
as also to meet the growing demand for good schooling and especially professional higher
education.
20
Once GATS was promulgated in 1995, education was treated as a tradable service, and so greater Conceptual Foundations
internationalization, including cross border delivery of education, started. Internationalization is
done through four modes or mechanisms: cross border supply of education, students studying
overseas, overseas students studying in a host country, and brain drain in professions, teaching and
research.

Due to liberalization and opening up of economy, demand for especially private education has
increased; there are changes in access and equity; demand for education abroad has increased;
private and international participation in education has also increased; employment opportunities
in both in-country and overseas have increased; and there is increase in salary and standard of living
too.

21
Economics of Education

UNIT 2:
EDUCATION AS INVESTMENT
Structure
2.1 Introduction
2.2 Learning Objectives
2.3 Decision Making
2.3.1 Individual decisions
2.3.2 Institutional decisions
2.3.3 Collective decisions
2.4 Development of Human Resources
2.4.1 Human capital vs. physical capital
2.4.2 Human capital: dimensions and determinants
2.4.3 Education and human capital
2.4.4 Formation of human capital
2.4.5 Human capital formation: quantitative indicators
2.5 Education and Earning
2.5.1 Earning profiles
2.5.2 Earning differentials
2.5.3 Earning and productivity
2.6 Production Function in Education
2.6.1 The production function
2.6.2 Human capital and agricultural/industrial productivity
2.6.3 Level of education and output return
2.6.4 On-the-job training
2.7 Wastage in Education
2.7.1 Educational wastage
2.7.2 Measurement of wastage in education
2.7.3 Repetition and dropout
2.8 Effective Utilisation of Resources
2.9 Let Us Sum Up
2.10 Model Answers to Activities

2.1 INTRODUCTION
In the last Unit, we dealt with the fundamental concepts in the study of economics of
education, including the concept of investment. We defined investment as the
deployment of physical and financial resources that have alternative productive uses
in any activity. The benefits of such activities will accrue to the individual and to
society over a period of time. The benefits of investment take the form of production of
goods and services which, in effect, are treated as incomes. The use of resources for
the development of education is essentially an investment, the benefits of which
accrue to society for a relatively longer period of time. Therefore, education, in all
countries, is regarded to a large extent as a social responsibility. The task of making
provision for adequate and relevant education to suit different types and levels of
learners is, therefore, largely assumed by the Government everywhere. Obviously, a
great deal of caution has to be exercised in respect of planning and management of
physical and financial resources devoted to education.

The present Unit, broadly speaking, deals with issues related to educational
investment. We talk of issues concerning the decision making for development of
human resources and increase in earning, the production function in education and
educational wastage, effect of the latter on the investment function of education, and
22 productive utilisation of resources for education.
 Education as Investment

2.2 LEARNING OBJECTIVES

After going through this Unit, you should be able to:

 Describe the decision making processes in education.

 Outline the theory of human capital and its relationship with economic
development.
 Identify and describe the ways and means of promoting the formation of human
capital.
 Explain the external efficiency of investments in education and training, especially
its impact on productivity and earnings of educated people.
 Describe the production function in education;
 Describe such aspects of education system as wastage which impinge upon internal
efficiency of investments in education.
 Describe proper utilisation of resources for educational purposes.

2.3 DECISION MAKING

Let us start with the process of making decisions for educational investment. In order
to play a justifiable role in expediting the process of educational development, the
Government and its constituent bodies have to take a number of sound decisions, of
course, taking into account the human resources requirements of different economic
and social sectors of the country. A wide spectrum of issues which always receive the
attention of educational planners and decision makers encompass such areas as:

 public and private uses of current resources;

 public expenditure on social welfare programmes including those relating to the

promotion of economic growth and the necessary provision for such services as
education, health, housing and national defence;

 estimation of budgetary requirements of different sectors of education, like

primary, secondary, vocational, higher, general and technical education, etc.; and

 determination of the combination of a set of inputs like teachers, laboratory,

library, size of the classroom and other necessary equipment, keeping in view of
course the desired quality of educational output.

The decisions in respect of all these, however, require detailed information pertaining
to:

i) the identification of factors which have a significant bearing on the process of

educational development, and the extent to which each factor exerts its influence in
determining the course of the above process; and

ii) the alternative costs or losses which a society will have to incur if the appropriate
decision is not taken to initiate action for the promotion of education.

Obviously, such information, as noted above, which is gathered through different

means from individuals as well as institutions, forms the basis for taking decisions in
respect of planning, managing and financing of the education system. As you have 23
Economics of Education seen in Unit 1, education has both consumption and investment aspects, the benefits
of which accrue both to individuals and to society. Therefore, investment decisions
with regard to the nature, types and levels of education as well as the extent of sharing
the costs of the related educational provisions are accordingly taken by both the
individual and society. Broadly, the process of decision making can be classified under
three categories:

i) decisions made by individuals with regard to buying or obtaining education of

different kinds and levels;

ii) decisions made by institutions regarding the sale or supply of education; and

iii) collective decisions taken in the case of conflict of interests or objectives

between individuals and institutions or society.

In the following sub-sections we have discussed the different perceptions which

influence and guide the decision making processes with regard to acquisition of
knowledge, training and technical know-how.

2.3.1 Individual decisions

The investment decisions taken by individuals for buying their dependants’ education
constitute individual decisions. Individual decision making varies from person to
person and from situation to situation, because the decisions are based on the
individual’s perception of the social and economic gains. These gains are expected to
accrue to the family as a whole, after the dependant(s) receive a particular type and
level of education. For instance, if a family faces a situation in which it can either
finance all the children up to an identical level of schooling or provide financial
sustenance to some children for higher levels of schooling, the investment decision of
the head of the family in either of the above situations would be influenced by
expected gains from the alternative investment. Likewise, individual decisions in
education may pertain to the type and level of education, choice of institution and
other related aspects which are expected to yield somewhat higher returns from the
various alternative investment choices available to individuals, especially in areas
characterising purely economic activities. Obviously, for making individual decisions,
it is imperative to explore all the alternative opportunities so that sound decisions can
be taken for achieving the best possible results. It can thus be said that the individual
investors in education seek to maximise the economic returns so that the life time
earnings could be increased.

2.3.2 Institutional decisions

All investment decisions taken by either individuals, private enterprises, public
institutions or the State, with respect to the creation of necessary facilities for
providing education to all those who are eligible and seek it, are termed as
institutional decisions. Such decisions are generally subject to societal judgement and
even control in one form or another.

The distinction between institutional and individual decisions about investment in

education is that the former pertain to those decisions for which there are private or
public agents to provide education, and the latter denote those made by or for
individuals for procuring their own or their dependents’ education. There is, thus, a
24
difference in the main categories of investments made by the institutions and Education as Investment
individuals.

 A large chunk of investment by an institution is accounted for by such items as

payments of salaries to teaching and non-teaching staff, and infrastructure
facilities like buildings, equipment, library, etc.

 Investments by individuals are made in the form of payment of fees, maintenance

expenditure, and the opportunity costs or foregone earnings.

Such a distinction in the pattern of investment arises because individual decisions are
influenced by considerations of private benefit whereas institutional decisions have to
take into consideration the total impact of the decision on society and economy as a
whole.

2.3.3 Collective decisions

Unlike the individual and institutional decisions that you studied in the two sub-
sections above, the social approaches to investment in education are dominated by
considerations like the social and economic welfare of society. Societal judgement on
investment decisions in education takes into consideration the entire investment
made by individuals and private and public institutions. These societal decisions are,
therefore, reflected in the policies and programmes of the Government for educational
development. At times, situations do arise in which the choices made by individuals
and/or institutions come into direct conflict with each other and, therefore, indicate
divergent trends in human activities. These trends may satisfy the wants of the
individuals and institutions concerned but the overall expected gains for the society
may be somewhat lower. In such a situation, it becomes imperative to rectify the
diverse and heterogeneous nature of choices of investments by way of a strong societal
intervention so that the overall social gains of investments in education are maximised
without unduly affecting the individual and/or institutional options for purchasing
education.

In this context, collective choice refers to societal investment decisions which are
aimed at optimising the social rate of returns derived from investments in education.
Such an objective of optimisation is realised by way of aggregating individual as well
as institutional preferences, and reconciling the two different dimensions of individual
and societal interests and judgements through a sound method is the process of
decision making about investment in education.

Activity 2.1
Distinguish between individual and institutional decision making with regard to investment in
education.
Answer in about 100 words.

Notes: a) Space is giving below for writing your answer.

b) Compare your answer with the one given at the end of the Unit.

25
Economics of Education

2.4 DEVELOPMENT OF HUMAN

RESOURCES
The major aim of educational investment is the development of human resources or
human capital. Almost every society makes a vigorous effort for human resource
development which constitutes the ultimate basis for generating the wealth of nations.
Capital and natural resources are the passive factors of production, whereas human
beings are the active agents who accumulate capital, exploit natural resources, and
build social, economic and political organisations with a view to promoting national
development. Obviously, if a country is unable to develop the skills and knowledge of
its people and to utilise them effectively in various socio-economic activities, it would
be unable to develop anything else. It is the development of the human resources of a
nation, not its capital nor even its material resources alone, that ultimately determines
the character and pace of economic and social development vitally necessary for
enhancing the quality of the life of the people.

Let us first distinguish human capital from physical capital.

2.4.1 Human capital vs. physical capital

As you have seen in Unit 1, the term ‘investment’ refers to the expenditure on creation
of capital assets which enable a country to produce a stream of goods and services (or
income) in the future. On the other hand, the assets which generate income in the
future are called capital. Traditionally, economic analyses of investments have tended
to concentrate on physical capital, namely machinery, equipment or buildings which
have productive capacity. Until the early sixties, there was, however, no worthwhile
attempt to examine the economic aspect of education and training which is conducive
for increasing the productive capacity of the manpower resources which has a direct
relationship with that of the physical capital. Today, there is consensus among the
economists and the educationists that the effective use of physical capital in itself is
dependent upon the quality of human capital. If there is under-investment in human
capital, especially in the form of educational and health services, the rate at which
additional physical capital can the productively utilised will be limited.

The market value of human capital, unlike that of physical capital, cannot be observed,
largely owing to the lack of homogeneity in the human force. However, knowledge
and skills embedded in human capital depreciate after a certain age. ‘Depreciation’ is
defined as the negative change in capital value especially due to wear and tear. In the
case of human capital, it depends upon the age of a person while in the case of physical
capital it is the chronology of time that causes it. In other words, depreciation of
26 human capital occurs as a result of increased probabilities of death and gradual
deterioration of mental and physical capacities with increase in age. However, in Education as Investment
certain other cases like white collar jobs (i.e., office jobs), there may be ‘appreciation’
of human capital with age. Further, human capital, like physical capital, also has
‘obsolescence’, i.e., it becomes out of date over a period of time. This is so because the
usefulness of the stock of knowledge and skills changes from time to time.

Human capital, like physical capital, requires regular efforts to keep up the required
level of knowledge and maintenance of physical vigour and mental calibre. For
instance, medical care and health services are concerned with the repair and
maintenance of human capital. Unlike physical capital, it deteriorates during the
periods of idleness and unemployment which impair the skills and knowledge already
acquired. Acquisition of knowledge, like possession of physical property, requires
adequate investment of physical and financial resources, time and effort. The
expenditure on education, health and other welfare programmes help not only in
improving the quality of human resource but also in enhancing productivity.

Human capital has many peculiarities which distinguish it from physical capital.
Some of the important distinguishing features are as follows:

i) No two units of human capital are homogeneous.

ii) Human capital (the factor) and the individual (the agent) who employs it are not
repairable; in the case of physical capital it is always so.

iii) Human capital requires a longer gestation period as compared to physical

capital. The term gestation period refers to the time gap between the start and
the completion of training for a person. In the case of physical capital, it refers
to the start of investment in the building or installation of a production unit and
the period taken to complete the work of installation so that production can be
started.

iv) With the lapse of time and on-the-job experience, human capital adds to the
built-in potential of human stock.

v) Depreciation of human capital is difficult to determine as it rests on many

factors including the factor of heredity.

vi) Occupational and spatial mobility of human capital is influenced by socio-

economic factors, besides purely commercial considerations.

vii) Productivity of human capital is the function of the efficiency of the individual
as well as the resourcefulness of the firm and the country where he/she is
employed.

viii) Development of human capital is the pre-condition of the optimal utilisation of

improved technological and physical inputs, and their relationship is of a
complementary nature.

ix) Expenditure on human beings is non-transferable, its consumption and

investment components are inseparable, and it changes the economic as well as
the non-economic attributes of the individual concerned (Patel, 1969).

It is obvious from the foregoing distinguishing features of human capital that it has
many social advantages over physical capital. However, there are difficulties in
quantifying the social indicators of change and measuring the qualitative aspects of
social development in which the role of the human factor is so crucial. Therefore, it is
27
Economics of Education not easy to formulate a model approach whereby human capital could be expected to
discharge its assigned role like its counterpart, i.e., physical capital. This constitutes a
major weakness in the theory of human capital vis-à-vis the physical capital theory,
especially in the context of its role in stimulating economic and social development.

2.4.2 Human capital: dimensions and determinants

(i) Dimensions of human capital

Human beings invest in themselves to acquire more education and training, and
better health conditions which, in essence, form human capital, which has both
quantitative and qualitative dimensions.

a) By quantitative dimension we mean the number of people performing a

particular task, the proportion of people who enter into the labour force or into
gainful employment, and the number of hours devoted to completing a particular
task.

b) On the other hand, the qualitative dimension of human capital involves the
acquisition of a variety of skills, extent of knowledge, abilities and other desirable
attributes that affect human capabilities of undertaking productive work as well as
handling it efficiently with a view to maximising the outputs.

(ii) Determinants of human capital

Of the various factors that determine the human capital, the following are the most
important:

a) Education
Imparting knowledge of various types and levels like elementary, secondary and
higher knowledge – which are, by and large, formally organised – is one of the most
significant determinants of human capital. Upgrading of standards by way of ensuring
the effectiveness of the teaching and learning process and modernisation of curricula
at all stages of education, and maintaining positive links between education and the
world of work, have a significant bearing on the quality of human capital. This,
however, requires that due emphasis be laid on science, environment and value-
oriented education, which are the basic elements of the quality of human capital.

b) Health service
The nature and the extent of availability of health services have both quantity and
quality implications for human capital. Improvement in the standard of health of
people has a direct link with population growth. Modernised health services improve
life expectancy, reduce infant mortality and the incidence of diseases. All these factors
improve the possibility of sustaining physical vigour and longevity of the labour force,
and they are positively related to high life long earnings. Moreover, health services
enhance the quality of human resources by enabling them to acquire better knowledge
and benefits from the new know-how which, in turn, enhances not only the prospects
of earnings but also the quality of life enjoyed by them.

c) On-the-job training
Almost every employer makes necessary arrangements to provide in-service training
to employees as it helps the trainees to become acquainted with the efficient methods
of production based on new knowledge. For instance, in-service teacher training
28 oriented towards innovative programmes in the thrust areas, such as education of the
first generation learners – specially learners from the poor and deprived sections of Education as Investment
the community – helps in expediting the process of educational development.
Likewise, vocational and environmental education, and group specific non-formal
education oriented towards skill formation, etc. contribute to the productivity of
human capital. The costs of on-the-job training are recovered or neutralised by
improved productivity gains due to the techniques of production newly acquired by
the work force.

d) Non-formal education
Non-formal education, which is normally aimed at school dropouts, who cannot
attend full-time schools, also contributes to the formation of human capital. Industrial
workers, farm labourers and other self-employed artisans and craft persons are
generally the target groups under non-formal education programmes.

e) Extension programmes
Study programmes are organised by various institutions, firms and organisations.
They include extension programmes in agriculture and allied sectors. Such
programmes are intended to improve the performance of the labour force, who are
already on the job in different sectors of the economy, by way of transmitting new
knowledge and skills to them.

f) Housing, urban development, water supply and sanitation

In fulfilling the pre-requisite condition for sound human capital, housing ranks next
only to food and clothing in importance. A minimum standard of housing is obviously
essential for a healthy and civilised existence. Moreover, factors like urban
development, water supply and sanitation also affect the development of human
capital and the quality of the life of people.

g) Modernisation of technical education

Modernisation of and removal of obsolescence in technical education programmes
and timely facilities help in developing infrastructure for manpower training in
emerging areas which, in turn, improve the quality of the human capital.

h) Migration of workers
Migration of individuals and families to other geographical areas help them exploit the
new opportunities and equip themselves to adjust to the new environment which, in
effect, enhances the ability of human beings to gainfully exploit the economic
opportunities available.

Activity 2.2

List and describe in about 150 words the dimensions of human capital. Summarise briefly in what way
they all put together affect human capital.

Notes: a) Space is given below for writing your answer.

b) Compare your answer with the one given at the end of the Unit.

29
Economics of Education

2.4.3 Education as human capital

Of all natural creatures, it is only human beings who have the ability and capacity to
generate, disseminate and preserve knowledge and technical expertise. The
acquisition and possession of knowledge by them through the educational processes
turns them into human capital, which has a strong and positive correlation with the
ability of human beings to use knowledge as effective means to satisfy their varied
needs and wants.

Let us examine how education itself may be considered human capital that further
contributes to improved productivity.

i) First, education and training influence the ability of the labour force to perform
their jobs in a better way owing to improvement in manual skills and rational
methods of handling different types of jobs.

ii) Second inculcation of scientific temper and values improves the allocative
ability which, in essence, refers to the worker’s ability to choose the most
appropriate among the possible alternatives to reach the set objective. Such an
ability presupposes judgement, cognitive ability as well as technical know-how.

iii) Third the educational process alone can enhance the innovative ability of
human beings, which is crucial for raising productivity and increasing the level
of earnings. Though it is difficult to establish a relationship between the level of
schooling and innovative ability, it is certain that for innovations a great deal of
cognitive ability and knowledge is essential, which is acquired mainly through
the process of formal and non-formal education.

