Financing Education in India: The Role of Centre and States

Education in India is constitutionally a concurrent subject – meaning both the Central government and State governments share the responsibility of funding and managing it. But how exactly does money flow from the Centre to the States for education? Who decides how much each state gets, and on what basis? Research shows that while India’s public expenditure on education stands at around 4% of GDP, the Union government contributes only about 1% while states collectively bear 3%. This division of financial responsibility has profound implications for how education is planned, funded, and delivered across the country’s 28 states and 8 Union Territories.

The constitutional and structural foundation 🔗

The 42nd Constitutional Amendment of 1976 moved education from the State List to the Concurrent List, formally making it a shared responsibility. This shift laid the groundwork for the Centre to play a more active financial role in education – beyond just setting policy – while states retained the primary administrative role on the ground.

According to education finance data, although the Central government provides national policy direction and allocates resources for education, nearly 80% of social sector spending on education comes from the States’ own budgets. The Centre, accounting for just 15% of total education spending, nevertheless plays a disproportionately important role in shaping priorities through the conditions it attaches to the funds it does release.

Two principal constitutional bodies govern how money moves between the Centre and the States: the Finance Commission and, formerly, the Planning Commission (now replaced by NITI Aayog). The Finance Commission distributes resources guaranteed by statute aimed primarily at programme maintenance, while discretionary development funds are channelled separately – a distinction that directly affects how much autonomy states have over their education spending.

Budget allocation mechanisms: how financial resources are distributed 🔗

The Union Budget, presented annually, allocates funds for primary, secondary, higher education, and skill development. In 2019-20, India allocated ₹6.43 lakh crore of public funds for education. Of this, the central government directed ₹56,537 crore – about 60% of its education share – to school education, and ₹38,317 crore to higher education.

The Finance Commission’s role 🔗

The Finance Commission, constituted every five years under Article 280 of the Constitution, is the primary body that recommends how central tax revenues are distributed among states. The 15th Finance Commission, for instance, adopted a distribution formula based on factors including population (15%), demographic performance (12.5%), income distance (45%), forest and ecology (10%), tax effort (2.5%), and area (15%). This multi-factor formula attempts to balance fiscal capability across states while encouraging better governance.

Under Article 275 of the Constitution, the Finance Commission recommends grants-in-aid for states that need financial assistance, helping bridge gaps between what a state can raise on its own and what it needs to spend on education and other public services. These recommendations directly influence how much each state has available for educational investment.

Centrally Sponsored Schemes 🔗

Beyond the Finance Commission’s devolution, the Centre channels education funds through Centrally Sponsored Schemes (CSS) – programmes jointly funded by the Centre and states in predetermined ratios. The most significant of these for school education is Samagra Shiksha, launched in 2018 by merging three earlier schemes: Sarva Shiksha Abhiyan (SSA), Rashtriya Madhyamik Shiksha Abhiyan (RMSA), and Teacher Education (TE). Samagra Shiksha covers 1.16 million schools, over 156 million students, and 5.7 million teachers across government and aided institutions from pre-primary to senior secondary level.

Under Samagra Shiksha, the funding ratio between Centre and State is 60:40 for general category states. North-Eastern and Himalayan states receive greater central support through a 90:10 ratio, where the Centre provides 90% and the state contributes just 10%. Union Territories without a Legislature are funded 100% by the Centre.

For secondary education specifically, the funding ratio between the central and state governments is 60:40, except for 8 North Eastern and 3 Himalayan states for which the ratio is 90:10 – reflecting the Centre’s deliberate effort to reduce the burden on financially weaker regions.

Grants and assistance: types of central support to states 🔗

The grants flowing from the Centre to States for education can broadly be classified into two categories based on their nature and the flexibility they offer states.

Statutory (formula-based) grants 🔗

These are grants recommended by the Finance Commission and distributed based on a set formula, independent of the Centre’s discretion. Statutory transfers do not reduce the fiscal autonomy of states because they are legally mandated and not conditional on fulfilling central policy preferences. States can use such funds more freely to address their locally identified education priorities.

Non-statutory (discretionary) grants 🔗

These include grants disbursed through Centrally Sponsored Schemes and central ministries. Non-statutory transfers reduce the state’s fiscal autonomy because they typically come tied to specific objectives and conditions set by the Centre. States must spend them on designated activities – building infrastructure, teacher salaries under particular schemes, or specific digital initiatives – rather than deciding their own priorities.

