How Higher Education in India is Funded: Challenges and Solutions

Funding a university system that serves over 43 million students – the third largest in the world – is no small task. India’s higher education sector has grown enormously since independence, but the financial architecture that supports it remains deeply complex and, increasingly, under strain. Government grants still form the backbone of public university funding, but declining allocations, rising student numbers, and the rapid growth of private institutions have put the entire system under scrutiny. Understanding how higher education in India is financed – and the fault lines within that system – is essential for anyone invested in the future of Indian academia.

Sources of university funding in India 🔗

Funding for higher education institutions (HEIs) in India comes from three broad sources: government grants, student fees, and private donations. Each plays a distinct role, and their balance has shifted considerably over the past two decades.

Government grants 🔗

Public universities and colleges depend most heavily on government support. Funding flows through two main channels: the central government – via the University Grants Commission (UGC) and the Ministry of Education – and state governments, which fund their own state universities. Institutions of national importance such as the IITs, IIMs, and AIIMS are funded 100% by the central government, while state universities receive their primary support from state budgets, with some additional plan grants from the UGC.

According to a PRS India analysis of the Union Budget 2024-25, the Department of Higher Education was allocated ₹47,620 crore in 2024-25 – with transfers to central universities accounting for the largest share (33%), followed by IITs (22%) and NITs (11%). Importantly, this figure represented a 17% reduction from the revised estimate for 2023-24, signalling a tightening of the public funding envelope.

The UGC itself – the apex grant-giving body – saw its allocation cut by over 60% in 2024-25, though the British Council notes this was partly a structural realignment, with funds previously routed through the UGC now being disbursed directly to central universities.

Student fees 🔗

Student fees form a significant and growing share of university revenue, particularly in private and self-financing institutions. In fully private unaided colleges – which constitute the majority of India’s college sector – tuition fees are virtually the sole source of funding, as these institutions receive no government grants. Even within public universities, fee contributions are increasing as governments look to reduce their fiscal burden. The central government has introduced schemes such as the PM-Uchchatar Shiksha Protsahan Yojana (PM-USP) to provide interest subsidies and scholarships, but expenditure on student financial aid has actually declined from ₹2,218 crore in 2017-18 to ₹1,908 crore in 2024-25.

Private donations and resource mobilisation 🔗

Private philanthropy has a long history in Indian education, predating independence itself. The UGC actively encourages universities to build a corpus from external fundraising – including contributions from alumni associations, industrial houses, public and family trusts, and Non-Resident Indians (NRIs). Under its resource mobilisation scheme, the UGC matches up to 25% of externally mobilised funds, subject to a ceiling of ₹25 lakh per year, incentivising institutions to seek non-governmental sources. Interest earned from such corpus funds can then be used for development expenditure decided by the institution.

Types of grants: what universities actually receive 🔗

Government grants to universities are not a single, undifferentiated stream of money. The UGC disburses grants under three broad categories, each serving a different institutional need.

Maintenance grants 🔗

Maintenance grants, also called recurring grants, are designed to cover the day-to-day operational costs of running a university: faculty and staff salaries, campus upkeep, utilities, and administrative expenses. Colleges maintained directly by their parent university receive 100% deficit maintenance grants, while colleges run by charitable or educational trusts receive 95% deficit grants. These grants are non-discretionary in the sense that they must be spent on approved operational items, leaving institutions with limited flexibility.

A critical concern here is that maintenance grants grow incrementally year on year, but rarely keep pace with actual cost inflation, particularly salary revisions and infrastructure maintenance. As a result, many state-funded institutions find their maintenance grants inadequate to sustain quality operations without supplementary income.

Development grants 🔗

Development grants, also referred to as plan grants, are provided on a five-year cycle to support the expansion, modernisation, and long-term growth of institutions. These grants are sanctioned for new programmes, expansion activities, and infrastructure upgrades, and are determined through negotiations between the UGC, the Ministry of Education, and the individual institution’s Finance Committee. Unlike maintenance grants, development grants are ad-hoc and non-incremental – an institution does not automatically receive a larger development grant as it grows.