The above-mentioned three points suggest that an educated person embodies better
human capital than an uneducated one. Can you, at this stage, think of the attributes
of human capital? Some of the distinctive attributes of this capital are given below.

i) An individual’s stock of human capital cannot be sold, nor can it be given to

someone else. It goes with the individual wherever he or she may go. If an
individual were to migrate to another country, the government cannot
confiscate that person’s human capital.

ii) To take advantage of the human capital, an individual must employ it in person.

iii) The duration of the value of an individual’s human capital cannot exceed his or
her life span.

30
iv) In acquiring human capital the individual must invest some of his or her time Education as Investment
along with other resources.

v) It is productive to invest in human capital at a young age, because the value of

time is less than it is when the individual grows older.

Human capital depreciates over time as does physical capital. Some aspects of human
capital become obsolete in a short time because of changing circumstances, while
others have a long life even if the circumstances change (Schultz, 1963). Therefore,
human capital must be updated and upgraded from time to time. With the
advancement of knowledge, an individual must renovate his/her human capital. For
example, new technologies have to be studied and new advances in medicine have to
be studied by doctors.

Obviously, education and training of people affect positively most of these attributes of
human capital. This fact leads us to know more about how human capital is formed—
education is human capital!

2.4.4 Formation of human capital

The term ‘human capital formation’ refers to the level and extent of acquisition of new
knowledge, technical know-how, skills and experience by the work force. Such human
capital formation is important because the productive capacity of a country depends
not only on its endowment of industrial plants, machine tools and natural resources,
but also on the level and types of education and training embodied in its labour force.
The human capital formation is, therefore, an essential but not a sufficient condition
for accelerating the pace of development as skilled labour force, entrepreneurs,
managers and administrators are needed for the development of institutions as well as
for directing critically the needed manpower into productive channels. For instance, a
machine by itself can do nothing, but when handled by a technician it becomes
productive, and when handled by a better technician, it becomes more productive.
Thus, without the formation of better and still better human capital, it is not possible
to promote and sustain a high rate of economic growth.

Human capital formation is a time consuming and continuous process. To train a

person, for instance, as an engineer, doctor or teacher, requires a period of one and a
half to two decades. And this process is influenced by various important factors
ranging from the availability of adequate food and health facilities to on-the-job
training, through formally organised education at the elementary, secondary and
higher levels, study programmes for adults, extension programmes, etc.

There are certain factors which slow down the process of human capital formation.
Poverty, defined as deprivation of basic material needs for survival, is the major
bottleneck which hampers this process. Although all people have a creative spark that
is inborn in them, poverty and the consequent poor health, tension, anxiety, worry,
etc., can sap that creativity and, thus, impinge upon the learning abilities. Poverty
does not permit people to get nutritious food, education, recreation, etc., and
therefore, imposes restrictions on the human capital formation. Also added to this
limitation are wide-spread illiteracy, low education, status of workers, etc., that
dampen the level of the human capital formation. And if the investments in human
capital are lop-sided, unscientific notions and social factors like superstition, social
taboos, caste system, unchecked population, etc., continue to hamper this process
further. Every country, therefore, plans its educational, health and other social 31
Economics of Education services in such a way that they become conducive to expediting the process of human
capital formation.

2.4.5 Human capital formation: quantitative

indicators
Human capital constitutes the most important of all the resources, and with skilful
management and scientific planning, it can go a long way in taking a country from a
lower to a higher stage of development or from poverty to prosperity. In order to
realise the socio-economic objectives, a number of quantitative indicators are evolved
which assist in the task of assessing and evaluating the nature and degree of human
capital development. These indicators generally fall into two broad categories
(Harbison and Myers, 1964):

i) those which measure a country’s stock of human capital; and

ii) those which measure the gross or net additions to the stock or, more precisely,
the rate of growth in human capital over a specified period.

The stock of human capital indicates the level of the human resource development
which has been achieved by a country; and the rate of the human capital formation
indicates the extent of periodic improvements in such capital. Let us discuss these two
indicators in some detail.

Some of the important indicators of the stock of human capital are as follows.

a) The first indicator is the level of educational attainment, i.e. the gross number of
persons in the total population who have completed successive levels of
education, like primary, secondary and higher education. Of these levels of
education, the last two are important in indicating the stock of high-level human
resources.

b) The second indicator is the number of persons in relation to the population or

labour force, who are in high level occupations. These refer especially to the
numbers in selected strategic occupational groups such as scientists, engineers,
managers, teachers, doctors, technicians, nurses, etc.

Some of the important indicators for measuring the additions to or

improvements in the human capital stock are as follows.

a) The first indicator is the number of pupils enrolled at the primary level education
as a percentage of the estimated population, say between the age of 5 to 14, who
are supposed to attend school.

b) The second indicator includes the pupils enrolled at the secondary level of
education as a percentage of the estimated population aged 15 to 19 inclusive,
adjusted for the required length of schooling.

c) The third is the enrolment in higher levels of education for the age group 20 years
and above.

d) The fourth is the proportion of students enrolled in scientific and technical

faculties in a given year.

e) The fifth indicator is the proportion of students enrolled in faculties of

32 humanities, fine arts and law in the same year.
 Education as Investment
Activity 2.3
Describe in about 150 words how education contributes to human capital.

Notes: a) Space is given below for the writing your answer.

b) Compare your answer with the one given at the end of the Unit.

2.5 EDUCATION AND EARNING

Earning, which is an indicator justifying investment, is closely related to education
due to the fact that educated workers earn higher wages or salaries than those who are
illiterate or unskilled or have lower educational qualifications. The relationship
between education and earnings is important from the point of view of distribution of
income and wealth among a cross-section of people. In countries with feudal
characteristics, where inequality in income is generally very high, it is very difficult to
ensure the even distribution of income by way of transferring resources from the
haves to the have-nots due to the policy constraints arising from socio-political
considerations. In such situations, equalisation of educational opportunities helps the
poor and deprived sections of society to improve the levels of their educational
standards, skill and training, thereby increasing the prospects of employability, higher
earnings, etc. Education is thus used as a major instrument to ensure the even
distribution of the benefits of development among different socio-economic groups,
without taking recourse to direct transfer of income and wealth, which if attempted
might arouse the resentment of the high income groups of people.

Moreover, an idea of the nature and extent of the relationship between different types
and levels of education and the earning from different professional categories is of
crucial importance in the decision making processes, especially with regard to the
optimum and efficient allocation of resources. This is mainly because the higher level
earning reflects the higher degree of productivity of educated persons. It is, however,
important to note that apart from the education of the workers, the patterns of wages
and salaries reflect the influence of many other factors. The individual’s natural
ability, family background and other personal characteristics also determine the
pattern of the earning differentials.

33
Economics of Education
2.5.1 Earning profiles
As discussed above, the level of education that an individual possesses, in one form or
the other, is positively correlated with the amount of personal earning. Age, sex, race,
native ability, social class background, place of residence, branch of employment,
occupation, and on-the-job training are all important factors which have a significant
bearing on the earning profiles. Of these, however, the influence of the number of
years of schooling completed successfully is the most significant, which implies that
additional years spent on education raise the life-time earnings of people. We have
evidences on the earning functions and path analyses of the effects of an individual’s
background and characteristics on occupational attainment and earnings, that
indicate that a large part of the variance is explained by the index of education. The
number of years of successful education is the best predictor of the eventual
occupational status and earning of an entrant into the labour force market. Entry for a
person, who successfully completes the necessary schooling, into the sector of the
modern labour market has a higher probability of getting well-paid urban jobs than
one who does not have access to an adequate level of education.

The earning profiles of workers with different levels of education or length of

schooling share three general characteristics as given below.

i) The average earnings of all workers, both highly educated and illiterate, increase
with age up to a maximum in mid-career, and the curve then either flattens or
begins to decline.

ii) The higher the level of educational attainment, the steeper the rate of increase of
earnings and, in most cases, the higher the initial earning of workers at the start
of their working life, the higher their emoluments towards the end of their
service.

iii) The workers with higher levels of education reach their maximum earning
capacity faster, and their level of earnings at retirement is also higher, as
compared to those who are less educated.

These three characteristics suggest that, over a life-time, the total earnings of educated
workers remain considerably higher than the life-time earnings of those with very
little or no education. By and large, it has been established that the average earnings of
workers rise as they grow older until they reach their peak level of earnings between
the ages of about 40 and 55. Thereafter, the average level of earnings decline, even
though the earnings of the individuals may continue to increase till their retirement.
The average earnings of all workers decline steeply after retirement, around the age of
60 to 65.

From the foregoing discussion, it is clear that the levels of education, or the
educational qualifications of workers, influence their relative average earnings. For
instance, university graduates have consistently higher average earnings than workers
with only secondary schooling, and likewise, the latter earn more than those with only
primary, middle or elementary schooling, or the illiterate with no schooling at all.

2.5.2 Earning differentials

The income derived from the sale of the labour services is determined by a variety of
34 factors such as social, economic, political, geographical or personal traits. As it is a
psychological fact that each individual is different from another, the economic fact is Education as Investment
that the earning capacity also differs from individual to individual.

As discussed in sub-section 2.4.1 above, the differences in educational attainments

and age directly affect the earning capacity of an individual, but they are not the only
factors that influence the relative earnings.

Sometimes race and sex also play an equally important part in determining an
individual’s earning potential. In many countries, and in many industries or
occupations within countries, discrimination may exist for different reasons, which
may distort earning patterns. Research studies have shown that women generally earn
less than men, irrespective of discrimination on account of personal characteristics or
lower productivity in certain jobs. People of high castes or socio-economic
backgrounds usually have higher average earnings than others. Nevertheless, the more
educated earn more than the less educated, when race, sex and other similar factors
are constant.

Apart from race and sex, hours of work and occupational differences also affect
the average earnings of different workers. Therefore, it might be concluded that the
earning differentials are caused due to the superior natural ability, family background,
motivation, social class, access to well-paid jobs, etc. However, education and
experience with age are the major determinants of earnings.

The relevant theories that have been evolved to explain as to why differences in
earnings exist may be summarised as given below.

i) The earning differentials exist because of the differences in the nature of jobs.
Since some jobs are more dangerous in nature and involve more dissatisfaction,
the employee expects a compensating premium. Similarly, some occupations
require additional training as compared to certain others, and as a result, some
expenditure is incurred during the training period in which people generally seek
to recover in the form of higher earnings.

ii) Wage differences also exist because of the differences in individuals. If more able
people are scarce, the extra earning of the more-able is due to the limitations in
the supply of able labour.

iii) In the absence of perfect consumption, institutional factors which are susceptible
to discrimination also explain wage differentials.

2.5.3 Earning and productivity

Education has usually been considered an investment in human capital. The basic
assumption behind this is that education raises the productivity of workers, and that
the higher earnings of the educated reflect the value of their product. The most
obvious way in which education raises productivity is by imparting knowledge and
skills which make a worker more efficient, and hence more valuable in the labour
market than the less educated workers.

If earnings reflect differences in marginal productivity, then the extra earnings of the
educated measure their higher contribution to the output. The marginal productivity
of a worker is the addition to the total output which is achieved by employing one
additional (marginal) worker. In this context, the economic theory suggests that the
relative prices of goods and services and the relative wages and salaries of workers
reflect their relative scarcity, and, hence, the productivity of the workers, provided, of 35
Economics of Education course, that the market, including the labour market, is competitive. If markets are
perfectly competitive, then earnings provide a completely satisfactory measure of
productivity. However, if there exist some imperfections in the degree of competition,
the earnings will still reflect differences in productivity, provided the forces of demand
and supply ensure that scarce factors command a higher price than the plentiful
factors of production. Since highly educated workers are more scarce than the
unskilled and uneducated workers, they become costlier, and are paid more in terms
of average wages and salaries.

Activity 2.4
Answer in about 100 words in what way earning and productivity are related to each other.
Notes: a) Space is given below for writing your answer.
b) Compare your answer with the one given at the end of the Unit.

2.6 PRODUCTION FUNCTION IN

EDUCATION
Having talked about the relationship between education and productivity, let us now
look into the production function of education, i.e. the input-output relationship in an
educational system.

2.6.1 The production function

The concept of the production function is the theoretical construct employed by
economists for analysing the effectiveness of resources allocation decisions of firms or
industrial enterprises. A firm’s production possibilities are assumed to be governed by
certain technical relationships between inputs and outputs, which indicate the
maximum feasible output that can be obtained from a given set of inputs. In other
words, production function defines the boundary in the input-output relationships,
specifying the maximum output from employing the best combination of inputs.

An important concept associated with the production function is the notion of

productivity. Can you recall how we described this notion earlier in this Unit? (See
sub-section 2.5.3 above.) We defined productivity as the output obtained for the
36 resources expended, i.e. the ratio of output to input at a particular time or place. The
relationship between the total output and the total input in a particular period is Education as Investment
called average productivity, whereas the relation between incremental output
resulting from the addition of one unit of a factor of production is known as marginal
productivity. Productivity may be measured either in physical terms, i.e., physical
units of output resulting from the use of a combination of a factor or addition of a
factor to existing ones, or in terms of value productivity expressed through money
value of the products.

The production function in education is described as the process which explains the
relationship between the variety of inputs to the outputs. The list of inputs include the
size of the institution, number of staff, class size, classroom atmosphere, student-
teacher ratio, per unit instructional expenditure, number of instructional assignments
per teachers, teachers’ qualifications and experience, teachers’ salaries, verbal ability
and job satisfaction, administrative expenditure, library and science laboratory
facilities, specific vocational courses, etc. The outputs are measured by the number of
students passing a particular grade and their ability to absorb and apply knowledge in
their day-to-day activities. (The earning profile described in sub-section 2.5.1 also
indicates the quality and quantity of the output). Thus, the production function in
education can be defined as a process which transforms the fixed quantities of inputs
i.e., individuals into individuals with different qualitative attributes which are
conducive for the socio-cultural transformation and economic development.

2.6.2 Human capital and agricultural/industrial

productivity
As discussed in section 2.4, the concepts of human and physical capital are closely
interrelated. The availability of natural resources, physical capital and abundant
unskilled labour alone are not sufficient for developing a modern and highly
productive economy. A wide range of human skills and a high level of specialised
human resources are essential for the dynamics of development. In the absence of a
relatively high level of human skills, it is not possible to make the optimum use of
physical and financial resources. In order to benefit fully from the new productive
techniques that emerge from the advances in science and technology, every country
plans for competent scientists/ technicians and administrative and managerial
personnel for raising productivity in every sector of development, as the contribution
of human resources in promoting economic growth is very close to that of natural
resources. This is more so because in all the developmental matters where scientific
know-how and technology are increasingly made use of, organisational capacity,
motivation, creativity and application of knowledge play a vital role in accelerating the
pace of development. The development of human capital, therefore, is crucial for
improving efficiency and thereby raising productivity which, in turn, promotes
economic growth.

Let us discuss productivity in both agricultural and industrial sectors.

i) Agricultural sector

As far as productivity and growth in the agricultural sector are concerned, regional
variations in agricultural fields and crop responses are explained by the differences in
the quality of the individual behind the plough. It is the well trained and skilled
individual who is the central catalyst in the process of agricultural production as,
compared to other economic activities, the agricultural sector is highly labour 37
Economics of Education intensive, especially in the developing countries. It is the human being who
manipulates plants and animals to produce the food and fibers which we require; who
also take decisions in the production process especially with regard to what and when
to plant, how to plant, in what kind of soil to plant, how to cultivate the growing plant
and how to protect it against pests and diseases, when to harvest, etc.

In short, the human being is the main functionary in the process as he/she is
responsible for taking and carrying out decisions pertaining to tilling the soil,
planting, weeding, etc. Hence, an individual and his/her abilities and skills (that we
have earlier referred to as human capital) are of crucial importance for expediting the
process of agricultural development. The performance of the farm worker is reflected
by the indicators of agricultural productivity such as production per acre and per
worker.

As in the case of agricultural production, the role of human capital is also crucial for
industrial productivity.

ii) Industrial sector

Productivity and growth in the industrial sector are dependent on the availability of
material resources as well as the upgrading of human resources. The latter require the
imparting of scientific knowledge and technical know-how on a continuous basis,
because improvements in the quality of human resources help in realising the
objective of increasing the level of outputs which constitute the means for alleviating
poverty and raising the quality of the life of people. In modern times, for effective
industrial growth, what is essentially required is highly qualified human resources,
such as engineers, technicians, designers, managers and administrators so as to
ensure efficient and effective management of industrial and commercial enterprises.

In brief, human capital is positively and significantly associated with productivity in

both the sectors of agriculture and industry. It is so in all the sectors of human
enterprise.

2.6.3 Level of education and output return

You have read about the contribution of education to marginal productivity in sub-
section 2.5.3 above. There are research studies (Psacharopoulus, 1973 and 1981) that
have shown that rates of return to education and the levels of education acquired by
the human resources are positively related, though there are differences in the social
and private rates of return to education of different types and levels. While the social
rates of return are generally estimated to be higher at the lower levels of education like
the primary and elementary stage, the accrual of private benefits are relatively more
from the successively higher levels of education. It is on the basis of such evidence and
reasoning that most governments everywhere on the globe have adopted a deliberate
policy of providing free education for certain age groups of the population; for
example, up to 14 years of age in India, while the extent of subsidy (as a proportion of
total cost of education per student) is somewhat less at the higher levels of education
as compared to the lower levels. However, the rates of return to education – social and
private – differ considerably, not merely at different levels and types of education, but
also across various regions.

38
2.6.4 On-the-job training Education as Investment

On-the-job training, which has different connotations, commonly refers to organised

instruction at the work place. In a narrower sense, it implies job related training
programmes sponsored by the employer or required by an employee as a pre-
condition for promotion, even when conducted on other premises. On-the-job
training, therefore, is a process that raises future productivity and differs from
institutional training in that in the former case an investment is made on-the-job
rather than in an institution that specialises in teaching. Hence, in a broader sense the
term implies formal as well as informal training programmes in a job situation (the
latter is also experiential learning or learning by doing) which result in improvement
of the worker’s productivity.