Specific-purpose grants under the Finance Commission 🔗

The Finance Commission also recommends sector-specific grants targeted at areas like health, education, and infrastructure, disbursed under Article 275 and often linked to performance outcomes. These sector-specific grants provide states with a directed financial boost for education without requiring them to go through centrally administered scheme structures.

Grants for higher education 🔗

For higher education, the Centre funds institutions directly. The University Grants Commission (UGC) disburses grants to central and deemed universities. Premier institutions like the Indian Institutes of Technology (IITs) and Indian Institutes of Management (IIMs) are funded directly by the Ministry of Education. The Centre’s budget for higher education also includes strategic funding aimed at supporting state higher education institutions through comprehensive state higher education plans that address expansion, equity, and excellence together.

Challenges in fund allocation: fiscal autonomy and resource gaps 🔗

Despite this elaborate architecture of devolution and grants, serious problems persist in how education is financed across India’s states.

The resource gap between states 🔗

Not all states are equally equipped to meet their share of education expenditure. Per-student expenditure, a more accurate measure of a state’s education investment, varies significantly across states. States with lower fiscal capacity – particularly in eastern and central India – struggle to contribute their required matching share under CSS, which means they sometimes cannot fully utilise the central funds available to them.

Low-income states depend on central transfers at a rate of 21% to 58%, compared to just 6%-18% for high-income states, highlighting the sharp asymmetry in fiscal self-sufficiency across India’s states. This dependence undermines the very goal of educational equity that the grant system is meant to achieve.

Erosion of fiscal autonomy 🔗

One of the most persistent structural concerns is the shrinking of states’ fiscal space. States have become increasingly reliant on Centrally Sponsored Schemes, with CSS expenditure surging from ₹5.21 lakh crore in 2015-16 to ₹14.68 lakh crore in 2023-24. Most of this funding comes with conditions, forcing states to align their education priorities with Central preferences rather than local needs.

Additionally, untied devolved taxes are crucial for states to expand spending on social sectors like health and education based on their specific needs. But the growing share of Union revenue coming from cesses and surcharges – funds outside the divisible pool – means states receive less than the formal devolution ratio suggests. The 15th Finance Commission’s effective devolution was only 33.16% of the Union’s gross tax revenue, despite a declared share of 41%.

Delayed disbursements and utilisation gaps 🔗

Delayed payments to states by the central government, as well as conditional allocation of funds towards items that schools do not need to spend on every year, create problems at the school level. When funds are allocated for specific activities but are insufficient to cover the complete cost, schools may avoid the activity altogether – leaving funds unspent while actual needs go unmet. Poor financial management systems and administrative bottlenecks at the state level further compound the problem.

The GDP target that remains out of reach 🔗

India’s long-standing policy goal has been to spend 6% of GDP on education – a recommendation first made by the Kothari Commission in 1966 and reiterated in the National Education Policy 2020. This goal of spending 6% of GDP on education needs to be equally shared by both the central and state governments, lest the development of education remain a lofty ideal. India’s actual spending has hovered around 4% of GDP for years, a gap that directly affects teacher recruitment, infrastructure quality, and learning outcomes.

The way forward 🔗

Financing education in India is not simply a matter of increasing the budget – it requires rethinking the terms on which money flows between the Centre and the States. Greater reliance on untied, formula-based grants gives states the flexibility to respond to local conditions. Streamlining the conditions attached to CSS funds reduces administrative friction. And digital platforms for transparent reporting, expenditure tracking, and monitoring of fund utilisation can improve the efficiency and effectiveness of resource allocation, ensuring that allocated funds actually reach classrooms and students.

The Centre’s role is indispensable – especially for poorer states that cannot fund education adequately on their own. But a system that over-centralises decisions while pushing financial responsibility onto states creates a structural mismatch that ultimately harms the quality and equity of education.

What do you think? Should states be given more untied funds and greater flexibility in spending on education, even at the cost of reducing central oversight? And given that India spends only around 4% of GDP on education against a stated goal of 6%, where should the additional responsibility lie – with the Centre, the States, or both equally?

References

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