Financing Higher Education in India: Challenges and Strategies

India has one of the world’s largest higher education systems, with over 1,000 universities and more than 40,000 colleges. Yet, despite this scale, the question of how to adequately fund it remains one of the most pressing and unresolved policy challenges of our time. Public spending on higher education has struggled to keep pace with the sector’s rapid expansion, leaving institutions caught between rising costs and shrinking real budgets. Understanding the history, structure, and gaps in higher education financing is essential – not just for policymakers, but for anyone who believes that quality education is a public good worth investing in.

Public spending on higher education: the long view
Budget allocation trends across the Five-Year Plans
State vs. central government: an unequal partnership
Core challenges in financing higher education
The inflation problem
The salary expenditure trap
The shift from grants to loans
Private financing filling the gap – at a cost
Exploring additional revenue sources: what expert committees recommend

Public spending on higher education: the long view

India’s commitment to publicly funding higher education dates back to the early years of independence. The first Five-Year Plan (1951-56) laid the groundwork, but allocated only a modest share of the national budget to education. The underlying philosophy, however, was clear: the state would be the primary provider. The Education Commission of 1964-66, chaired by D.S. Kothari, was emphatic that the responsibility for supporting higher education should rest with government funds, not the private sector – a position that shaped national thinking for decades.

Yet intent has rarely translated into adequate expenditure. A key benchmark – allocating 6% of GDP to education – was first recommended by the Kothari Commission and has been reiterated in every major policy document since, including the National Policy on Education 1968 and the National Education Policy (NEP) 2020. India has never consistently met this target. Today, higher education specifically receives only about 0.7-0.8% of GDP, making systemic transformation extremely difficult to achieve given the sector’s scale and ambitions.

Looking at absolute numbers, there has been nominal growth. Comparing FY 2019 to recent years, the education budget saw a cumulative increase of over 51%, rising from Rs 85,010 crore to Rs 1.28 trillion. But these headline numbers obscure a more uncomfortable reality: when adjusted for inflation, the actual purchasing power of these allocations has grown far more slowly – and in some years, has effectively declined.

Budget allocation trends across the Five-Year Plans

The evolution of education funding across India’s Five-Year Plans reveals a story of shifting priorities. In the early plans, both school and higher education received relatively small allocations, reflecting a resource-constrained newly independent nation focused on basic infrastructure. Over time, higher education gained ground as the government established landmark institutions – the IITs, IIMs, and central universities – that became the backbone of India’s knowledge economy.

By the Tenth and Eleventh Plans, large-scale expansion was underway: new universities, research facilities, and major institutions were set up with dedicated plan funding. The Twelfth Five-Year Plan (2012-17) explicitly prioritised quality and infrastructure in higher education alongside expansion. However, as plan-based budgeting gave way to the current annual budget framework, continuity of vision became harder to maintain.

A troubling long-term pattern has since emerged. Education’s share of total government expenditure fell from 4.77% in 2013-14 to just 2.50% in 2024-25 – a reduction of over 42% in relative terms. This decline has been steady rather than sudden, reflecting a sustained deprioritisation of education within the broader Union Budget. Within that declining share, higher education has been hit particularly hard: the Department of Higher Education’s share of the Union Budget dropped from 2.52% in 2013-14 to just 0.91% in 2024-25 – a reduction of more than 55% in relative terms over barely a decade.

The split between school and higher education has remained relatively stable in structural terms. School education has historically received around 60% of the central education budget, with higher education accounting for the remaining 40%. This ratio reflects a deliberate policy prioritisation of universal elementary education – a justified goal – but has meant that higher education must operate within a structurally constrained envelope.

State vs. central government: an unequal partnership

Understanding India’s higher education financing requires recognising one fundamental constitutional reality: education is on the Concurrent List, meaning both the Centre and states share responsibility. In practice, a bulk of the actual spending on education – particularly on state universities and affiliated colleges – is borne by state governments.

In 2024-25, the Ministry of Education was allocated Rs 1,20,628 crore. Of this, the Department of Higher Education received Rs 47,620 crore, with the largest shares going to central universities (33%), IITs (22%), and NITs (11%). These are premium central institutions that serve a fraction of India’s total student population. The vast majority of students – enrolled in state universities and affiliated colleges – depend on state budgets that vary enormously in their capacity and commitment.

The disparity between states is stark. The 15th Finance Commission noted that poorer states such as Bihar, Jharkhand, and Uttar Pradesh lag significantly in per capita education expenditure. In 2022-23, Uttar Pradesh spent approximately Rs 3,205 per capita on education, Bihar around Rs 3,245, and Jharkhand Rs 3,626 – well below the national average of approximately Rs 5,300 for larger states. This means that a student’s access to quality higher education is heavily determined by which state they happen to live in – a deeply inequitable situation.

State-level contributions to education have been constrained by poor fiscal health and lower devolution of taxes from the Centre. Many states are caught in a fiscal bind: their revenue bases are inadequate to fund the growing demand for higher education, yet the central government’s transfers do not fully compensate for this gap. The result is that state universities – which educate the overwhelming majority of India’s degree students – remain chronically underfunded compared to their centrally funded counterparts.

Core challenges in financing higher education

The inflation problem

One of the most persistent but underappreciated challenges in higher education financing is inflation. Budget allocations may increase in nominal terms year on year, but the real value of those funds – what they can actually purchase in terms of faculty, equipment, infrastructure, and research – often stagnates or shrinks. According to PRS Legislative Research, total expenditure for higher education in 2024-25 was estimated to increase by only 6.1%, with revenue expenditure growing at just 3.2% – a rate insufficient to keep pace with inflation and rising institutional costs.