On-the-job training is of two types: general and specific. Let us briefly discuss these
two types.

i) General training

General training is useful in many firms. For example, a mechanic trained in the army
finds his/her skills useful in steel and aircraft firms; or a doctor trained at one hospital
finds his/her skills useful in other hospitals. Most of the on-the-job training
programmes presumably increase the future additional product of workers in the firm
providing it. General training also increases the additional product in many other
firms or organisations as well. This implies that general training is also equally useful
in many firms, and there is rise in additional product more or less in the same order in
all of them. Consequently, wage rates rise in accordance with the productivity gains.
Persons receiving general training pay the cost of training as it can raise their future
wages as well as their productivity.

ii) Specific training

In contrast to general training, specific training is a kind of training which increases

productivity in a particular line of production. Obviously, it increases productivity
more in the firms that provide it. For example, some forms of training provided to
military officers like the astronauts, fighter pilots, etc. are useful to the defence sector
only. Such training schemes fall under the scope of specific training because
productivity is raised in the relevant sectors but not elsewhere. In such a case, the cost
of training is usually made available by the firms concerned.

In short, it may be said that on-the-job training – no matter whether general or

specific, whether received virtually as a part of the job at the work-place or elsewhere
– is basically a training of the active members of the labour force with the purpose of
improving productivity and career prospects at one and the same time. On-the-job
training entails investments in the human capital of men and women who have
already entered in the labour force, and these investments are oriented towards their
future in paid or self-employment.

Activity 2.5
Given below are two questions. Space is given after each question for you to write your answer.
Compare your answers with those given at the end of the Unit.

i) What is meant by productivity when applied to education?

39
Economics of Education

ii) Differentiate between average productivity and marginal productivity in about six lines.

2.7 WASTAGE IN EDUCATION

Planners of education have always expressed concern about educational wastage
caused by repetitions and dropouts. Such wastage is one of the difficulties in fulfilling
the social demand for formal education. For effective management of an educational
system, it is required that the retention rate should be improved by reducing
educational wastage while maintaining the quality of the system at reasonable input
costs. In the following sub-sections, an attempt is made to define the concept of
educational wastage, discuss the issues concerning its measurement and examine the
relationship between dropouts and repetition. Though the examples given in the sub-
sections pertain to school, where the magnitude of wastage is high, they are equally
applicable to colleges and universities where the magnitude of repetition and dropout
is comparatively lower than that at the earlier stages of education.

2.7.1 Educational wastage

Educational wastage is an economic term defined as the total number of student-years
spent by the repeaters and dropouts. A repeater is a student who, in a given school
year, remains in the same grade as in the previous year, while dropouts are those who
leave the school before the end of the final year of, or somewhere during, an
educational cycle in which they are enrolled. Wastage refers to the benefits provided to
the repeater for his/her spending extra time in school, and the benefits accruing to the
dropouts before their leaving the school. Total wastage, then, merely reflects the total
size of repetition and dropout in the flow of promotion within an educational system.
Of the two, repetition is thought to be more wasteful because repeaters:

 stay in school longer than normal duration thereby reducing the intake capacity;
and
 cause the loss of investment in educational services and increase the amount of
40 expenditure per student.
Besides, it raises inequalities as failure to get promoted at a normal pace is larger Education as Investment
among learners of rural low socio-economic background.

2.7.2 Measurement of wastage in education

While some attempts have already been made by researchers to evolve formulae for
measuring wastage, there is no foolproof method to measure it. This is so because
within school systems repetition may be due to various reasons. For instance, a
student’s migration from a rural school to an urban school before completing a
particular grade (due to the migration of parents to the urban area), and taking
admission in the same grade again in the next year in the urban school causes
repetition for the student. Sometimes, students pass a year-end examination but
repeat a grade to improve the overall score. For example, in some multi-lingual
societies repeating the first grade (Grade I) may be a prerequisite for the students to
master the language of instruction which is different from their local dialect.
Moreover, high rates of repetition in the final grade (Grade X) of secondary education
may be due to the desire on the part of the students to obtain favourable results
needed to qualify for admission to the senior secondary grade. In spite of these
problems, certain methods have been in use for measuring wastage at any given level.
One such method which has been extensively used for this purpose includes counting
the number of failures during different years from the same cohort of the students.
The formula used in India for computing the indicator of wastage at school level is as
follows:

Total optimum years

Index of wastage = 1 -
Total actual used years

where, ‘optimum years’ stands for the number of years required to complete the
prescribed course on the assumption that every student will make normal and regular
progress from year to year. The ‘actually used years’ are, however, calculated by
counting the total number of years spent in school by every student in the age-cohort
(NCERT, 1968).

The procedure described above, however, cannot be applied for quantifying the
wastage at international levels. When comparing educational wastage across nations,
a great deal of caution needs to be exercised because educational systems are not alike
structurally; and promotion policies and achievement norms differ to a great extent.

For measuring wastage across nations, a different approach has been used with
reasonable convenience and success. It consists of measuring school output by the
number of pupil years attributable to all primary schoolers (where a student who
spends one year at school is said to have spent one pupil year). We have considered
educational wastage as the total number of pupil years spent by repeaters and
dropouts, and can be converted into a percentage of the total number of pupil years
accruing to a student cohort. For example, if a student drops out after grade three
having repeated grades two and three once each, calculations would show that the
student has spent five pupil years – two as a repeater and three as a dropout.

41
Economics of Education
2.7.3 Repetition and dropout
Let us specifically distinguish between dropout and repetition. Dropout is generally
understood to note the premature withdrawal of a student from an institution before
completing the last grade of the stage of education at which he/she is studying. Thus,
every student who is withdrawn from the institution before completing, for example,
grade VII or VIII is a dropout. Whereas repetition is defined as the retention of a
student in a grade for more than one year on account of unsatisfactory progress. Thus,
if a student passes a grade in two or more years, he/she constitutes a case of
stagnation or repetition.

The tendency of students to repeat and dropout is greatly influenced by socio-

economic and educational factors. We have evidence that point out the fact that social
and economic backwardness of the family has been one of the most important causes
contributing to the phenomena of repetition and dropout. Moreover, factors like
excessive involvement of learners in domestic work, parental opposition to or
indifference towards education, and the educational status of the parents have a direct
impact on the education of learners and their performance at school. As far as
educational factors are concerned, stagnation, absence of relationship between
educational system and economic needs of the community, faulty admission policy,
lack of physical facilities, poor institutional environment, etc., are some of the
significant causes of repetition and dropout. Besides, certain miscellaneous factors
like the death of parents, poor physical standard of learners, etc., also lead to dropping
out or repetition of grades.

Activity 2.6

Describe in about 100 words how wastage in education is measured.

Notes: a) Write your answer in the space given below.

b) Compare your answer with the one given at the end of the Unit.

2.8 EFFECTIVE UTILISATION OF

RESOURCES
The allocation of resources for education must be effectively utilised to derive the
42 maximum benefit from those resources. Such resources are of three types:
 Education as Investment
i) Human resources: teaching, administration, technical and professional staff.
ii) Physical infrastructure/resources: classroom, laboratory, library,
instrumentation centre, hostel, office accommodation, etc.
iii) Financial resources: fees from students, donations, endowments, government
grants, etc.

Though effective utilisation of financial resources is usually taken into consideration,

the human and physical resources acquired through financial resources are also
equally important. Resources are deployed with the intention of achieving certain
objectives and systems to study the capacity of resources for goal achievement. Factors
like the organisation of a system, size of its operation, mechanism of finding,
timeliness of resource allocation, flexibility in deployment, and adequacy of resources
affect the efficiency of resource utilisation. An analytical framework of utilisation of
resources in education is given by Qamar (1992) while studying higher education
institutions. The framework takes into account the working of indicators of efficient
resource utilisation, ascertaining of the status of utilisation of resources and exploring
the causes of their under-utilisation. We shall discuss the indicators of the three types
of resource utilisation. It may be noted that while these indicators are broad and
suggestive, one may select indicators at micro-level depending on the objective of
analysis and the components involved in the organisation of the system under study.

Utilisation of human resources

The indicators for a study of the utilisation of human resources take into account what
different kinds of employees are expected to do, and what responsibilities are assigned
to them by the organisation. In a situation involving face-to-face classroom teaching,
the index of utilisation of teaching resources, for instance, can be studied with the
following formula:

t1 h1 d1
IT = (–––) (–––) (–––)
t0 h0 d0

where: IT = the index of utilisation of teachers as resource

t1 = the actual number of teachers reported taking their classes
t0 = the total number of teachers working with an institution
h1 = the actual number of hours teachers are generally available in the
campus
h0 = the standard number of hours teachers are expected to be available in
the campus
d1 = the actual number of days an institution conducts teaching
d0 = the standard numbers of days the institution must conduct teaching
as per the rules

While data relating t1 and h1 need to be collected from students, teachers and heads of
departments through structured questionnaires, the performance of students in
annual (and term-end) examinations expresses the effectiveness of teaching. The
effectiveness of non-teaching (library, laboratory, administration, secretarial)
resources may be studied through the following formula:
s1 d1 h1
Is = (–––) (–––) (–––)
s0 d0 h0
43
Economics of Education where: Is = the index of utilisation of a particular category of non-teaching staff
s1 = the actual number of staff reported efficient
s0 = the actual number of staff in the category of s1
(d1, d0, h1, h0 as above)

The indices of utilisation may be calculated separately for various categories of such
staff; and a final weightage may be calculated for all the indicators to suggest the
effective utilisation of human resources.

Utilisation of physical facilities and infrastructure

The optimum of utilisation of physical facilities and infrastructure like classroom,

library, laboratory, etc. may be studied by using the following formula:
ph1 h1 e1
IPH = ( )( )( )
ph0 h0 e0

where: IPH = the index of utilisation of a particular type of

physical facility or infrastructure
ph1 = the actual number or portion of the facility
being in active use
ph0 = the total number of facility available in the
educational institution
e1 = the actual number of persons making use of the
facility in a given time frame
e0 = the standard number of persons which may use
the facility in a given time frame.
(h1, h0,d1,d0 as above)

The IPH has to be calculated separately for each type of physical facility and
infrastructure available in the instituion.

Utilisation of financial resources

Financial resources have no meaning unless these are utilised to procure human and
physical resources for further utilisation. Their efficiency to procure human and
physical resources determines their effective utilisation. Three important indicators of
effective utilisation of financial resources are discussed below:

i) Allocative Efficiency: The efficiency of financial resources vis-a-vis achievement

of goals of an institution depends on how resources are allocated. The ratio or
proportion of expenditure, administrative expenditure, teachers, teaching aids,
procurement of facilities, maintenance of facilities, and the like indicates the
allocative efficiency of financial resources.

ii) Administrative Efficiency: The efficiency shown by the administration in

spending money determines the effective utilisation of financial resources.
Administrative efficiency or inefficiency is reflected through various indicators
including: over-spending, budgetary deficit, diversion, refund of funds from one
activity to the other, procedural delays, refund of funds due to inability to spend
in the stipulated time or financial year, delay in completion of tasks or projects,
and the like.

iii) Efficiency of Funding Mechanism: Every institution has its own mechanism of
generation, allocation and utilisation of financial resources. Factors such as
44
 adequacy, timeliness, objectivity and flexibility in funding mechanism determine Education as Investment
the effectiveness of utilisation of financial resources.

While the above analysis was based on the consideration of effective utilisation of
resources at the institutional level, some issues need to be addressed to and resolved
at the system or state/government level so that resources are effectively utilised for
education. Three important issues are discussed as follows (Singhal, 1992):

i) Policy Issues

The policies of the national or provincial governments largely affect the allocation
and utilisation of resources for education. Some of the policies include the
following: Whether the system of large scale public support for education should
continue or there shall be greater privatisation of educational provision (at school
or college or university level)? Whether there should be indiscriminate expansion
of regular colleges and universities (leading to at times substandard educational
provision) or education should be restricted to the selected meritorious students?
Whether there should be expansion of non-formal and distance education
provisions so as to economise educational resources? Whether the norms and
regulations for educational institutions should be framed and strictly followed so
that quality is ensured and resources are efficiently utilised? Keeping in view the
analytical findings on the rate of return, whether there should be readjustments
in inter-sectoral allocation of resources? Whether there should be regular
national academic and financial audit of institutions or should each of the
educational institutions be left free to decide for itself? Whether grants should be
linked to performance of educational institutions? These and allied issues at the
policy level affect the allocation and utilisation of resources at both national and
institutional levels.

ii) Management Issues

 The organisational climate affects considerably the utilisation of resources in

educational institutions. At the central and provincial levels, decisions have to be
made with regard to, for instance, the activities of teachers and non-teaching staff
associations which largely affect the efficient utilisation of human, infrastructure
and financial resources.

 Mechanisms of institutional evaluation affect their performance. The question

arises as to whether there should be external evaluators or self-evaluation, or
both? What reward (or even punishment) systems are adopted, based on
institutional and individual evaluations?

 The system of budget management affects the extent of utilisation of resources.

Modern techniques, viz. expenditure analysis, unit costing, and the like have been
useful in determining the cost-effectiveness of each of the items of expenditure.

 The measures undertaken in minimising and checking wastage contribute towards

the efficiency in resource utilisation. The decision as to whether institutions need
to consider further utilisation of physical and human resources during the period
when students are not on-campus. This would not only meet deficits if any, but
also facilitate institutional goals of innovation and quality enhancement.

45
Economics of Education iii) System-Level Issues

Some decisions taken at the state level, other than those concerned with policy
and management issues as discussed above, have implications for the functioning
of the educational institutions at the system and institutional level. For instance,
the staffing pattern in institutions and actual work (load) allocated to various
categories of functionaries influence institutional efficiency. Frequent transfers of
teachers adversely affect teaching. At school level, for instance, policy shift from
an emphasis on enrolments to the development of mechanisms leading to higher
retention and lower attrition contributes to an increase in efficiency in the
system.

It may be emphasized that effective and efficient utilisation of physical, human

and financial resources is the most important indicator of success of educational
systems and institutions. Efficiency in utilisation of resources is directly related
to an increase in academic standards and productivity of the educational system.

Activity 2.7
How can an educational institution effectively utilise different resources?

Notes: a) Write your answer in about 150 words in the space given below.
b) Compare your answer with the one given at the end of the Unit.

2.9 LET US SUM UP

In this Unit, you studied about decision making in education – individual and
institutional decision making as well as collective choice. Individual decisions are
made for private benefits, while institutional decisions are undertaken to provide
educational facilities to all. Collective choice is dominated purely by societal
considerations. Decisions for investment in education and training are made to
develop human resources, both quantitative and qualitative. Various factors like
education, on-the-job training, health services, non-formal education, better living
conditions, modernisation of technical education, etc. determine the quantity and
quality of human capital.
46
We have also noted that education is seen as human capital. A more educated person Education as Investment
is empowered with better human capital than a less educated one. Human capital
formation refers to acquisition of knowledge, skill, technical know-how, experience,
etc. by human beings to contribute more to the output. Therefore, a more educated
person has higher earnings than a less educated person; an additional education
increases the lifetime earnings of individuals. You also studied that, besides education,
age, sex, race, hours of work, etc. contribute to the differences in earnings.

Another important aspect of educational investment that you studied is the

production function in education. Like any production process in an industry, in
education inputs in terms of teachers, institutions, class size, teacher-student ratio,
expenditure on infrastructural facilities, etc. are invested to achieve the outputs
measured in terms of the number of students passing a particular grade and their
ability to apply whatever is learnt in day-to-day-life situations. Investment in
education and human capital formation increase both industrial and agricultural
productivity. Thus, human capital formation and productivity get curtailed by wastage
in education measured in terms of the number of years wasted by repeaters and
dropouts. Further, for deriving the maximum benefit from educational resources, such
infrastructural human and financial resources should be effectively and efficiently
utilised.

2.10 MODEL ANSWERS TO ACTIVITIES

Activity 2.1:

Both individuals and institutions make decisions with regard to investment in education. Individual
investment decisions are made to buy education for oneself or for dependents where private
benefits are the main concern. Investment in this case includes tuition fees, maintenance
expenditure and forgone earnings. On the other hand, institutional investment decisions are mainly
concerned with providing education to all for socio-economic change benefiting all the members of
society. Usual investment heads include salary to staff (teaching and non-teaching) and expenditure
on infrastructural facilities.

Activity 2.2:

Human capital has two dimensions: quantitative and qualitative. Quantitative dimension refers to
percentage of people getting employed, number of people and hours invested in doing a particular
task. Qualitative dimension refers to the qualitative aspect of human capital, viz., extent of
knowledge, skills and other attributes affecting human ability to do work efficiently and at relevant
levels of specialisation.

Activity 2.3:

The contribution of education to human capital can be seen in the difference in the quantity and
quality of output made by a less educated person and a comparatively more educated one.
Education directly contributes to the development of human capital by increasing one’s ability to
perform faster and with a qualitatively better result; inculcating scientific temper and values in the
workers so that they choose the best possible alternative to accomplishing a task, and increasing
the innovative ability of the individual and thereby raising productivity.

Activity 2.4:

Education increases the productivity of workers, and usually a more educated person receives
higher salary/earning than a less educated one. Difference in earnings reflects difference in
marginal productivity. Extra earnings of a person, therefore, reflect his/her contribution to extra
output. It should be noted in this context that earning differentials bring in difference in
productivity, provided the market is competitive in nature.
47
Economics of Education Activity 2.5:

i) Productivity refers to the ratio of output to input at a given time and place. When applied to
education, it refers to the ratio of output of the system (i.e., number of student passing a
particular grade with the ability to apply whatever they learnt on the course) to inputs (which
consist of the teacher and his/her abilities, class/school size, teacher salary, student-teacher
ratio, academic and non-academic facilities, etc.).

ii) Average productivity is the ratio of total outputs to given inputs in a particular period of time,
whereas marginal productivity refers to the relation of increase in output to a given increment
in one unit of input/factor of production.

