State Governments and Their Role in Financing Education

When we think about who funds education in India, the central government often gets the most attention – the big policy announcements, the IITs, the national schemes. But the real financial backbone of education across the country is the state government. From the school around the corner to the state university in a district town, it is state budgets that keep classrooms running, teachers paid, and institutions functional. Understanding how states finance education – and what constrains them – is essential to understanding why educational outcomes vary so dramatically across India.

State responsibility in education: the constitutional foundation 🔗

India’s constitution places education on the Concurrent List, meaning both Parliament and state legislatures have authority to legislate on educational matters. In practice, however, the on-ground responsibility falls overwhelmingly on states. According to IndiaSpend, if you look only at the Union budget, the education story in India is incomplete – the bulk of funds for government schools come from state governments. A Policy Circle analysis citing Reserve Bank of India data puts this in sharp relief: states account for nearly 85% of total public education expenditure, compared to just 15% from the central government.

This means that the quality of a child’s schooling in India is shaped far more by which state they were born in than by national policy alone. And that disparity, rooted in financial capacity, is something every educator and policy stakeholder needs to reckon with.

How states manage primary and higher education funding 🔗

State governments fund two major tiers of education: primary and higher. Each comes with a distinct set of obligations and financial pressures.

Primary education 🔗

Primary education is free and compulsory under the Right to Education (RTE) Act, and states bear the primary responsibility for delivering it. This includes constructing and maintaining school buildings, recruiting and paying teachers, providing mid-day meals, and ensuring that schools in remote or disadvantaged areas meet minimum quality standards. PRS Legislative Research notes that the primary responsibility for maintaining school infrastructure rests with state governments, while the central government supports select schemes.

The major centrally sponsored scheme for school education – Samagra Shiksha Abhiyan – is funded in a 60:40 ratio between the Centre and states. In northeastern and special-category states, the Centre’s share rises to 90%. IndiaSpend reports that Kendriya Vidyalayas and similar central institutions account for only 1-2% of education funding in India; everything else falls to states and their local bodies.

Higher education 🔗

For higher education, states fund their own universities, colleges, and technical institutions. According to PRS Legislative Research, while the central government funds institutions like IITs, NITs, and IIMs through bodies like the University Grants Commission (UGC) and AICTE, state governments are the financial backbone of the far larger network of state universities and affiliated colleges. State universities and colleges depend heavily on state budgets for faculty salaries, infrastructure development, and academic programmes.

However, there is significant variation between states. Policy Circle’s analysis shows that Kerala, Himachal Pradesh, and Odisha allocate more than 15% of their state budgets to education, while several large states remain below 12%. This disparity directly affects learning outcomes: states with higher per-student spending consistently record better results and lower dropout rates.

Types of grants received by states 🔗

States do not fund education entirely from their own revenues. A significant portion comes through grants from the central government, which are structured to serve different objectives. There are three key categories worth understanding.

Proportional grants 🔗

Proportional grants are allocated based on population size or the number of students enrolled in schools. The logic is straightforward: larger states with more children require more resources. As outlined in early education policy frameworks, proportional grants are designed to secure broad equalization and provide for rapid expansion of schooling, ensuring that no state is categorically underfunded simply because of its size. These grants help maintain a baseline of parity across states with widely varying revenue capacities.

Backward area grants 🔗

Backward area grants are directed at states or regions that are socio-economically underdeveloped and face structural barriers to providing quality education – poor infrastructure, shortage of trained teachers, low literacy rates, and geographic remoteness. The Backward Regions Grant Fund (BRGF), launched in 2007, is a concrete example of this mechanism. It covers 250 districts across 27 states, funding everything from school building construction to drinking water facilities, specifically in areas that fall behind national development benchmarks. States like Assam, Jharkhand, and Odisha – which have significant tribal and rural populations – are among the primary recipients of such targeted funding. Additionally, under Article 275 of the Constitution, the Finance Commission recommends grants-in-aid for states facing post-devolution revenue deficits, with a particular focus on under-resourced regions.

Specific purpose grants 🔗

Specific purpose grants are conditional transfers tied to particular programmes or outcomes. States receive these funds only when they implement defined schemes, meet prescribed criteria, or achieve targeted outcomes. As the Asian Development Bank’s analysis of India’s fiscal arrangements explains, specific-purpose grants under Article 275 are designed to ensure minimum standards of certain basic services, cover capital expenditure in specific sectors, and incentivize better fiscal management. Examples include grants under the Sarva Shiksha Abhiyan for infrastructure development and teacher training, or scheme-specific allocations under the Mid-Day Meal programme. Private and aided institutions receiving government support are also typically covered under grants-in-aid codes, which govern recurring grants (covering teacher salaries and maintenance costs) and non-recurring grants (covering building construction and equipment).