The effects are tangible. UGC and CSIR research fellowships remained stagnant in nominal terms since 2014, resulting in a real decline of over 50% once inflation and rising living costs in university towns are factored in. For research scholars and early-career academics, this erosion of real income is a direct driver of the brain drain that institutions complain about but struggle to address.

The salary expenditure trap

A significant structural challenge in higher education financing is the heavy concentration of spending on salaries. As universities expand their student intake and recruit more faculty to meet demand, salary bills grow – often consuming the lion’s share of available budgets. This leaves proportionally less for development expenditure: new laboratories, library upgrades, digital infrastructure, and research grants. The problem is compounded by periodic pay revisions that create sudden, large upward pressure on budgets without corresponding increases in allocations.

In many state universities, salary expenditure accounts for upwards of 70-80% of total budgets, leaving almost nothing for capital development. This is a classic fiscal squeeze: the recurring budget crowds out the development budget, and institutions end up maintaining the status quo rather than growing. Severely limited funds, poor infrastructure, and poor governance have resulted in sub-optimal performance at most central, state, and private universities, with research output particularly suffering as a consequence.

The shift from grants to loans

A significant policy shift in recent years has compounded the financial pressures on institutions. The Higher Education Financing Agency restructured the funding model by moving from outright grants to institutional loans, meaning that universities which borrowed for hostels, classrooms, or campus expansion now carry debt obligations with interest rates between 8 and 9%. Several central institutions have confirmed that their annual interest repayments now exceed their research budgets – a financially devastating outcome that forces postponement of laboratory upgrades and academic expansion.

Private financing filling the gap – at a cost

As public funding has declined in real terms, private financing has stepped in. Over 75% of higher education institutions and nearly two-thirds of all enrolment are now in the private sector, indicating a fundamental structural shift toward household-funded expansion. While this has enabled rapid scaling of access, it has also meant that the cost burden has shifted from the state to individual families – disproportionately affecting students from lower-income backgrounds and reinforcing educational inequality.

Multiple expert committees have recognised that government budgets alone cannot sustain the higher education system at the scale and quality India needs. Several strategies for resource mobilisation have been consistently recommended over the years.

The Kothari Commission itself advocated a multi-pronged approach: earmarking dedicated funds in central and state budgets for critical infrastructure, alongside grants-in-aid, low-interest loans, and community contributions. The emphasis was on the state remaining the anchor funder while drawing on supplementary sources – not replacing public commitment with private money.

More recent policy frameworks have pointed to several specific mechanisms. Education cess – a dedicated surcharge on income tax earmarked for education – has become an increasingly important funding channel. Cess now funds approximately 74% of the school education budget and around 33% of the higher education budget, though CAG audits have found that in several years, the amount actually transferred to education reserve funds fell short of the required 75% share of cess collections – a compliance gap that undermines the instrument’s effectiveness.

Public-private partnerships (PPPs) have also been promoted as a way to supplement government funding, particularly for infrastructure development. The current budget framework supports PPP models for research institutions, skill development centres, and educational townships. The 2026-27 higher education budget of Rs 557 billion represents an 11.3% increase over the previous year, with explicit priority given to world-class institutions, research and innovation, digital learning platforms, and the Study in India initiative – areas where PPPs are expected to play a growing role.

Committees have also recommended rationalised fee structures that allow institutions to recover a portion of costs from students who can afford to pay, while cross-subsidising access for economically weaker sections through robust scholarship and loan guarantee programmes. A consolidated education loan scheme introduced in 2024-25 aimed to provide subsidised loans for domestic higher education, backed by a government guarantee – a step toward making such cross-subsidisation more viable. However, student financial aid allocations in 2024-25 stood at Rs 1,908 crore, lower than the Rs 2,218 crore spent in 2017-18, suggesting that the scholarship ecosystem has not kept pace with either enrolment growth or rising education costs.

The push for digital education infrastructure also carries a resource mobilisation dimension. Platforms such as PM eVIDYA and centralised digital library initiatives can reduce per-student delivery costs significantly, enabling institutions to serve larger populations without proportional increases in physical infrastructure spending. A Centre of Excellence in AI for Education, announced with an initial Rs 500 crore investment, signals the government’s intent to use technology as a force multiplier in education spending.

Finally, research and commentary consistently point out that achieving the 6% GDP target is financially feasible if there is genuine political will – through reallocation of resources from lower-priority sectors, raising the common pool of government revenues, or both. The challenge is less one of capacity and more one of sustained political commitment to treat education as a genuine national investment rather than a line item to be trimmed when budgets tighten.

India’s higher education financing challenge is ultimately a reflection of a deeper tension: the gap between the aspiration to build a world-class, equitable higher education system and the fiscal reality of a developing economy with competing demands on public resources. Bridging that gap requires not just more money, but smarter allocation, stronger accountability, and a long-term view – one that recognises, as the Kothari Commission reminded us six decades ago, that investment in education is not a cost but a foundation for everything else.

What do you think? Given the persistent gap between India’s 6% GDP target for education spending and actual allocations, should higher education institutions be given greater autonomy to generate their own revenues – and if so, how can equity for students from disadvantaged backgrounds be protected? And with states bearing a disproportionate share of higher education costs but varying widely in their fiscal capacity, what structural reforms in centre-state funding arrangements could help bridge the gap?

References

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Table of Contents

Public spending on higher education: the long view 🔗

Budget allocation trends across the Five-Year Plans 🔗

State vs. central government: an unequal partnership 🔗

Core challenges in financing higher education 🔗

The inflation problem 🔗

The salary expenditure trap 🔗

The shift from grants to loans 🔗

Private financing filling the gap – at a cost 🔗

Exploring additional revenue sources: what expert committees recommend 🔗

References

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Higher Education – Its Context and Linkages