Activity 2.6:

An extensively used method for measuring wastage in education is to count the number of failure
from the same cohort of pupils during different years and to apply the formula

total optimum years

(1 – ----------------------------- )
actually used years

Because this method poses problems for international comparison, the method of counting the
number of pupil years spent by repeaters and dropouts is used to measure educational wastage.

Activity 2.7:

Various teaching, administrative and technical staff comprising human resources can be effectively
utilised if these functionaries devote themselves to tasks by utilising fully the time allocated to
them, and by optimally utilising the potentiality of each functionary. Utilisation of physical facilities
and infrastructure can be enhanced if there is economy in utilisation of space and if these facilities
are put to use by a large number of clients. Efficiency in utilisation of financial resources can be
enhanced by ensuring efficient generation, allocation and disbursement (and actual spending) of
resources.

48
UNIT 3:
Cost Analysis in Education

COST ANALYSIS IN EDUCATION

Structure
3.1 Introduction
3.2 Learning Objectives
3.3 Different Types of Cost Analysis
3.3.1 Basic cost analysis
3.3.2 Cost-feasibility analysis
3.3.3 Cost-benefit analysis
3.3.4 Cost-effectiveness analysis
3.3.5 Cost-utility analysis
3.4 What Constitutes Cost in Education?
3.4.1 Individual or private cost
3.4.2 Institutional or public cost
3.4.3 Total or social cost
3.5 Determinants of Costs of Education
3.5.1 Private cost
3.5.2 Public cost
3.6 Unit Costs
3.6.1 Unit recurring cost
3.6.2 Unit capital cost
3.7 Cost Functions
3.8 Cost in Education: Current and Constant Prices
3.9 Let Us Sum up
3.10 Further Readings
3.11 Model Answers to Activities

3.1 INTRODUCTION
Cost analysis as an important tool for making decisions to improve the educational
systems. A competent cost analysis can contribute significantly to improved
policymaking in education, given genuine interest of the decision maker. Many
important decisions on education concern its costs. These decisions may be related to
the allocation of national resources (including the government budget) across the
levels of education, the estimation of the total cost and evaluation of financial
feasibility of education programs (such as teacher training programs, special
education programs, and alternative curricula for skill training), or the cost
effectiveness of alternative methods for promoting learning in the classroom. Hence, a
cost analysis in education encompasses a variety of needs.

In an era of increasing demand for educational resources, cost analysis in education is

useful for a number of purposes.

 To estimate the resource requirements for education such as the amount of

resources required to establish a school. The various resource requirements such
as amount required for constructing a building, other educational infrastructure
such as furniture, blackboards and number of teachers required to be employed
in relation to the expected enrolment, etc are to be worked out. Hence, the basic
cost analysis needs to come out with the norms, parameters, unit costs and the
underlying assumptions in working out the resource requirements.

49
Economics of Education  To facilitate decision making to allocate resources at macro and sub-sectoral level
of education. The macro level allocation for education or inter-sectoral allocation
indicates the allocation of resources for education in the total income of an
economy (GDP) or in the total government’s expenditures (total budget) of a
country. Sub-sectoral or intra sectoral allocation implies allocation of resources
to sub-sectors of education, that is allocation of resources to elementary,
secondary, higher and other levels of education.

 Not only for allocation but also for monitoring and improving the utilization of
resources, cost analysis is very useful. The unit cost estimates can identify the
extent of wastage of resources in the system through which utilization of
resources can be monitored and improved. This also indicates the internal
efficiency of the educational system.

 Using the cost function or the relationship between the average and marginal cost
principles along with enrolment, optimum allocation of resources can be
identified in an institutional set up.

 It helps to understand inequalities in the cost of education across regions (rural-

urban or by states and within states by districts), gender, social class, ethnicity
and income groups.

In sum, analyses of the costs of education can reveal the cost implications of an
educational policy, provide diagnosis of past cost patterns (such as the determinants
of costs and sources of variation in costs) and prognosis of future cost requirements,
and assess the relative cost-efficiency of alternative educational policies or
interventions. Cost studies in education can thus contribute to improved policymaking
in education.

In this unit, while you will be exposed to the importance of cost analysis in education
as outlined above, you will also have a comprehensive idea about various dimensions
of cost analysis including determinants of educational costs, and cost analysis and
enrolment.

3.2 LEARNING OBJECTIVES

After going through this unit, you should be able to:
 Define cost of education.
 List and describe the purposes of using different types of cost analysis in
education.
 Explain the types of cost of education.
 Identify the determinists of private and public cost of education.
 Calculate different types of unit costs.
 Explain the cost functions.
 Calculate costs in current and constant prices.

3.3 DIFFERENT TYPES OF COST ANALYSIS

3.3.1 Need for cost analysis in education
Different types of cost analysis answer different kinds of questions and use different
50 analytical techniques. Basic cost analysis is used to know how much a particular
educational program or intervention will cost. In achieving the goal of universal basic Cost Analysis in Education
education, many such estimates are worked out using the basic cost analysis. A step
ahead of basic cost analysis is to know whether the required cost could be
implemented within existing budgetary constraints. Such an analysis is known as cost-
feasibility analysis. On the other hand, if the purpose is to know about the relative
effectiveness or utility of a range of programs or interventions, cost-effectiveness, or
cost-utility analysis are desirable. The benefit-cost analysis is more appropriate for
evaluating the economic profitability of alternative investment projects. However,
each of this involves a different method for analyzing economic information, and each
has evolved from historically distinct economic traditions. For example, benefit-cost
analysis grew out of welfare intervention outcome. Cost-effectiveness analysis was
developed to help decide among various options in the provision of limited resources.
Each method of analysis makes different assumptions regarding the data (e.g.,
qualitative or quantitative) and provides very different outcome analyses (e.g.,
comparison of alternatives or the overall value of a program). Each one of them is
discussed below.

3.3.2 Basic cost analysis

It is concerned with costing several inputs that are used in education. The major tasks
here are to identify, classify, and measure the costs of various inputs to education.
Analytically, they are concerned with identifying the various inputs to educational
production and measuring the costs of these inputs. It is the most limited form of cost
analysis. This form of analysis answers questions regarding the overall cost (or
distribution of costs) of implementing a given intervention or program. Although this
form of analysis can be very helpful during the financial planning for education, it may
not be appropriate for making within- or cross-country comparisons.

3.3.3 Cost-feasibility analysis

This is a technique for costing and testing the economic feasibility of an educational
plan, measuring the start-up costs and operating costs of a major educational
intervention, and estimating the short-term and long-term cost budget feasibility of a
project. Cost-feasibility analysis is a situation-specific form of analysis that addresses
whether a given program can be successfully implemented within predefined
budgetary constraints. Although this form of analysis can be very helpful during the
financial planning phase of a project, it is not appropriate for making cross-site
comparisons. In both basic-cost analysis and cost-feasibility analysis, program or
intervention benefits are not considered.

3.3.4 Benefit-cost analysis

Benefit-cost analysis is used to determine which program or intervention provides the
greatest benefits at the lowest cost. Founded in the principles of welfare economics,
benefit-cost analysis is typically used to compare programs that may (but need not
necessarily) have different goals and program structures. All costs must be translated
into monetary terms (e.g., a dollar amount must be placed on the cost of time).
Although this form of analysis can be very helpful for making decisions regarding the
distribution of resources between two categorically different projects (e.g., road
construction vs. educational investment), it requires that all benefits and costs be
converted to monetary units. The advantage of the monetary approach to inputs is 51
Economics of Education that there can be many different types of input involved (labor, capital, rent, etc.), yet
they all can be made commensurate and aggregated using the common denominator
of money. It is best suited to address the question, which among many programs or
interventions provides the most benefits at the least monetary cost?

3.3.5 Cost-effectiveness analysis

Effectiveness is defined as performance on a single criterion variable (e.g., reading test
scores). The essential problem to be solved here is how to relate the inputs, which are
measured in dollar terms (i.e. the costs), to the outputs, which are measured in
physical units called effects. Unlike the benefit-cost analysis, outputs are specified in
physical units and hence measured in different units. Cost-effectiveness analysis is
able to determine which program or intervention provides the most effectiveness at
the least possible cost. Costs are monetary (e.g., cost of materials), but benefits can be
monetary (e.g., supplies) or non monetary (e.g., time) in nature. Although this form of
analysis can be helpful in deciding which of the two programs with similar objectives
(e.g., reading improvement) is most effective at the least cost, it generally is not used
to compare programs with multiple program objective. It is most appropriate when
comparisons are made according to a single criterion measure, such as gains in
reading achievement or mathematics scores. Because programs must be compared
according to this single criterion measure of effectiveness, cost-effectiveness technique
requires that programs being compared have similar outcome goals (Lewin, 1995).

Cost-effectiveness analysis refers to the consideration of decision alternatives in

which both their costs and consequences are taken into account in a systematic way. It
is a decision oriented tool, in that it is designed to ascertain which means of attaining
particular educational goals are most efficient. For example, there are many
alternative approaches for pursuing such goals as raising reading or mathematics
achievement. These include the adoption of new materials or curriculum, teacher
training, educational television, computer-assisted instruction, smaller class sizes, and
so on. The cost effective solution to this challenge is to ascertain the costs and effects
on reading or mathematics achievement of each alternative and to choose that
alternative which has the greatest impact on raising achievement scores for any given
resource outlay. The underlying assumption is that different alternatives are
associated with different costs and different educational results. By choosing those
with the least cost for a given outcome, a society can use its resources more effectively
(Woodhall, 2004).

3.3.6 Cost-utility analysis

In cost-utility analysis, the costs of a program are related to stakeholder perceptions of
its value. Cost-utility analysis appears rarely in educational cost studies. Cost-utility
analysis uses the concept of program utility to compare programs with different
outcome measures. Like cost-effectiveness analyses, cost-utility analyses do not limit
the definition of costs to items that can be assigned a monetary value. However, in
cost-utility analysis, unlike cost-effectiveness analysis, evaluators use the criterion of
utility to compare programs. To define operationally the criterion of utility, program
evaluators typically consult stakeholders to determine which outcome measures are
most relevant to them. Once utility is operationalised in this fashion, program
evaluators can then collect the data necessary to compare programs according to their
52
utility ratings. Although this method of estimating program “worth” is appealing Cost Analysis in Education
because it defines social validity locally, it is inherently more subjective than other
methods of cost analysis. As such, cost-utility analysis can only ask: Which program or
intervention provides the most utility at the lowest cost? Hence, cost-utility analyses
need not be cost-effective. Unlike the basic cost or cost feasibility analyses, benefit-
cost or cost-effectiveness or cost-utility analyses relate inputs to educational
outcomes, by comparing both the costs and benefits or effects of alternative
educational outcomes.

Table 3.1 illustrates the different forms of cost analysis, their purpose and outcomes.
Basic-cost and cost-feasibility analyses are best suited to answer questions about the
financial viability of a given program. While basic-cost analysis is used to describe
economic data, cost-feasibility analysis is used to make decisions about the economic
data described. For example, cost-feasibility analysis is frequently used to determine
the extent to which a program can be successfully implemented, given the existing
budgetary position in educational decision making. In contrast, basic cost analyses
seek only to describe the distributions of cost, both real and current, that are
necessary to successfully implement a given program; whereas conclusions about the
feasibility, its worth, or relative benefits of the program are determined through other
forms of cost analysis. In sum, basic cost analysis asks: How much will implementing
this program or intervention cost, and what is the distribution of those costs? And,
cost-feasibility analysis asks: Can we implement this program or intervention, given
our budgetary constraints? (See Table 3.1).

Table 3.1: Form of cost analysis, their purpose and outcomes

Form of cost analysis Purpose Outcome

Basic-cost analysis How much will implementing this program or Estimates total costs required
intervention cost, and what is the distribution of to implement a program
those costs?
Cost-feasibility analysis Can we implement this program or intervention, Assess the total costs and
given our budgetary constraints? financing of the required costs

Benefit-cost analysis Which among many programs or interventions To estimate the external
provides the most benefits at the lowest efficiency of the investment
monetary cost? made
Cost-effectiveness Which program or intervention provides the To know the internal efficiency
analysis most effectiveness (on a single criterion of the resources invested
measure) at the lowest cost?

Cost-utility analysis Which program or intervention provides the To know the internal efficiency
most utility at the lowest cost?

To summarise Table 3.1, you may note that benefit-cost analysis identifies among
many programs the one which would give the highest monetary benefit with the least
cost. Hence, it indicates the external efficiency of the education system in the labour
market. Cost-effectiveness analysis seeks to answer effectiveness of a program or
intervention at the least cost. As noted earlier, benefit-cost analysis looks at both cost
and benefit in monetary terms, but in cost-effectiveness analysis, the effectiveness is
measured in terms of educational outcomes – achievement scores, passed out
percentages, etc. This brings out the extent of internal efficiency within the
educational systems. Cost-utility analysis estimates which program or intervention
provides the highest utility given the least cost. It also brings out the internal
efficiency of the system.
53
Economics of Education Different techniques of cost analysis are used for a given purpose. In order to use any
of these cost analysis techniques, we should be clear about what do we mean by costs
in education and what are the different types of costs of education. This you will study
in the next section.

Activity 3.1

Give examples in education where each of the five types of cost analyses in education
is applied or used.

Notes: a) Space is given below for writing your answer.

b) Compare your answer with the one given at the end of the unit.

i) Basic cost-analysis:

ii) Cost-feasibility analysis:

iii) Benefit-cost analysis:

iv) Cost-effective analysis:

v) Cost-utility analysis:

3.4 WHAT CONSTITUTES COST IN

EDUCATION?
Costs of education are defined as value of all inputs that go into the process of
education (Schultz, 1963). From the viewpoint of economic analysis, the costs incurred
include both the costs incurred by the families or households and the institutions or
government. In other words, the cost of education includes not only public costs on
education but also private costs. The summation of public and private costs is the
social cost of education. Social cost represents the cost to the economy as a whole.
Each of these private and social costs can further be distinguished between direct and
indirect costs. Each one of them is explained further.

3.4.1 Private or individual cost

Private cost represents the cost to an individual. Private costs of education include
both direct monetary expenses for tuition, textbooks, and other maintenance items
and the indirect cost of students' time measured by the foregone earnings if employed
54 in the labour market. The expenditure incurred by the individual is of two types–
direct and indirect cost. The direct cost includes expenditure on admission fee, tuition Cost Analysis in Education
fees, books, stationary, examination fee, boarding and lodging for hostel students, etc.
This is the household expenditure on education or out-of-pocket expenditure on
education or direct cost. Indirect cost is incurred by the student and his/her family
implicitly. The indirect cost or invisible cost or the foregone earnings is the
opportunity cost of the child attending a school. The sum of direct and indirect costs is
referred to as individual cost of education. It consists of the following items:

 Fees consisting of tuition fee, examination fee and other fee and payments

 Other household or out-of-pocket expenditure such as books, stationary,

uniforms, transport, private coaching, boarding and lodging, etc. It is also
known as maintenance cost or living expenses.

 Opportunity cost, that is foregone earning which is hidden cost when the child
goes to school forgoing its earning in the labour market. It is also referred to as
indirect cost. Opportunity cost of a child in the age group 14-17 is the wage of the
child in the same age group in the labour market (see Box 3.1).

Box 3.1: Opportunity Costs or Foregone Earnings

Opportunity cost in education refers to the earnings foregone by a student to the

output foregone that would have been produced by the present inputs in the next
best use. In Economics, the distinction between real and money cost is important.
Real cost in Economics is said to correspond to the sacrifice of resources or
inputs needed to produce goods and services. Therefore, real cost corresponds to
opportunity cost; because, opportunity cost refers to the foregone output that
could have been produced had the input been utilized in the next best way.

3.4.2 Institutional or public cost

Costs incurred at the institutional level (government, private or mixed) are called
institutional costs or public costs of education. Public costs are those that include
financing by the government on the basis of taxes, loans and other public revenues.
The public cost on education also consists of both direct and indirect costs. The direct
public costs include non-recurring or capital or fixed cost and recurring or current or
variable cost. The non-recurring or capital cost is incurred on educational
infrastructure, such as school and college buildings, teaching-learning materials, etc.
The inherent features of fixed cost are such that:

o Fixed or non-recurring or capital cost is incurred at a point of time (e.g.

purchase of land, building, durable equipment, furniture, etc.).
o Fixed costs do not vary with a change in the enrolment.
o Fixed cost changes when scale or size of operation changes.
o For a small increase in enrolment, there is no change in fixed cost.
o Yet, fixed cost changes when the scale or size of enrolment changes.

Recurring or current or variable cost is incurred on teachers’ salaries, maintenance of

the buildings, etc. Variable or recurring or current costs are incurred every year, every
month. Variable costs vary with every change in the number of enrolment, e.g. costs
on teachers, laboratory materials, and stationary items. However, one cannot argue 55
Economics of Education that certain costs are fixed, and others are variable for all time. The scale of operation
or size of school and size of incremental changes determine whether the cost is
variable or fixed cost. For example, if the number of enrolments increases to a great
extent, not only the number of teachers has to be increased, but an additional number
of classrooms may also have to be constructed. Hence, fixed cost changes when the
scale or size of operation changes. The indirect public costs are the sums of the value
of taxes not collected on income foregone during education. The total public cost is the
sum of the direct and indirect costs.

3.4.3 Social cost

The sum of individual costs and institutional costs is the total or social costs of
education. While estimating the social costs of education, it is necessary to see that no
double counting of any item is made. If there are transfers, e.g. in terms of fees (a
transfer from the institution to the individual), it is important that social costs of
education takes into account only the net of transfers. From both the social and
private perspectives, indirect costs are the value of the student’s time, typically
measured as earnings foregone. The student’s time is a cost because a student could be
earning an income or performing other activities if he or she were not spending time
studying. As explained earlier, in economic terms, the value of the student’s time is
called an opportunity cost.

