Let the rich pay for tuition

Feb 09 2013, 17:33 IST
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SummaryA moderate Rs 15,000 a year from half the students in government colleges will meet a sixth of the deficit reduction target

A responsible budget can only come about through expenditure realignment. And before we get into pyrotechnics about whether the rich should pay more, etc, let it be fully understood that the top 10 per cent of the population pays for almost all the income tax collected in India. Add to it that they pay the lion’s share of corporate taxes, one gets the simple result that more than 60 per cent of all taxes are paid by just 10 per cent of the population.

It is imperative that the fiscal deficit be reduced, and be reduced substantially. This will involve a major “sacrifice” from the populists. But isn’t there some way that the rich could share in this burden of adjustment? It turns out there is — start asking the rich to pay more for tuition at government-run “institutions of higher learning” hereafter. These institutions, like their counterparts in the private sector, come in different sizes and shapes of quality. Many are first-rate institutions, though it is particularly sad, and surprising, that none of our finest institutes figures even in the top 200 of the world.

How to improve quality is a larger subject best left for another occasion. Though it is possible that tuition increases at government colleges will motivate them to perform better as they seek to attract more students. At present, it is very unclear whether students are attending government colleges for their quality, or their cheapness.

All forms of education have “externalities”. That is why education — whether primary, secondary, or higher — is never priced at “market”. Equally, no one should make the case that education should be free for everybody. To be sure, there are many students who could not attend college without both a scholarship and a stipend. They need to be subsidised — but that does not mean that everybody should be subsidised.

The pattern of income distribution is such that only about a fifth of the entire working population has incomes above the present cut-off point for paying taxes — Rs 1.8 lakh a year. So a large majority of those who go to college — private or public — belong to the top 20 per cent of the income distribution. Recall that one needs to graduate from high school in order to attend college. And despite all the freebies, only about 10-12 per cent of the college-going-age cohort goes to college in India. This is about half the international average, with both China and Brazil close to this average of 25 per cent.

This India gap is rapidly becoming less as more and more people enter high school and a greater fraction of them graduate. Where are the resources to finance this ever-widening pool? There aren’t — but by increasing fees for the top half of university entrants, more of the “bottom of the top 20 per cent” can aspire that their kids go to college.

Some idea of the magnitude of the extra subsidy (over and above that received by the private colleges) for government colleges can be provided by data available from the Employment and Unemployment National Sample Survey for 2009-10. Questions were asked of each household member as to the type of college attended, tuition fees paid to the college, expenditure on books, etc. The simple result — on average, fees at private colleges were Rs 30,000 a year and fees at government colleges Rs 6,000 a year. Projecting the data to 2012-13 on the basis of the information available, one obtains the result that private colleges now charge as tuition an average of Rs 60,000 and government colleges Rs 8,000. The number of students going to college — approximately half in each, or 22 million students in all.

Government expenditure on higher education is provided by both the states and the Centre, with the former accounting for about two-thirds of the total of Rs 90,000 crore a year — for about 11 million students. Rounding off, one obtains that the government spends about Rs 1 lakh per college student per year — and collects less than 10 per cent in tuition. The education cess yields about Rs 32,000 crore with about a third, around Rs 11,000 crore, going towards higher education. The present structure of tuition fees yields another Rs 10,000 crore. The higher education subsidy is therefore close to Rs 70,000 crore, or about 1.3 per cent of GDP.

Why this massive subsidy? Because the forefathers of Indian higher education, the British, believed in free universities. But even the British have moved on, as they price higher education at the market for those who can afford it, and subsidise those who cannot. Can’t we do the same?

Yes, we can. So the modest proposal is as follows. About 60 per cent of college-going students can pay for an increase in annual tuition of Rs 15,000. Many students pay multiples of this level for high-school education — remember, their parents are in the top 5 per cent of all income earners. The revenue generated from Rs 15,000 a year, from the top half of college goers attending government colleges (approximately 25 per cent of 22 million, or 5.5 million) is Rs 8,250 crore a year, or approximately 0.08 per cent of GDP. Our fiscal deficit is slated to be reduced to 4.8 per cent of GDP, a decline of 0.5 percentage points — a modest cut in education subsidy alone yields 16 per cent of this reduction.

Will there be protests if tuition is raised for rich students? Let me see — these students will say that they are paying more than three times this amount for private colleges, but the government should subsidise them, and therefore they will lead a demonstration? The CPM will argue that we cannot tax rich students and taxi fares must be reduced. And Mamata Banerjee will argue that her bankrupt state will continue to provide free education to the rich, as required by the laws of equity and inclusive growth.

The writer is chairman of Oxus Investments, an emerging market advisory firm, and a senior advisor to Blufin, a leading financial information company

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