Balancing autonomy and dependence 🔗

Here lies the core tension in state education financing: states bear most of the expenditure burden but do not always control the decisions that come with it. This dynamic is often described as “federalism by finance.”

As Politics for India explains, the central government collects the majority of revenue and distributes funds to states through various schemes – but with those funds come conditions and guidelines that constrain how states can spend them. Over time, this has reduced states’ ability to tailor their education budgets to local needs. A stark recent example: the central government withheld ₹2,152 crore in Samagra Shiksha funds from Tamil Nadu because the state refused to implement NEP 2020’s three-language formula – a policy Tamil Nadu had historically opposed. This affected 40 lakh students and 32,000 staff members.

This tension is not new, but it has sharpened in recent years. Policy Circle points out that fiscal constraints limit poorer states’ ability to invest in teachers, digital infrastructure, and skilling programmes, while the Finance Commission has highlighted the need to link intergovernmental transfers to educational performance rather than policy compliance. Without predictable funding and shared accountability, even well-designed national reforms struggle to translate into classroom realities.

What the numbers say 🔗

PRS Legislative Research data shows that combined spending on education by states and the Centre has ranged between 3.9% and 4.6% of GDP in recent years – well short of the 6% of GDP target recommended by successive National Education Policies, including NEP 2020. UNESCO comparisons show countries like Bhutan (7.5% of GDP) and Kazakhstan (7.2%) spending significantly more. Meanwhile, per-student expenditure varies sharply across Indian states – IndiaSpend analysis found that education spending as a share of total state expenditure ranged from 12% in West Bengal to 15% in Bihar, Maharashtra, and Himachal Pradesh, reflecting significant disparities in state fiscal priorities.

The path toward stronger state financing 🔗

Improving education financing at the state level requires both structural reforms and better cooperative mechanisms. Several directions are worth noting:

First, states need greater fiscal flexibility. Currently, many central grants come with tight usage conditions. Allowing states more discretion in allocating funds – within broad national objectives – would enable them to address local needs more effectively, whether that means investing in tribal-area schools, upgrading urban colleges, or addressing teacher shortages in specific districts.

Second, as ORF analysis of NEP and cooperative federalism suggests, all major decisions affecting education execution must be collaborative and consultative between the Centre and states. Education’s placement on the Concurrent List was always meant to foster partnership, not imposition. Restoring that spirit requires the Centre to design scheme guidelines through genuine dialogue rather than unilateral mandates.

Third, international collaborations and grants from bodies like the World Bank can supplement national funding – particularly for states facing persistent fiscal deficits. Several states have already leveraged World Bank-assisted projects for school infrastructure and teacher training, providing a useful model for others.

Ultimately, the strength of India’s education system will be measured not by the ambition of its national policies but by the financial capacity and autonomy of its states to deliver quality education in every district, block, and village.

What do you think? Given that states contribute nearly 85% of public education spending in India, should they have proportionally greater autonomy in how central education grants are spent – or does national oversight ensure better accountability? And with the 6% GDP spending target consistently missed decade after decade, what structural changes do you think are needed to close that gap?

References

1. https://www.indiaspend.com/budget/budget-explainer-how-india-funds-public-school-education-718488
2. https://www.policycircle.org/policy/india-must-raise-education-spending/
3. https://www.education.gov.in/en/scholarships-education-loan-4
4. https://prsindia.org/budgets/parliament/demand-for-grants-2023-24-analysis-education
5. http://www.edugyan.in/2017/02/committee-on-relationship-between-state.html
6. https://en.wikipedia.org/wiki/Backward_Regions_Grant_Fund
7. https://prepp.in/news/e-492-statutory-grants-indian-polity-notes
8. https://www.adb.org/sites/default/files/linked-documents/54001-001-sd-03.pdf
9. https://politicsforindia.com/national-education-policy-and-indian-federalism/
10. https://believersias.com/eroding-federalism-in-education-funding/
11. https://prsindia.org/budgets/parliament/demand-for-grants-2024-25-analysis-education
12. https://www.orfonline.org/expert-speak/the-national-education-policy-2020-and-the-future-of-cooperative-federalism-in-india