Even though indirect, the opportunity cost of time is a very important cost to be
considered. If, for example, a student studying full-time in a university course could
have been earning a salary of $6,000 per year, then the $6,000 must be counted as
part of the total cost of the student’s investment. From society’s perspective, the
opportunity cost is the before-tax foregone income. From the individual’s perspective
(or that of the individual’s family), it is the after-tax income foregone, because if the
individual had instead been working, he or she would have received only an after-tax
income, as the tax is collected by the government. This is nothing but the disposable
income. Table 3.2 summarizes the various components under private, public and
social costs of education.
Table 3.2: The private, public and social costs of education

Private Costs Public Costs Social Costs

Student Institution Society
Fees paid; transportation costs; Cost of capital goods, e.g., buildings All resources directly
books, private coaching, etc. and equipment; salaries of teachers used in the production
Direct Costs

Out-of-pocket expenses borne and other staff; cost of recurrent of education, including
by the student or student’s inputs, e.g., books, materials, etc; private and public
family. other recurrent costs such as costs.
transportation, uniforms, meals, etc.

After-tax income foregone by Taxes on income foregone during Before-tax income

Indirect Costs

1
the family, i.e., earnings schooling or before tax income foregone .
foregone. foregone.

*These are the same as private indirect costs except for taxes that would have been levied on the
student’s higher income; in other words, social indirect costs are higher than the private indirect
56 costs by the amount of taxes foregone.
The various components of private, public and social costs of education helps us to Cost Analysis in Education
estimates the total volume of costs of education. It is important to note that the cost is
influenced by factors not only within the education system but also the broader macro
economic factors and demographic conditions in a country.

Activity 3.2

Give a practical example on each of the following:

a) Direct private cost:

b) Indirect public cost:

c) Direct social cost:

3.5 DETERMINANTS OF COSTS OF

EDUCATION
The major tasks are to identify the various factors determining costs of education–
both public and private costs of education. First, the determinants of pubic cost, which
can be grouped under two heads: that factors which determine the public cost within
the education systems, and outside the education systems. Within the education
system, the public cost depends on the level and structure of the teachers' salaries; the
average pupil-teacher ratio at each level; the non-salary costs of education; and the
capital cost for buildings and other equipments. Of course, each of these factors is
themselves determined by a number of other factors like availability of funds,
teachers, student enrollment, etc. It is because of the variation in these factors that
countries or states and districts within the country differ with regard to their
educational priorities and the corresponding expenditure. Outside the education
system, the public costs gets influenced by the macro economic factors like general
income and prices, government revenue and fiscal position and more importantly the
political commitment towards prioritizing educational spending. The demographic
demand pressure is also an equally important factor. Further, the institutional factors
(such as the share of public and private educational institutions) also influence the
public cost.

Second, the determinants of private cost are at least influenced by five broad set of
factors, viz. cost factors, economic factors, demand side, supply side factors, and non- 57
Economics of Education economic factors. Cost factors include private costs of education especially fees and
other direct costs besides the opportunity costs. Opportunity cost is important as the
child has to work for wage/salary. Further the child has to participate in other
economic activities, has to look after siblings, and to attend other domestic activities.
Economic factors include the expected private benefits in the form of increased life
time earnings, the level of personal disposable income and unemployment rates.

The determinants of private cost from the demand side or direct household demand
factors are particularly dependent on a number of household characteristics such as
household size, social groups the children belong to, gender, the educational levels of
the parents, income of the household, occupation of the parents, geographic location,
etc. Supply-side factors can be discussed at three levels at the public policy or macro
level, system level and at the institutional level. Macro level factors would include
shortage of places and poor and inadequate provision of physical infrastructure (viz.
school places, the remoteness of rural schools and poor physical infrastructure).
System level factors include the governance dimension such as, incentives and penalty
to influence the performance of the schools, school governance, management
mechanism and structures including supervision and inspection, ineffective or no
teacher accountability, etc.

Within institutional level, the academic factors on the one hand and leadership and
cordial environment on the other hand influence the performance. It includes
academic oriented approach and also good institutional leadership, good
interpersonal relationship among headmaster, staff and students and team-work, etc.
All of these factors need to operate together for better performance, which indirectly
influence the private costs of education. The non-economic factors include the social,
cultural and political influences on the private demand for education and hence
determine the private cost of education.

3.6 UNIT COSTS

Unit cost in education refers to the cost per student. It is a sum of unit recurring cost
and unit capital cost. Information on unit costs are an important guide to
policymakers. Particularly important are unit costs by level of education (i.e.,
preschool, primary, secondary, tertiary), though sometimes information are also
needed for particular subjects (e.g., science or languages), for different streams (e.g.,
arts, science, commerce, etc).

3.6.1 Unit recurring cost

Unit recurring cost is the recurring cost per student or the average recurring cost.
Depending upon the purpose, a number of concepts on unit costs can be developed.
Most often, the term unit cost refers to the cost of a school place occupied by a single
student for one year. However, this definition says nothing about attendance (i.e.,
whether pupils actually occupy the spaces allocated to them). For this purpose, it is
the number of students actually attending the classes should be taken for the purpose
of calculation of unit costs and not the total number of learners on roll. Even this
definition says nothing about the quality of teaching or learning. Alternatively, unit
costs can also refer to the unit of output, i.e. successful student or graduate. This is
58 called effective unit costs of education. This type of cost calculation takes care of
wastage in education. The difference between the effective and the normal costs of Cost Analysis in Education
education reveals the internal efficiency of the given level of educational system due to
both drop-out and failure. Thus, we can calculate alternative forms of unit costs of
education. These are given as follows.

i) Normal unit cost = Total cost/Enrolment

It is the cost per pupil enrolled and widely used in planning at all levels of education.
This can be calculated by grades and levels of education and by school wise; and also
be estimated at district, state and national level. It can be estimated across space and
over time. Hence, one can compare the unit costs across countries (after converting
into comparable terms for instance in terms of purchasing power parity), states,
district or schools. One can also compare the unit costs over a period of time as well.

ii) Cost per pupil attending school = Total cost/Number of students

attending school

If there is a large gap between enrolment and attendance as found in many developing
countries including India, this cost is calculated. The difference between normal unit
cost and cost per pupil attending school indicates the wastage of resources due to
drop-outs in a grade and hence in the system. It reflects partly internal efficiency of
the system.

iii) Effective unit cost = Total cost/Number of passed out students

It is cost per successful student. It is useful for manpower planning and it relates cost
with performance. Difference between normal and effective unit cost brings out
wastage in education due to drop-outs and failure. It reveals internal efficiency of the
education system. Larger the gap, higher is the inefficiency in the system. This
indicates the extent of effective utilization of resources.

Example:

Normal and effective unit cost at elementary levels of education for the state of Tami
Nadu is estimated and reported in Table 3.3. The normal unit cost in 2003-04 at
elementary levels of education was Rs.2387. This has increased to Rs.5512 by 2007-
08. It is important to note that the unit cost has more than doubled in these five years.
Further, the divergence between the normal and effective unit cost brings out the
extent of wastage of resources on account of drop out and failure in the education
system. In the example given here wastage per student range from Rs 780 during
2007-08 to a maximum of Rs.1230 in the year 2003-04.

Table 3.3: Normal and effective unit cost in elementary education in Tamil Nadu (in Rs.)

Difference between Effective and

Nominal Unit Cost Effective Unit Cost
Normal unit cost
2003-04 2387 3617 1230
2004-05 2741 3834 1093
2005-06 3022 3925 903
2006-07 4481 5601 1120
2007-08 5512 6292 780

Source: Based on Analysis of Budgeted Expenditure on Education, Information on enrolment from SSA
office

59
Economics of Education iv) Besides these unit costs, crude methods of working out unit cost also prevail. It is
estimated in the absence of relevant information on enrolment. Cost per child of
the relevant age group for general education is given as:

= Total cost on general education/Population of the relevant age

group

v) Similarly cost per child of the relevant age group population by levels of education
can also be estimated. It is given as:

= Total cost of given level of education/Population of relevant age

group.

vi) Depending upon the purpose of coverage, cost per capita is estimated as:

Cost of education per capita = Total cost/Total population

A variety of other types of unit cost measures exist that are valuable for certain
purposes. For example, the average cost per teacher, the average cost per classroom,
the average cost per school, the average cost per course can also be calculated. As
mentioned earlier, the suitable unit to use for costing depends upon the particular
item with which we are concerned. If we are costing the number of notebooks and
textbooks needed, then the individual student is the most suitable unit because, in
these cases, cost varies in direct proportion to the number of students. Generally, unit
costs of education are calculated per year. Unit costs can be worked out as those
related to the students; those related to the teachers; and those related to various
items, such textbooks, uniforms, etc.

3.6.2 Unit capital cost

Unlike the unit recurring costs, there are problems involved in calculating capital cost,
because capital investment is made at a point of time but the benefit flows over its
lifetime. Hence, one has to be very cautious in amortizing the capital cost by
considering its net present value by depreciating or discounting the capital value of the
asset. The annualized capital cost can be worked out using the formula as

= [r(1+r)n / (1+r)n –1] *I/ E

Where r = discount rate
n= life span of the asset
I= Initial investment
E = enrolment

The value of the annualization factor can be derived from the following Table 3.4,
which can be used to estimate the annual fixed cost.

Table 3.4: Annualisation factors for determining annual fixed cost for different
periods of depreciation and interest rates

Lifetime of Assets Interest Rates (r)

n 5% 10% 15%
1 1.050 1.100 1.150
2 0.538 0.576 0.615
3 0.367 0.402 0.438
4 0.282 0.315 0.350
5 0.231 0.264 0.298
60
 6 0.197 0.230 0.264 Cost Analysis in Education
7 0.173 0.205 0.240
8 0.155 1.187 0.223
9 0.141 0.174 0.210
10 0.130 0.163 0.199
15 0.096 0.131 0.171
20 0.080 0.117 0.160
30 0.065 0.106 0.152
40 0.058 0.102 0.151
50 0.055 0.101 0.150

Source: Lewin and McEwan (2001)

Example:

Suppose the rate of discount is 10 percent, the life span of the building is 20 years,
then we get the value as 0.117. If the value of the building is Rs.2,00,000, then the
annualised fixed cost is Rs. 23,400.

Activity 3.3

Explain what do you mean by ‘unit cost’; and distinguish between unit recurring cost and unit capital
cost with suitable example.

Note: a) Write in about 150 words in the space given below.

b) Compare your answer with the one given at the end of the unit.

3.7 COST FUNCTIONS

The concept of cost functions can be used to investigate the relationship between
average and marginal costs. This analysis is useful to know whether the investment
decisions are involved a choice between different types of institutions – whether
expanding or keeping the existing system or consolidation. It may be noted that here,
we are discussing the relationship between different costs pertaining to institutional
or public costs.

Total cost (TC) is an increasing function of enrolment. This indicates that when the
enrolment increases, total cost also increases. A cost function expresses the 61
Economics of Education relationship between ‘cost’ and its determinants. As discussed earlier, several factors
influence cost. Such relationship to cost is expressed in a functional or mathematical
form. It is called cost function. Symbolically,

TC = f (E) ……………………….. (1)

where, TC = total public costs of education and E = enrolment

We already know that, total cost (TC) is the sum of total fixed cost (TFC) and total
variable cost (TVC). This we can write as:

TC =TFC+TVC ……………………….. (2)

Where, TC = total cost; TFC = total fixed cost; TVC = total variable cost.

This relationship can be illustrated in a diagram (Figure 3.1). The fixed cost remains
fixed as enrolment increases hence it is parallel to the x axis. The variable cost is an
upward sloping line starting from the origin. This indicates that when no student is
enrolled, no cost is incurred. As enrolment increases, the variable cost also increases
indicating a direct positive relation between variable cost and enrolment. The total
cost and enrolment also exhibit a positive relationship and hence an upward sloping
line. But, total cost (TC) starts from fixed cost (FC) on the y axis and not from the
origin; it is because total cost is the sum of variable and fixed costs.

TC
Cost

VC

FC

Enrolment

Figure 3.1: Relationship between fixed cost, variable cost and total cost

We already know that average cost (AC) is nothing but the unit costs or cost per
student. The AC is derived by dividing the total cost by the number of enrolments as
given in equation (3)

AC = TC/ N ……………… (3)

Where, AC= average costs, N = number of students enrolled.

Marginal Cost (MC) refers to the cost incurred on an additional student or the
additional cost attributable to an additional student. We can express it in notational
form as:

62 MCn = TCn – TCn-1 ……………… (4)

Where, MC = marginal cost, TCn = the total cost when enrolment is n, TCn-1 = the Cost Analysis in Education
total cost when enrolment is n-1.

In other words, it is an incremental cost. It may be emphasized that in cost analysis in

education, total cost and average cost are used extensively. On the other hand, the use
of marginal cost in education is limited. There exists a functional relationship between
total cost (TC), average cost (AC) and marginal cost (MC). The average cost per
student falls as student number increases as presented in Figure 3.2 and Table 3.5.

Table 3.5: Total, Average and Marginal Cost (Hypothetical Cost Function)

Number of Total Average Marginal

students Cost(TC) Cost (AC) Cost (MC)
0 0 0 0
1 300 300 --
2 410 205 110
3 528 176 118
4 660 165 132
5 795 159 135
6 950 158 155
7 1108 158 158
8 1320 165 212
9 1620 180 300
10 1950 195 330
11 2220 202 270

Whereas the rate of decline in average costs is relatively large to begin with, it quickly
falls off. Later, it rises. Average cost declines as enrolment increases up to a point and
then starts increasing, resulting in a ‘U’ shaped curve. Marginal cost (MC) is additional
cost incurred on an additional student. MC also declines as enrolment increases (but
less than AC) up to a point (where AC=MC) and then starts increasing (but higher
than AC) giving a ‘U’ shaped curve. The same is depicted through a hypothetical
example in Table 3.5 and plotted in Figure 3.2.

There are three possible relationships between average and marginal costs, which
provide valuable information to the educational planner, particularity regarding the
economies of scale and optimum size of the institution. Using this, the educational
administrator identifies whether he is using the resources at an optimal level or not.
Further it facilitates him to identify the best size of the school in order to achieve
efficiency of the resources utilized.

63
Economics of Education
350

AC/MC
300
250 DRS
IRS
200
150
`
100 E

50
0
1 2 3 4 5 6 7 8 9 10
Enrolment
AC MC

Figure 3.2: Relationship between Average and Marginal Cost and Enrolment

Analysis of the behaviour of AC and MC provides three valuable tips to educational

planners:

 Constant Returns to Scale, where AC equals MC and MC=AC remains the same
regardless of enrolments. E is the point of constant return to scale in Figure 3.2.

 Economies of Scale (Increasing Return to Scale - IRS), where AC falls due to

increase in the enrolments. It is because marginal costs are lower than average
costs as shown in the IRS portion.

 Diseconomies of scale (Decreasing Return to Scale - DRS), where AC increases

with increase in enrolment and MC is higher than AC, and therefore AC increases
as the enrolment increases as shown in Figure 3.2 as DRS.

Whether the marginal cost equals to average cost or not depends on the degree of
utilization of resources in the existing system. If there is spare or unutilized capacity,
then it would be possible to increase enrolments without incurring substantial costs.
There would be economies of scale and marginal costs would be below average costs.
If existing facilities are over crowded, however, there are diseconomies of scale, and
marginal costs may exceed average costs.

The most obvious application of cost functions involve school reorganization or

consolidation based upon scale effects. Other uses of cost functions would be in
identifying the impact of input utilisation on school costs and in funding methods by
which costs could be minimised.

3.8 COST IN EDUCATION: CURRENT AND

CONSTANT PRICES
In cost analysis of education, when examined over a period of time or in a time-series
data, it is important to convert the data in current or nominal prices to constant
prices. It is because the time series data inherently includes the inflationary changes
in an economy. Costs at constant prices take care of price-inflation and represent real
costs of education. We calculate the costs of education at constant prices so that the
64
changes in the value of money are taken into account. It is important to estimate the Cost Analysis in Education
cost in constant prices which has serious policy implications for the future cost
allocations in education. By converting the current costs into constant prices, the
influence or effect of change in the rate of change in prices or inflation is attempted to
be removed. Only when expressed in constant prices, the inter-temporal comparison
becomes meaningful.

In practice, costs at current prices can be converted into costs at constant prices, with
the help of either price or income deflators. It can be converted by deflating the values
through deflators. The widely used deflators include the following:

 Education Price Index is the most suitable deflator. But in many developing
countries including India, there is no such index constructed.

 Consumer Price Index (CPI) would be appropriate as the education budget

predominates with salary of the teachers. But there are capital goods as well
involved in the education budget. Hence, this CPI is generally not preferred.

 Wholesale Price Index (WPI) could also be used but only as the second best as
that of income deflator. However, in WPI, the education sector as such may not
be represented. Hence, we use the income deflators in the education sector.

 Use of National Income/State income deflator is the second best alternative when
there is no information available such as on Education Price Index. This is being
widely used in the education sector.

The method of converting the current expenditure into constant expenditure involves
the following two steps (see Table 3.6 for an exercise):

Step 1: Calculate income deflator as:

Income Deflator = current income/constant income

Step 2: Divide the current expenditure by income deflator. The resulting

quotient is expenditure in constant prices:

Expenditure in constant prices = Expenditure in current prices/income

deflator
Example:

How to converting cost in education from current to constant prices?

Table 3.6: Converting Cost in Education from Current to Constant Prices

(Rs. In 100 millions.)
SDP in SDP in Income Expr. on Expr. on
Current 80-81 Deflator Elem. Edn. Elem. Edn.
Prices prices =(2)/(3) in current prices in 80-81 Prices
(1) (2) (3) (4) (5) =(5)/(4)
1980-81 7218 7218 1.0 281 281
1981-82 8677 8011 1.1 323 298
1982-83 8821 7578 1.2 411 353
1983-84 10222 7988 1.3 441 345
1984-85 12028 9033 1.3 522 392
1985-86 13682 9391 1.5 646 443

Source: Analysis of Budgeted Expenditure on Education, Ministry of Human Resource Development,

New Delhi. 65
Economics of Education Note: The data on SDP (State Domestic Product) in current and constant prices are
available from Department of Economics and Statistics or economic survey of
countries; expenditure on education is available from the state education budget
document. Hence data on column 2, 3, and 5 are secondary data which are used to
convert the current cots into constant costs of education.

Activity 3.4

Establish the relation between total cost, fixed cost, and variable cost with the help of an example.

Note: a) Space is given below for writing your answer.

b) Compare your answer with the one given at the end of the unit.

3.9 LET US SUM UP

Cost analysis in education is an important technique essential for the educational
administrator for planning and utilizing the resources efficiently. In this unit, we
studied the need or usefulness of cost analysis in education. We also studied the
different types of cost analysis of education, such as basic cost analysis, cost-feasibility
analysis, cost-benefit analysis and cost effectiveness analysis and their purpose and
outcomes. We further understood what constitutes costs in education and also the
different types of costs such as private, public and social costs within which the direct
and indirect cost concepts. We identified what are the factors which determine the
private and public cost of education. Yet another important concept and method of
calculating unit costs of both unit recurring and unit capital costs are explained. We
studied the cost functions in detail using the relationship between average and
marginal cost. Finally, we also learnt to calculate costs in current and constant prices.

3.10 FURTHER READINGS

Coombs, P.H. and Jacques Hallak (1987). Cost Analysis in Education: A Tool for
Policy and Planning. Baltimore: Johns Hopkins University Press.
Lewin, H.M. (1995). Cost-effectiveness Analysis. In International Encyclopedia of
Economics of Education, 2nd ed, Ed. by Martin Carnoy, Oxford: Pergamon,
pp 381-386.
Lewin, Henry M. and Patrick J. McEwan (2001). Cost-effectiveness Analysis. 2nd
Edition: Thousand Oaks, CA: Sage Publications.
Schultz, T.W. (1963). The Economic Value of Education, New York: Columbia
University Press.
66
Tsang, Mun. C. (1997). Cost Analysis for Improved Educational Policymaking and Cost Analysis in Education
Evaluation, Educational Evaluation and Policy Analysis, 19, (4), 318-324.
Tilak, Jandhyala, B.G. (1997). Analysis of Costs of Education: Modules on
Educational Planning, Module 11, New Delhi: NIEPA.
Woodhall, M. (2004). Cost Benefit Analysis in Educational Planning. Fourth Edition.
Paris: UNESCO.

3.11 MODEL ANSWERS TO ACTIVITIES

Activity 3.1:

i) Basic cost analysis: This is utilized n developing the overall budget of a country or an institution or a
project/programme. All cost centres are put together to calculate the total cost.

ii) Cost feasibility analysis: Given that there are budgetary constraints of an organization, analysis is
done to find out what short and long term costs wil be involved, and what short and long term
benefits be accrued at what cost. For example, opening up a sports ground, and expanding to
include swimming pools, indoor games, gyms, etc.

iii) Benefit-cost analysis: This suggests which alternative should be followed so that is becomes most
beneficial. For example, to construct a huge library building with large number of study rooms, or
to subscribe to online resources and provide assess to students and teachers from department or
home.

iv) Cost-effectiveness analysis: This helps in deciding the best-alternative and the most effective way to
achieve the stipulated goals.

v) Cost-utility analysis: Instead of effectiveness, utility is the main consideration here, as perceived by
the end users or various stakeholders.

Activity 3.2:

a) Students paying for their transportation, purchase of books, private tuition.

b) The loss to the government due to foregone tax on income of the student since he/she goes for
further study instead of doing a job.

c) All costs involved in educating the citizen of a country.

Activity 3.3:

Unit cost is the cost of educating one student or one graduate. Unit recurring cost is cost incurred
(like teacher salary, computer lab cost, library cost) while teaching-learning goes on till one
completes education. Unit capital cost is expenditure incurred once which shall benefit more than
one cohort of students. For instance, money spent on sports complex shall benefit a large number
of students for coming many years.

Activity 3.4:

Total cost is the sum total of fixed cost and variable cost. For example, the total cost for one
academic session shall comprise of the total investment made/expenditure incurred on fixed costs
like central facilities, library, teachers’ salary, etc. (apportioned for that year), and total investment
on variable items like chemicals in science lab, student laptop as part of course work, etc.

67
Economics of Education
UNIT 4:
GENERATION AND UTILIZATION
OF RESOURCES
Structure
4.0 Introduction
4.1 Objectives
4.2 Resource Generation and Mobilisation
4.2.1 Generating human resources
4.2.2 Generating non-human resources
4.2.3 Generating financial resources
4.3 Problems of Educational Finance
4.4 The Process of Financing Education in the Context of
Centre-State Relations
4.4.1 Role of the government in education
4.4.2 Role of the central government in financing education
4.4.3 Role of the state governments in financing education
4.4.4 Transfer of resources through the Finance Commission
4.4.5 Transfer of resources through the erstwhile Planning Commission
4.4.6 Financing mechanisms: adequacy and efficiency
4.4.7 Equity in financing
4.5 Mobilisation and Optimum Use of Resources
4.5.1 Measures to raise additional resources
4.5.2 Measures to reduce government spending on education
4.5.3 Measures for optimising the use of non-monetary resources
4.6 Let Us Sum Up
4.7 Model Answers to Activities

4.0 INTRODUCTION
In the previous three Units, we discussed the very foundations to economics of
education– concepts of economics of education, education as investment, and cost
analysis in education. These should provide the back-drop to what you are going to
study in this unit. In this fourth Unit, we shall discuss the generation and utilisation of
resources, both human and non-human. In our discussion, resource generation and
utilisation has been considered in respect of only the government supported
institutions, which were administered and financed directly by the government or are
being controlled indirectly through grants-in-aid. Educational institutions such as
public schools, which were administered by private bodies, meet their entire expenses
from fees and do not receive any financial grant from the government. They fall out
side the purview of the unit. The four sections deal with generation and mobilisation
of different types of resources, problems of educational finance, the mechanism of
financing education in India with reference to centre-state relations, and mobilisation
and optimum use of resources for education respectively. For describing the
generation and utilisation of resources in education, we need to rely on any specific
national context – in this case, we give the example of educational structure as it exists
in India. You may relate the aspects of resources in education (as discussed in this
unit) to the situation as it obtains in your country (if you do not belong to India).

68
 Generation and Utilization
of Resources

4.1 OBJECTIVES
After going through this Unit, you should be able to:
 Describe the nature of human resources needed by education, and their generation
and mobilisation.
 Describe the nature of the process involved in the generation and mobilisation of
non-human resources (physical and financial).
 Describe the problems involved in educational finance (in India).
 Explain the sources and the status of income to and expenditure on education (in
India).
 Describe the role of the Central and the State governments in educational finance
(in India).
 State and describe the process involved in the transfer of resources from the Centre
to the State government.
 List and explain the measures involved raising additional resources for education,
and reducing government spending on education.

4.2 RESOURCE GENERATION AND

MOBILISATION
Resources for education can be categorised into two broad types: human and non-
human. In this section, let us start with describing the human resources.

4.2.1 Generating human resources

Education in a country is provided at different levels: primary through university; and
it is of several types: general, liberal vocational, technical and professional. For
providing education, different modes are available, viz. formal, non-formal, and
distance mode. For providing different types of education at different levels, a variety
of human resources are needed. These may be classified into two categories: teaching,
and non-teaching. Human resources for teaching comprise all categories of teachers,
librarians, demonstrators, laboratory/workshop assistants, etc. Human resources in
the non-teaching category consist of office superintendents, accounts officers,
secretarial staff, attendants, etc. Whereas human resources for teaching are directly
concerned with teaching-learning activities, those for non-teaching provide essential
support services. Thus, both the types of resources are important for education and
make their respective contribution to the effectiveness of any educational system.

The most important determinant of the quality of human resources is the quality of
education that one has received, which in turn depends upon the quality of the
teachers. Both the quantity and quality of teachers for teaching at different levels and
for teaching various types of courses are a function of the level of development of the
education system (especially at higher and professional stages) and of professional
training. This also depends upon the proportion of academics who are willing to adopt
teaching as a career. Their willingness is determined by a number of factors that
influence vocational choices, chief among which are the pay scales, opportunities for
career advancement, working conditions, social prestige, aptitude for teaching, etc.

69
Economics of Education The process of generating human resources is lengthy, requiring a number of years for
them to become functional. Developing countries like India which are facing the
problems of providing universal, free and compulsory education up to elementary
level, and expansion of secondary and higher education for meeting human resource
needs of the economy, cannot afford a long process of human resource development.
The problem that these countries face may be articulated as ‘how to meet the
requirements of the ever expanding education system’.

The supply of teachers can be increased by improving the efficiency of existing stock of
teachers and by raising their number. The measures to bring about these desired
changes are discussed below.

 The efficiency of teachers can be increased by training them in the methods of

teaching large classes. It can also be increased if they are trained on how to use
print and audio visual media, as substitute teachers. Examples of such media-
packages are correspondence lessons, radio lessons, educational television,
educational films, computer assisted instructions, etc. Through these media a
teacher can reach out to a large number of students who otherwise cannot receive
formal education as, for example, they live in remote areas or due to other factors
like educational backwardness.

 The supply of teachers can be increased through mobilisation and use of

community resources. In every community there are retired government servants,
army personnel, teachers, doctor, unemployed youth, and educated housewives
etc., who may be prepared to take up teaching assignments voluntarily. Their
energies can be channelised for providing education through voluntary and non-
government organisations. Community resources play a very important role in
supplementing the efforts of school teachers in providing elementary vocational
and adult education through formal and non-formal modes.

 Shortage of teachers in certain subjects such as sciences and mathematics (specify

if it is so) can be countered by recruiting persons who do not hold professional
qualifications (like B.Ed.) but posses requisite academic qualifications (like B.Sc.,
M.Sc. etc.). The appointment could, however, be made subject to the condition that
they would acquire professional qualifications through part-time/full-
time/distance learning courses, within a stipulated period. Besides this provision,
the shortage of teaches can be taken care of by appointing qualified persons to
work as guest teachers on hourly basis.

 In the case of higher education, the shortage of teachers in certain subjects is met
by appointing qualified persons as part-time teachers or guest lecturers/teachers
who are paid on hourly basis, or as ad-hoc teachers for a specific period. Some
institutions persuade their own teachers to attend classes of guest teachers for
acquiring competence in new subjects, and thereby contribute to the development
of the internal resources of the institution. However, such teachers need to be
regularized after a period of time.

4.2.2 Generating non-human resources

Non-human resources include both physical and financial resources. We shall first
70 consider generation of physical resources needed for providing education and than
 Generation and Utilization
of Resources
take up financial resources in sub-section 4.2.3. The physical resources consist of the
following:

i) Fixed capital items like land and building consisting of administrative blocks,
halls, class/lecture rooms, laboratories, library, subject specific rooms computer
room, sports room, lavatories, sports ground, hostel buildings, etc.

ii) Moveable capital items like mobile laboratory and other equipment, furniture,
books, implements and tools, teaching aids like globe, models etc., technological
educational gadgets like radio, television, telephone, overhead projector, film
projector, tape recorder, slide projector, personal computer, laptop, tablet, etc.

iii) Permanent capital installations like fittings and fixtures, fans, etc.

iv) Consumable items like power, water, writing-chalk, duster, stationary,

newspapers, magazines, etc.

Whether an item is of capital or of consumable nature depends upon the life span over
which it provides services. Those items which provide services for a short period (say
for one or less than one year) are regarded as consumable items while those which
provide services for a long period are considered to be of capital nature.

Mobilisation of physical resources

In the developing countries, physical resources of capital nature for education are
generally provided by the community. Land required for building educational
institutions is often donated by individual, religious bodies, trusts, industrialists,
village panchayats and/or government. The community, at times, contributes labour
in the form of “shramdan” (donation of free labour) to put up schools and colleges.
Some members of the community, who are financially well off, make liberal donations
towards the construction of buildings and provision of other infrastructural facilities.
Given the capacity, the extent of mobilisation of physical resources depends on the
ability of the management of the institution and the community leaders to exploit
these sources.

It may be pointed out that when education expands at a rapid pace, the community
cannot meet all the requirements out of its own sources. The Government has to
provide for them from its own revenues. In case of non-formal education, physical
resources are often provided by the community. The classes are held at homes, work
places, farms, etc. Apart from space, other physical resources, both of capital and
consumable nature, are also provided by the community.

Activity 4.1

Describe, in about 15 lines, how the supply as well as efficiency of school teachers can be increased in a
country like India or any developing country.

Notes: a) Space in given below for writing your answer.

b) Compare your answer with the one given at the end of the Unit.

71
Economics of Education

4.2.3 Generating financial resources

Financial resources, by themselves, do not make the provision of education possible
until a country has acquired both the human and physical resources. The major role of
financial resources is to mobilise human and physical resources and bring them
together for providing education. Lack of financial resources adversely affects not only
the maintenance of the existing system of education but also its development in the
country. The financial resources for education may be examined both from the point
of view of expenditure and income. Let us first consider financial resources from the
point of view of expenditure.

i) Expenditure on education

Expenditure on education can be categorised into two groups  recurring and non-
recurring, and plan and non-plan expenditure. These are discussed below.

Recurring and non-recurring expenditure

An educational institute incurs recurring and non-recurring expenditure for providing

education. Recurring expenditure is that which is incurred every year for running an
educational institution. Broadly speaking, it includes expenditure on salaries of staff,
contingencies, maintenance and repair of equipment, buildings and furniture;
expenditure on stipends, scholarships and other fee concessions, provision of mid-day
meals and school uniforms, games and sports, inspection, public examinations, hostel
charges (except mess charges) etc.; and expenditure on consumable articles used in
the teaching learning transaction.

Non-recurring expenditure is that part of educational expenditure which is other than

recurring expenditure. Broadly, it covers expenditure on purchase of land, capital
items like equipment and furniture, expenditure incurred on buildings, hostel, staff
quarters, and the purchase of books, dictionaries, encyclopaedias, etc. An idea of the
relative size of the recurring and non-recurring expenditure on the educational
institutions in India during 1983-84 is provided in Table 4.1.

Table 4.1: Expenditure by objects on all Indian educational institutions during 1983-84 (Rupees in
thousands)
Percentage
within the
category (recurr- Percentage of
ing/non-recurring) total expenditure
Amount of expenditure on education
Recurring

Salaries and allowances

of teaching and other
academic Staff 39,62,30,14 75.20 71.70

72
 Generation and Utilization
Salaries of non-teaching of Resources
staff 5,73,93,30 10.90 10.40

Maintenance of buildings 68,97,54 1.30 1.20

Maintenance of equipment
and furniture 38,00,55 0.70 0.70

Apparatus (chemical-
consumable stores) 65,62,66 1.20 1.20

Library 30,62,21 0.60 0.60

Stipends, scholarships and

other financial concessions 1,43,84,19 2.70 2.60

Games and sports 17,15,80 0.30 0.30

Hostels 24,96,67 0.50 0.50

Other items 3,44,47,95 6.60 6.20

Total (recurring) 52,69,91,11 100.00 95.40

Not-recurring

Libraries 18,43,97 7.30 0.30

Buildings 1,09,26,98 43.00 2.00

Equipment 39,78,01 15.70 0.70

Furniture 17,96,92 7.00 0.30

Other items 68,45,29 27.00 1.30

Total (non-recurring) 2,53,91,17 100.00 4.60

Grand Total 55,23,82,28 100.00

Source: Education in India, Vol.11, 1983-84.

Table 4.1 reveals that in 1983-84, 75.20 % and 10.90 % of the total recurring
expenditure was made on salaries of the teaching and the non-teaching staff
respectively, together making a total of 86.10%. Compared to recurring expenditure
on salaries, only 13.90% of the total recurring expenditure was incurred on other
items. This expenditure pattern shows the labour intensive nature of education. Table
4.1 also shows that the highest percentage of total non-recurring expenditure (i.e.,
43%) was spent on buildings, 15.70% on equipment and 27% on other items. These
data indicate that due attention was paid to the creation of infrastructural facilities for
education during that period.

Further a low percentage of recurring and non-recurring expenditure on libraries and

low recurring expenditure on games and sports reflect lack of concern for the
provision of quality education and the co-curricular activities during that period. It
may be pointed out that expenditure incurred on the creation of capital assets, though
usually very huge, forms a small percentage of the total cost of providing education.

Plan and non-plan expenditure

Financial resources of the Central and the State governments are classified into plan
resources, and non-plan resources. Plan resources refer to the expenditure incurred 73
Economics of Education on the development of educational facilities such as construction of new buildings,
recruitment of new teachers, expenditure on innovations during the period of Five
Year Plans and Annual Plans. The non-plan resources refer to expenditure incurred on
the maintenance of educational facilities and the infrastructure already created during
the Five Year Plans. Plan outlays get translated into non-plan outlays at the end of
each Five Year Plan. Thus, where the plan expenditure ends, non-plan expenditure
begins. The outlay and expenditure on education under various Five Year Plans are
given in Table 4.2.
Table 4.2: Educational outlay in the various plans
(at current prices)
Expenditure on Total Plan Expenditure on
Five Year education outlay education as % of
Plans (Rs. in millions) (Rs. in millions) total plan outlay
1 2 3 4

First Plan 1530 1,9600 7.80

Second Plan 2730 4,6000 5.90
Third Plan 5890 8,5800 6.90
Fourth Plan 7860 15,9020 4.90
Fifth Plan 9110 39,3220 2.31
Sixth Plan 25300 97,5000 2.59
Seventh Plan 76330 1,80,0000 4.24
Eight Plan 196000* 7,98,0000 2.46
(Approved)

Source: Compiled from various Five Year Plans

*Plan allocation.

Table 4.2 shows that the plan outlay on education at current prices has been rising at a
rapid rate since the First Year Plan. In the Eighth Five Year Plan, the plan expenditure
is expected to be 138 times that of the First Plan. However, when we consider
expenditure on education as a percentage of the total plan outlay, a different picture
emerges. As is evident from column 4 of Table 4.2, expenditure on education as a
percentage of the total plan outlay was the highest in the First Plan (7.80%) and the
lowest in the Fifth Plan (2.31%). It started rising marginally in the Sixth Plan (2.59%)
and is likely to be 4.60% (estimated) in the Eighth Plan. This decrease in expenditure
shows that low priority is being accorded to education generally in India.

Table 4.3 reveals that since 1950-51 the non-plan expenditure has been much higher
than the plan expenditure, and with the passage of time the difference goes on
widening. Whereas at the beginning of the First Plan (1950-51) non-plan expenditure
was 2.5 times that of the plan expenditure, by 1994-95 the former was five times the
latter.

It may be pointed out here that in a federal country like India, there exists a complex
mechanism for providing financial resources for meeting plan and non-plan
expenditure. This you will study in section 4.4 below. Before that let us look into the
sources of income for meeting the expenses incurred on education.

Table 4.3: Plan and non-plan expenditure in India

(Rs. in millions at current prices)
Year Plan expenditure Non-plan expenditure Total
1950-51 200 (28) 510 (72) 710 (100)
1960-61 900 (38) 1440 (62) 2340 (100)
1965-66 1780 (41) 2590 (59) 4370 (100)
74
 Generation and Utilization
1970-71 1150 (14) 7310 (86) 8460 (100) of Resources
1973-74 2250 (17) 10860 (83) 1,3110 (100)
1977-78 3240 (14) 19910 (86) 2,3150 (100)
1978-79 4130 (16) 22450 (84) 2,6580 (100)
1980-81 5200 (14) 32260 (86) 3,7460 (100)
1994-95 45347 (17) 226425 (83) 271772 (100)

Sources: Trends of Expenditure 1968-69 to 1978-79, New Delhi: Ministry of Education 1980, 1995
Ministry of Education, Annual Reports of various years.
Note: Figure in brackets represent percentages.

ii) Source of income for financing education

So far, we have examined financial resources for education in terms of expenditure; let
us now examine them in term of income.

A developing country like India has several sources of income for financing education,
viz., government, local bodies, university funds, fees, endowments, etc. The
government sector comprises both the Central Government and the State
Governments. The term ‘local bodies’ refers to the corporations, municipalities and
town area committees in urban areas and the zila parishad, panchayat samities and
panchyats in rural areas.

You will find from Table 4.4 that in absolute terms the contribution has been
increasing over the years. However, in relative terms the share of the Central and the
State Governments has been consistently increasing, and that from other sources has
been declining. Whereas the contribution of the government sector in 1950-51 was
57.06, it rose to 81.51% in 1983-84. On the other hand, the contribution from local
bodies, fees, endowments and other sources declined from 10.93%, 7.50% and 11.62%
to 5.61%, 7.50% and 3.80% respectively during the same period. The decline in the
contribution from these sources has placed considerable burden on the government
for financing education.

Table 4.4: Income (recurring and non-recurring of all types of educational institutions by
sources
(all India 1950-51 to 1983-84) (figures in thousands of rupees)

Endowments
Government Local body University and other
Year funds funds funds Fees sources Total
1950-51 65,2678 124,987 N.A 233,272 132,885 1143,822
(57.06) (10.93) (20.39) (11.62) (100)
1960-61 2340,914 224,914 N.A 590,258 287,714 344,801
(67.97) (6.53) (17.15) (8.35) (100)
1970-71 8459,499 484,925 152,162 1432,370 65,3905 11182,862
(75.65) ( 4.34) (1.35) (12.81) (5.85) (100)
1975-76 16523,063 N.A N.A N.A N.A 21047,030
(78.51) (100)
1980-81 30772,393 1773,291 514,312 3090,208 1516,928 37667,132
(81.70) (4,71) (1.36) (8.20) (4.03) (100)
1983-84 46443,305 3195,042 916,285 4273,312 2153,312 56981,243
(81.50) (5.60) (1.60) (7.50) (3.80) (100)

Source: Education in India volume II, 1983-84; figures in brackets show contributions as percentages.
N.A = not available

75
Economics of Education The rise in the share of the government in financing education is accounted for mainly
by three factors as given below.

a) The first is the phenomenal rise in the social demand for education after
independence, which required greater government participation in expanding
educational facilities to meet the demand.

b) The second is the adoption of developmental planning. This increased the

demand for human resources with varied skills and in turn it called for grater
government involvement in expansion of secondary, vocational, technical,
general and professional education.

c) The third is the policy of the government to bring about equality in educational
opportunity requiring heavy subsidies in education, particularly for students
belonging to S.C and S.T., weaker sections and those belonging to socially and
economically backward regions.

Local bodies play an important role in the development of primary education. The
decline in the relative contribution of local bodies, as you have seen in Table 4.4, is the
result of the inability of the State Governments to strengthen them by devolution of
the more powers to them. In comparison to municipalities in towns and municipal
corporations in metropolitan cities, the State Governments have discriminated against
Panchayati Raj institutions. Besides, where local bodies have been given powers to
administer, control and develop primary education, they have failed to mobilise
required community and fiscal resources for financing education and have been
relying mostly upon grants-in-aid from the respective State Governments.

As regards fees, the proportionate decline in this income for education is attributed to
the following factors.

a) First, according to Article 45 of the Indian Constitution, the Sate is required to

provide free and compulsory education to all children until they complete the
age of fourteen. Obviously, the government cannot charge fees from children
upto the elementary level.

b) Secondly, the State Governments have been following populist policies which
have resulted in providing free education upto the graduation level in many of
them.

c) Thirdly, wherever fees are charged, the policy of the government has been to
keep their level very low in view of the consideration of equity.

d) Last, though the cost of providing education has been rising because of inflation
and other factors, the fee structure has not been revised for many years now.

It may be emphasised that while providing grants-in-aid to an educational institution,

the governments deduct the income that the educational institution concerned
receives from fees from the total grant. Low income from fees has, therefore, increased
the burden on the governments progressively over the years.

Endowments and donations constituted an important source of income in the past. In

the beginning of the twentieth century, 25% of the total expenditure on education was
76 met through this source. The fall in income from this source is attributed partly to
 Generation and Utilization
of Resources
increased expenditures involvement in education, partly to the increased expenditure
involvement in education and partly to the failure of the educational institutions to tap
this traditional source.

Activity 4.2

Notes: a) Space is given below each question to write your answers.

b) Compare your answers with those given at the end of the Unit.

i) How may the non-human resources for education be considered? Illustrate your answer with
examples in about 100 words.

ii) Compare the recurring and non-recurring expenditure given in Table 4.1 and the plan and non-
plan expenditure given in Table 4.3. Use about 150 words to write your answer.

4.3 PROBLEMS OF EDUCATIONAL

FINANCE
There are several problems pertaining to educational finance that a federal country
like India faces.

i) The first and foremost is the inadequacy of resources in comparison to the

magnitude of the task faced at various levels of education. For example, even
after 65 years of independence, India has not been able to fulfil the constitutional
obligation of providing universal elementary education to all the children of the
relevant age group. Whereas for achieving this goal, 5 crore (50 million)
additional children had to be enrolled in the Seventh Five Year Plan, only about 77
Economics of Education 2.53 crore (25.3 million) were actively enrolled. According to 1991 census, the
number of illiterates in all the age groups is 33.60 crores (336 million) and the
overall literacy rate is only 52.11%.

As per the Fifth All-India Educational Survey (1992), among the primary schools
27.96% were single teacher schools and 32.36% were two-teacher schools. In the
States of Arunachal Pradesh, Karnataka, Jammu and Kashmir, Meghalaya and
Rajasthan, the single teacher schools constituted more than 50% of the primary
schools. As regards physical facilities, among the primary schools 7.69%, 37.79%
and 25.42% had zero one and two instructional rooms respectively. Among the
upper primary schools, 2.30% schools had no institutional room and 18% had
one or two instructional rooms.

The data presented above show the extent of the lack of various types of resources
in the educational institutions. To solve this problem it is necessary to find
alternative ways for raising additional resources.

ii) The second important problem is the inability to use the existing resources
economically/optimally. When the resources are not optimally utilised, it leads to
their wastage which in turn raises the cost of providing education per student.
The economic use of resources makes it possible to release resources for
developmental tasks and thereby brings down the demand for additional
resources for developmental purposes.

4.4 THE PROCESS OF FINANCING

EDUCATION IN THE CONTEXT OF
CENTRE-STATE RELATIONS
Before we discuss the process of financing education in the context of centre-state
relations, it would be worth-while to describe the roles of the Central Government and
the State Governments in the field of education, as envisaged in the Indian
Constitution.

4.4.1 Role of the government in education

The Seventh Schedule of the Indian Constitution has divided all the subjects under
three heads: Union list, State list, and Concurrent list. List I contains subjects falling
under the Union list; List II has subjects under the State list; and List III indicates
subjects under the Concurrent list. List II had vested the responsibility for providing
education mainly to the State Governments, subject to the provisions of entries 63, 64,
65 and 66 of List I and entry 25 of List II. The said provisions in List I mention the
functions of the Central Government in respect of education: central universities,
union agencies and institutions of national importance, institutions for professional,
vocational and technical training, and co-ordination and determination of standards
in institutions of higher education. Entry 25 of List III makes vocational and technical
education a concurrent function of both the Central and the State Governments. The
above mentioned arrangements lasted till 1975. With the 42nd Amendment of the
Constitution, education was transferred to the Concurrent list in 1976. It is worth
78 mentioning that the ‘concurrent’ status accorded to education has in no way reduced
 Generation and Utilization
of Resources
the responsibility of the State Governments. It has, however, increased the
participation of the Central Government in the development of education by providing
more central funds. Besides, the Centre can legislate on educational matters of
national importance.

4.4.2 Role of the central government in financing

education
As compared to the State Governments, the Central Government has more varied
sources of income. It, therefore, plays a major role in financing education which it
does in three ways.

i) First, it meets non-plan and plan expenditure of all the educational institutions,
organisations, etc. under its control. The central sector comprises, besides the
Union List I, the central schools, the regional colleges of education, national
scholarships and the programmes of the UGC.

ii) Secondly, it provides grants-in-aid for centrally sponsored schemes. These

schemes are formulated by the Central Government and are included in the
Centre’s Five Year Plans. The State Governments as such do not accept
responsibility for their implementation. The Centre, however, persuades the
States to implement these schemes through financial incentives in the form of
grants-in-aid which meet a larger proportion of the total expenditure of the States
on those schemes. Some examples of centrally sponsored schemes are Mass
Orientation of School Teachers (MOST) strengthening of Secondary Teacher
Education Institutions (STEls) State Councils of Educational Research and
Training (SCERTs) setting up of District Institutes of Education and Training
(DIETs), etc.

iii) Thirdly, the Central Government provides assistance for centrally-assisted

schemes. Though these schemes are included in the State plans, the Centre is
interested in their speedy implementation. It, therefore, provides central
assistance to the States for this purpose.

An example of centrally-assisted scheme is the enrolment of handicapped students in

the integrated schools. Though these schools are run by the State Governments, a
special grant is sanctioned to them by the Central Government (though the
Rehabilitation Council of India) as a priority educational sector for implementing the
strategies required to bring the handicapped children upto the level of the normal
children studying in the same classroom. It is to be noted that besides the Ministry of
Human Resources Development (MHRD), other Central Ministries like Health,
Defence, Labour, etc. also finance education; for instance, the Ministry of Agriculture
for agricultural education and extension, the Ministry of Health for medical education,
etc.

4.4.3 Role of the state governments in financing

education
As already stated in the sub-section 4.4.1 above, the Indian Constitution has vested the
responsibility for providing education in the State Governments. The States meet the
non-plan and plan expenditure on education at all levels. The non-plan expenditure is 79
Economics of Education met from a State’s own revenue supplemented by the financial resources passed on
from the Centre to the State through the Finance Commission. Generally, the States
incur non-plan expenditure on education to the tune of one fifth of their revenue in a
financial year. They meet plan expenditure for educational development from the
grants-in-aid received by them through the Planning Commission and from their own
resources. Figure 4.1 illustrates the process of transfer of financial resources from the
Central Government to the State Governments.

Finance
Commission

Shareable taxes,
Grants-in-aid of
revenue

Centre Central Centrally sponsored schemes States’

Ministries Centrally assisted schemes expenditure
on education

Planning Plan grants

Commission and loans

Figure 4.1: Mechanisms for the transfer of resources from centre to states to
finance education

Let us examine, in same detail, the transfer of resources, noted in Figure 4.1 above,
through the Finance Commission and the Planning Commission to the States.

4.4.4 Transfer of resources through the Finance

Commission
The role of the Finance Commission is very important in the Indian federal set up,
comprising of 28 States and 6 Union Territories. Article 280 of the Constitution
provides for appointment of the ‘Finance Commission as a statutory body, every five
years or earlier if necessary. So far, nine Finance Commissions have given their
awards. The tenth Finance Commission was set up in 1992 under the Chairmanship of
Sh. K.C. Pant.

Article 275 of the Constitution lays down the mechanism which the Finance
Commission follows for assessing the requirements and distribution of resources. This
is given as follows.

On the basis of the trends of the financial resources of the Central and State
Governments the Finance Commission prepares estimates of revenue and expenditure
for a specified period and decides the total amount of transfers from the Centre to the
States. This is followed by determination of separate principles/criteria of distribution
of shares of taxes and grants -in-aid among the States. These two aspects are further
discussed as under.

Tax sharing

80 Tax revenue received by the Central Government is classified into five types:
 Generation and Utilization
of Resources
i) Taxes levied and collected by the Union Government, the receipts of which “are
not” shared by the States (e.g., custom duties).

ii) Taxes levied and collected by the Union Government, the proceeds of which “are
mandated” to be shared with the States (e.g., income tax under Article 270).

iii) Taxes levied and collected by the Union Government, the receipts of which “may
be” shared with the States (e.g., Union excise duties under Article 272).

iv) Taxes levied and collected by the Union Government, the receipts of which “are
wholly transferable” to the states (e.g., estate duty, succession duties under
Article 267).

v) Taxes levied by the Union Government but “collected and used” by the States
(e.g., excise duties on medicine, toiletries, etc.).

It is clear from the above classification that proceeds from certain taxes listed at serial
nos. ii), iii), and iv), levied and collected by the Centre, are shared by the States
through the Finance Commission.

Grants-in-aid of revenue

Article 275 (1) of the Constitution provides for transfer of resources to the State
Governments through grants-in-aid of revenue. These grants are given to those States
which generally need financial assistance. The Finance Commission identifies the
States that would be requiring assistance for the period of the award and also the
amount of such assistance in each case.

Thus there are two channels through which the Finance Commission makes statutory
transfer of funds to the states  the tax receipts and grants-in-aid revenue.

4.4.5 Transfer of resources through the erstwhile

Planning Commission
Under Article 262 of the Constitution, the Central Government set up Planning
Commission in 1950 for making grants to the States for plan purposes. The grants
made by the erstwhile Planning Commission are non-statutory.

The Planning Commission used to set objectives for development of various fields,
makes an assessment of existing resource of individual States and the country as a
whole, and formulates plan. Each State submits the plans for development to the
Planning Commission in the light of these objectives and the availability of financial
resources. Those project/plans of a State Government which are approved by the
Planning Commission are included in the relevant Five Year Plan. The Planning
Commission provides grants-in-aid for their implementation during the period of the
Plan concerned. During the first three Five Year Plans (1951-1966) and three Annual
Plans (1966-1969), there were no clear cut principles for allocation of Central
assistance for State plans. This gave the Planning Commission considerable discretion
in allocating assistance. To overcome this lacuna, the quantum of Central assistance
for State plans including those for education have been determined on the basis of
Gadgil formula which was modified for the Sixth and Seventh Five Year Plans. A
revised formula has been devised for the Eighth Five Year Plan as well. 81
Economics of Education Table 4.5 shows the original, modified and revised Gadgil formula for Central Plan
assistance to States. The provision of revised Gadgil Formula (formulated by D.R.
Gadgil, the then Deputy Chairman of the Planning Commission in 1969) applicable to
the Eighth Five Year Plan is as follows.

Table 4.5: Original, modified and revised Gadgil formula for Central Plan
assistance to states
Weightage (%)
Original formula Modified formula Revised formula
(Forth and Fifth (Sixth and Seventh
Criteria Plans) Plans) (Eighth Plan)

Population 60 60 60
Per capita income 10 20 25*
below the national
average (deviation)
Per capita tax efforts 10 10 _
Outlay on continuing 10 _ _
irrigation and power
projects

Performance 10 _ 7.50
Specific problems 10 10 7.50

Total 100 100 100

*5% be allocated to all the States on the basis of “distance”

Source: Report of the Commission on Centre-State Relations Part 1, 1988, para 10.07.04 and decisions
of the National Development Council reported in the Press.

The requirements of special category States (viz., Arunachal Pradesh, Assam,

Himachal Pradesh, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland,
Sikkim, and Tripura) are at first met from the total Central assistance. It is about 30%
of the total Central assistance for the State Plans. The remaining resources are
allocated amongst the rest of the states on the basis to the following criteria:

i) 60% on like the basis of the total population (1971 census);

ii) 20% on the basis of per capita State income to those States in which the per
capita income is below the national level;

iii) 5% on the basis of ‘Distance Method’ covering all the States. The distance is
calculated on the basis of the following method. First, the average per capita
income of all the States is calculated. Next, those are ranked in ascending order.
Lower the per capital income, higher is the distance of that State from the State
having the highest per capita income, and higher is the assistance received from
the Centre; and

iv) 7.50% on the basis of performance. The performance indicators are: (a) tax-
efforts, (b) fiscal management, and (c) progress in respect of national objectives.
Under the criterion of progress in respect of national objectives, the approved
formula covers four objectives, viz., (a) population control and maternal and
child health, (b) universalisation of primary and adult education, (c) on/time
completion of externally aided projects, and (d) land reforms. (The rest 7.50%
could be considered as miscellaneous.)

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of Resources
It is to be noted that though plan assistance to States is formula-based, yet the total
amount of such assistance to be transferred to the States each year is determined by
the Central Government.

Apart from Central assistance for the State plans, the Centre under Article 293(2)
gives loans to the States. These loans have largely been used for implementing Five
Year Plans. Thus, resources are transferred through the Planning Commission to the
States through two channels  grants-in-aid and loans.

Activity 4.3

Describe, in about 150 words, the process of transfer of resources from the Centre to the States
through the Planning Commission. Also state the revised Gadgil formula for the same.

Notes: a) Space is given below for writing your answer.

b) Compare your answer with the one given at the end of the Unit.

4.4.6 Financing mechanisms: adequacy and

efficiency
The financing mechanisms have to be looked at from the point of view of their
adequacy and also efficiency. Is the system of financing such that it enables every
sector and type of education to have adequate resources in relation to the
requirement? The generally held notion that there is scarcity of finances for education
has to be examined specifically with reference to local situation because at the local or
regional level there may or may not be scarcity. Very often in a big country like India
or big States like Uttar Pradesh it may be the case of imperfect financial management
or a case of defective financial mechanism unable to supply adequate finance.
Besides, the financing mechanism should be able to ensure efficiency in the use of
resources. All the State Governments have grants-in-aid codes, which are to be
modernised. Such modernised grants-in-aid codes will have to contain provisions to
ensure that there is efficient utilisation of available resources like teachers, equipment,
etc.

Adequacy and efficiency are inter-related. At present, due to inadequate and irrational
allocation of resource, there is a great deal of inefficiency arising out of the high rate of
drop-outs from the educational institutions. A policy of allocating adequate resources,
on the basis of well thought out norms for every level and type of education is urgently
needed. This has to be preceded by an appropriate survey in as many schools and
colleges as possible in all parts of the country so that appropriate norms could be
evolved.
83
Economics of Education
4.4.7 Equity in financing
There are different meanings given to equity and there are different aspects of equity.
One could speak of equity in enrolment, or equity in achievement. The present method
of achieving equity through financing is by providing a large number of scholarships,
however, have both been sufficient in number or amount. Educational disparities can
be regarded as evidence of inequities. There are such disparities between rural-urban,
male-female, scheduled castes and others, as well as scheduled tribes and others. You
can notice such differences with regard to the following four aspects.

i) The first is the availability of facilities. According to the Fifth All India
Educational Survey, 1992 the position regarding the availability of schools in
1986 is given in Tables 4.6 and 4.7.
ii) The second is the utilisation of facilities. Utilisation varies from one place to the
other.
iii) The third is the efficiency in utilisation of facilities which is indicated by varying
wastage rates.
iv) And the fourth is the form of the use of facilities.

Table 4.6: Number of various types of schools in 1986

School type Number of schools

1. Total number of Schools
(i) Total 735785
(ii) Rural areas 634719
2. Primary Schools
(i) Total 529392
(ii) Rural areas 475938
3. Upper Primary Schools
(i) Total 138687
(ii) Rural areas 112836
4. Secondary Schools
(i) Total 52208
(ii) rural areas 38720
5. Higher Secondary Schools
(i) Total 15458
(ii) Rural areas 7225

One can say that this situation suits Indian education due to the present system of
financing particularly the process of allocation of funds. There are large variations in
per student expenditure by districts, blocks and institutions. Such regional variations
arise because allocation of resources is done by the State Departments of Education
without adequately taking into account the varying regional requirements. The
answer to this appears to lie in regionalisation and decentralisation of financial
policies. Some States like Gujarat have adopted the policy of financial decentralisation
even up to the “taluqua” (block) level, and it appears to help in making the system of
financing education equitable and efficient.

Table 4.7: Percentage of habitations having schooling facilities in 1986

Habitations Percentage of the Total

1. Percentage of habitations having a Primary School/Section
(i) Within the habitation 51.36
(ii) Within 1 km. of the habitation 84.45
2. Percentage of habitations having an Upper Primary
School/Section
84 (i) Within the habitation 13.25
 Generation and Utilization
(ii) Within 3 km. of the habitation 75.80 of Resources
3. Percentage of habitations with population 300 or more
served by a Primary Schools/Section
(i) Within the habitation 76.98
(ii) Within 1 km. of the habitation 94.01
4. Percentage of habitations with population 500 or more
served by an Upper Primary School/Section
(i) Within the habitation 29.93
(ii) Within 3 km. of the habitation 84.45
5. Percentage of rural population served by Primary
School/Section
(i) Within the habitation 80.34
(ii) Within 1 km. of the habitation 94.60
6. Percentage of rural population served by Upper Primary
School Section
(i) Within the habitation 36.98
(ii) Within 3 km. of the habitation 85.39

For this purpose, there should be adequate delegation of financial powers from the
State Governments to district authorities, from district to block and from block to
institutional level. There should be delegation of financial powers and autonomy to
institutional heads who will then be able to provide necessary flexibility to financing
mechanisms at the actual operational levels.

Activity 4.4
What are the four factors indicative of equity/inequity in educational financing in India?

Notes: a) Space is given below for writing your answer.

b) Compare your answer with the one given at the end of the Unit.

4.5 MOBILISATION AND OPTIMUM USE OF

RESOURCES
You have seen in sub-section 4.2.2 that about 86% of the total expenditure is being
met through funds provided by the Government. Because of the financial constraints,
the Government is finding it very difficult to meet the ever growing plan and non-plan
expenditure on education. This calls for new workable measures for resource
mobilisation and optimum use of resources. A possible set of such measures is as
follows:

i) Measures to raise additional resources for education.

ii) Measures to reduce Government spending on education.
iii) Measures to make optimum use of non-monetary resources.

Let us discuss these three measures one by one. 85

Economics of Education
4.5.1 Measures to raise additional resources
We shall describe below three important measures for raising additional resources.

i) First, educational economists suggest that the Government should levy tax on
private firms which employ human capital who are educated and trained at
public cost. The tax should be worked out on the basis of the total volume of
human capital employed by a firm and the rate of interest required to be paid on
that capital. This proposal is based on the theory that whereas employees are
educated and trained at public cost, its benefits are reaped by private
firms/institutions. This is, however, not so in the case of public sector
undertakings. Based on the aforesaid logic are the proposals to levy tax on self-
employment persons and professionals migrating to foreign countries on
private employment. The value of the tax levied is to be calculated on the basis
of the public investment made on them.

ii) Secondly, it is suggested that additional resources for financing education,

especially the higher education, may be generated by upward revision of the fee
structure. Items of fee income include admission fee, tuition fee, laboratory fee,
games and sports fee etc. Though the tuition fee can be raised to a limited
extent, fees for other items can be raised to such a level that they meet the entire
cost of services provided. While revising the fee structure, the following
observation made in the Eighth five Year Plan document should be taken note
of :

“……the fees charged should not be exorbitant and should be supplemented by

the provision of scholarships and other financial assistance to SCs/STs and
students below the poverty line and loans to other students”.

The fee should not inhibit the students belonging to the weaker sections of the society
and the meritorious students from availing themselves of education; otherwise only
the rich will have access to it.

iii) Thirdly, additional resources for education can be raised by strengthening local
bodies through devolution of more powers by the State Governments. Strong
local bodies can mobilise financial resources by levying taxes such as
educational cess. They can also mobilise community resourcesfinancial and
non-monetaryin a much better way than the State Governments. By
strengthening these bodies, quantitative targets can be met as well as qualitative
improvements can be effected in respect of at least the primary education.

4.5.2 Measures to reduce government spending on

education
Among the measures that we may consider to reduce Governmental spending on
education are the following.

i) Privatisation of education

The Eighth Five Year Plan had mooted the proposal of involvement of voluntary
agencies and private sector participation in the opening and conduct of higher
education institutions with a view to make them self-financing. Though plausibly
86
 Generation and Utilization
of Resources
sound, this proposal required to be examined in depth from various angles. The
teachers’ bodies had a general feeling that privatisation would adversely affect the
teacher, and their service conditions. Moreover, they doubted the ability of private
organisations to fulfil the socio-economic objectives of providing education. However,
in case of primary, elementary, and adult education, the Government could involve
students, voluntary organisations, co-operatives and industries for supplementing its
efforts. These agencies considerably reduce the financial burden on the Government.
While privatisation is a reality at all levels of education in India, the most favoured
policy has been the mechanism of public-private participation (PPP).

ii) Raising institutional resources

If each educational institute raises its own resources, it will reduce its dependence on
the Government for funds. The institutions can raise resources on their own in several
ways.

a) By making efforts to revive the traditional sources of finances, i.e.,

endowments and donations: The primary and upper primary schools can raise
immense financial resources for meeting non-recurring expenditure through
community participation. Apart from it, they can also raise human and physical
resources. For the higher education, private contributions can be encouraged
by giving tax rebates to the donors.

b) By starting such courses for which students are prepared to bear the entire
cost: Courses of vocational and technical nature, which enable the learners to
acquire new skills or those which enable them to update their skills, are helpful
in the generation of institutional resources. Since such sources enhance the
productive capacity of the learners, they do not mind bearing the expenses
incurred in the process. Educational institutions should plan for such courses
and implement the plans. Incidentally, this effort will result in socially relevant
courses which we require badly at this stage of our development.

c) By providing consultancy services at a price: Some institutions can build their

resources; for example, the technical institutes in higher education can provide
consultancy services to industries on reasonable consultancy fees.

d) By allowing outside agencies/bodies to make use of infrastructure facilities of

the institutions at a price: Educational institutions can raise additional
resources by allowing individuals or organisations to make use of their
infrastructural facilities at a price during holidays and vacations. For example,
an institution may charge for the use of its building for holding Personal
Contact Programme of an Open University or a Correspondence Course
Institute or for conducting examinations by the UPSC, Banking Services Board,
etc.

e) By organising fetes, film show, etc., the educational institutes can raise funds
for financing education.

iii) Adoption of cost-effective innovations/methods

Cost-effective innovations/methods can reduce the financial burden on the

Government. As the open learning system comprising Open Universities, Distance
Education Institutions, and Open Schools can provide education at a much lower cost 87
Economics of Education per unit than the institutions of the formal system of education, this innovative system
needs to be expanded to meet the ever increasing demand for education.

There is a need to experiment with and adopt such innovations/methods that may
reduce the time of learning. One such method is Improved Pace and Content of
Learning (IPCL). It is capable of reducing the duration of learning from 500 hours to
200 hours. In view of the fact that such methods save resources, they should be
experimented with and adopted by other systems too.

4.5.3 Measures for optimising the use of non-

monetary resources
By making optimum use of non-monetary resources, it is possible to contain and even
decrease the ever rising demand for additional financial resources for education.
Some of the suggested ways for bringing this about are as follows.

i) The infrastructural facilities of educational institutions may be put to multiple

use through double or triple shift system. The morning and the day shifts may be
devoted to the provision of formal education to students (both girls and boys),
and the evening shift for providing part- time courses or non-formal education to
adult learners. Similarly, the institutional library may be used for providing
service not only to the regular students but also to part-time and non-formal
education students. It may also provide services to the community. Through
such practise, the non-recurring cost per student can be brought down.

ii) By making use of the innovative techniques of institutional planning and

management, the existing resources can be used optimally. This can considerably
reduce the recurring and non-recurring expenditure per student.

iii) By raising the student teacher ratio, it is possible to bring down the recurring
expenditure on education. According to the Fifth All India Educational Survey
(1992), the overall student-teacher ratio for the upper primary stage, the
secondary stage and the higher secondary stage were 29, 21 and 15 respectively.
There is thus a lot of scope for rising teacher-pupil ratio, with proper training for
teacher in the techniques of handling larger classes.

Activity 4.5
State the measures that can be used for:
i) raising additional resources for education; and
ii) reducing the government spending on education.

Use 100 words for writing your answer for each question.

Notes: a) Space is given below for writing your answer.

b) Compare your answer with the one given at the end of the Unit.
i)

88
 Generation and Utilization
of Resources

ii)

4.6 LET US SUM UP

In this Unit, you studied about the generation and utilisation of both human and non-
human resources for education based on India as a case. Relatively we gave more
space to the themes of the generation and the mobilisation of financial resources,
including the process of educational finance in India. You could compare this case
with the situation as obtains in any other developing country.

Within the educational system, both the teaching and non-teaching staff are required.
The generation of teaching personnel depends upon the quantity and quality of
teachers teaching at different levels, more specifically in the professional institutes.
The increasing demand for teachers can be met through various ways: teachers can be
asked to teach larger classes; print and audio-visual materials may be used to
substitute teacher functions whenever possible; and the community resource may be
mobilised and utilised for this purpose.

The non-human resources can be divided into two categories: physical and financial
resources. In case of physical resources for education, the community can be involved
in generating and mobilising such resources of capital as well as consumable nature.

The financial resources depend upon both the human and physical resources for
further utilisation, and comprise both income and expenditure. In India, there are
varied sources of income for meeting educational expenditure: government, local
bodies, university funds, fees, endowments and other sources. While in absolute
terms the financial contribution has been increasing, in relative terms there is marked
increase in the contribution made by both the Central and State governments, and a
decrease in contribution from the local bodies, fees, private endowments and other
sources. The rise in the contribution from the governments is due to: increase in the
social demand for education, policy of developmental planning, and increase subsidies
for education.
89
Economics of Education So far as expenditure is concerned, salaries and allowances of the
teaching and non-teaching staff consume a very high percentage of the recurring
expenditure, while in case of non-recurring expenditure buildings take away a sizeable
portion. You have seen that in case of expenditure on education in Five Year Plans,
the expenditure in the First Plan was the highest (i.e., 7.80%), which was reduced to
2.59% in the Sixth Plan after which an increasing trend was notice. The proposed
outlay for education in the Eighth Plan stands at 2.46% of the total plan outlay.
Among other things a disheartening feature of the expenditure over the years is the
increase in the non-plan expenditure, i.e., from 2.5 times higher than the plan
expenditure in the First Plan it increased five times in the Sixth plan.

Both the central and state governments play significant roles in financing the
education sector. The Central Government meets the plan and non-plan expenditure
of institutions under its control and provides grants-in-aid for centrally sponsored
schemes. Each State Government finances education at all levels except those noted
for the Central Government. Transfer of resources from the centre to the state
governments is made through both the Finance Commission and the Planning
Commission. The two mechanisms of ‘tax sharing’ and ‘grants-in-aid of revenue’ are
followed to share resources through the Finance Commission. The Planning
Commission, on the other hand, gives approval to the plans of the state governments
and the approved plans are included in the Five Year Plan. During the
implementation of the Five Year Plan, the Planning Commission provides grants-in-
aid to the states for the approved plans.

You have also read that additional resources can be generated by the government
levying taxes on the private firms, and increasing the fees for various courses at the
higher education stage. Besides, the government spending on education can be
reduced by measures, such as privatisation of education, raising institutional
resources, and adoption of cost effective methods.

90
 Generation and Utilization
of Resources
4.7 MODEL ANSWERS TO ACTIVITIES
Activity 4.1:
In India, there is a shortage of school teachers, especially for science subjects. With increasing student enrolment
the demand for teachers would increase. In this situation, the community as a whole can be involved to
undertake this task. For instance, retired government servants, educated housewives, etc. can be involved to
teach students on voluntary basis. Moreover, voluntary organisations can be involved to help in this task.
So far as the efficiency of the teachers is concerned this can be increased by the use of print and non-print media
(like audio, video, etc.) in the classroom. And this strategy would also partially solve the problem of the short
supply of trained teachers.
Activity 4.2:
i) Non-human resources may be classified into two types: physical and financial resources. The physical
resources include “capital items” like buildings of an educational institution (i.e., classrooms, computer room,
laboratories, libraries, hostel buildings, etc.); “movable capital items” like books, furniture, technological
educational gadgets, etc; “permanent capital institutions;” and “consumable items”. The financial resources
include both income from sources like the government, local student fees, endowments, etc., and expenditure
(recurring and non-recurring, and plan and non-plan expenditure).
ii) Table 1 suggests that for the year 1983-84 the total recurring expenditure was much higher than the total
non-recurring expenditure. Within the category of recurring expenditure the head ‘salary of academic staff’
had taken away the major chunk expenses (i.e., 75.20%) followed by the salary of non-academic staff
(10.90%). On the other hand, within the non-recurring head, the construction of buildings had the highest
share of all i.e., 43%).
In Table 3 we notice a feature that has persisted in the expenditure from 1950-51 to 1980-81; it is that the
non-plan expenditure was higher than the plan expenditure all along. Not only that, the percentage share of
non-plan expenditure also showed an increasing trend, i.e., from 72 in 1950-51 to 86 in 1980-81.
Activity 4.3:
The Planning Commission, after assessing the progress made in different fields in the State and the requirement
of further resources, formulates plans for each State. The States also submit their respective plans to the
Planning Commission which approves them after discussions and adjustments. These Plans put together
constitute the Five Years Plan(s). Till the Third Five Year Plan and the subsequent Annual Plans, the Planning
Commission had considerable discretion in the allocation of financial resources to States. But after
implementing the revised Gadgil formula, first the central assistance is provided to the special category State
(i.e., 30% of the total assistance). From the remaining resources, 60% is allocated on the basis of total
population of a State 20% to states in which per capita income is below the national level, 5% to those States
which are much distant from the per capita income of the richest State, and 7.50% on the basis of the
performance of the States.

Activity 4.4:
Equity/inequity in educational finance in India can be indicated based on the following four factors:

i) The availability of educational facilities in terms of levels and types of educational institutions, rural-urban
disparities, and proximity of educational institutional facilities to the students.

ii) The availability of educational facilities, viz., school buildings, teachers, equipment, books, scholarships and
stipends, etc., that vary from place to place, and from institution to institution.

iii) The efficiency with which the facilities noted in (ii) above are utilised. Educational wastage in terms of
repetition and dropout are indicative of the efficiency or otherwise in utilisation.

iv) The outcome of the utilisation of such facilities measured in terms of the pass percentage and the ability of
the students to apply gained knowledge and skills in the immediate environment.
Activity 4.5:
i) Additional resources for education can be raised by : levying tax on private firms, upward revision of the
fee structure, and giving more powers to and strengthening the local bodies.
ii) The spending by the government (both central and state) on education can be reduced by: privatising
education, raising resources within the institution, and adopting cost-effective innovations and methods of
teaching students.
91