This structure creates a built-in inequity: top-tier institutions with stronger proposal-writing capacity and better institutional records tend to attract larger development grants, while smaller and newer institutions – often those serving rural or underserved populations – struggle to secure adequate development funding.

Non-recurring grants 🔗

Non-recurring grants are one-time allocations for specific projects or purposes that fall outside regular institutional operations. These include funding for research equipment, books and journals, academic conferences, laboratory upgrades, and special infrastructure projects. Non-recurring grants cover one-time expenses and the assets procured – such as equipment and books – must be transferred to the institution’s library or department upon project completion.

The UGC’s Special Assistance Programme (SAP) is a well-known vehicle for non-recurring research grants, supporting advanced research in specific disciplines. However, access to these grants is competitive and heavily bureaucratic, which can disadvantage institutions with weaker administrative capacity.

The UGC may also provide an additional overhead grant of up to 10% of the total recurring and non-recurring allocation under a programme, capped at ₹2 lakh, to cover utilities and communication costs. This overhead provision recognises that project implementation itself generates indirect costs that institutions must absorb.

Financial challenges and the rise of privatisation 🔗

India’s higher education system faces a fundamental mismatch: student enrolment has been growing rapidly, but public funding has not kept pace. This gap has accelerated the entry of private players into higher education – with significant implications for equity, quality, and access.

Declining public investment 🔗

India’s public expenditure on education in 2017-18 was 2.7% of GDP – well below the 6% target that has been recommended in every National Education Policy since 1968, and significantly lower than comparable nations. Countries such as Sweden, Finland, and Costa Rica allocate 7-7.5% of GDP to education. This persistent underfunding has meant that Indian HEIs typically spend 85-95% of their operating revenue on salaries and maintenance alone, leaving little for research, infrastructure renewal, or innovation.

The shift from outright grants to loan-based financing has compounded the problem. The Higher Education Financing Agency (HEFA), set up in 2017 as a joint venture between Canara Bank and the Ministry of Education, replaced some UGC grants with repayable loans for infrastructure development. As of March 2024, HEFA had sanctioned loans worth ₹39,720 crore – but 64% of this went to just 22 IITs and 12 AIIMS facilities, leaving the vast majority of institutions with little benefit.

Growth of private institutions 🔗

As public funding has tightened, the private sector has filled the gap rapidly. Private institutions accounted for 57% of higher education enrolments in India in 2020, the highest share among South Asian nations. According to available data, approximately 78.6% of India’s colleges are privately managed, of which 65.2% are completely unaided – meaning they receive no government funding and rely entirely on tuition fees.

This growth has dramatically expanded access – more students can now find seats in higher education – but it has also deepened inequalities. Private unaided institutions set their own fee structures, making quality higher education unaffordable for large sections of the population. Most private sector expenditure on higher education benefits students from privileged communities, while students from marginalised backgrounds are largely excluded.

Equity concerns and the NEP 2020 🔗

The National Education Policy (NEP) 2020 acknowledges the funding crisis directly, setting a target of raising public education expenditure to 6% of GDP and recommending diversification of funding sources – including alumni endowments, philanthropic contributions, and industry partnerships. However, critics point out a tension within the policy itself. Research suggests that if NEP 2020 enrolment targets are to be met, and given the shrinking public sector share in higher education, greater impetus will have to be provided to private higher education – raising difficult questions about how to ensure that expansion does not come at the cost of inclusivity.

Scholars such as J.B.G. Tilak have long argued that public investment in education is a moral and developmental imperative, and that while private participation can supplement state effort, it must not substitute the government’s core responsibility. The risk, as evidence increasingly shows, is that an education system reliant on private funding becomes stratified – offering world-class opportunities to those who can pay, and a diminished experience to those who cannot.

Possible pathways forward 🔗

Addressing India’s higher education funding challenge requires action on multiple fronts. First, meeting the long-overdue commitment of allocating 6% of GDP to education would provide the fiscal headroom that public institutions desperately need. Second, performance-linked funding models – where grants are tied to measurable outcomes in teaching quality, research output, and equity – could make disbursements more efficient and accountability-driven. Third, building robust alumni networks and endowment cultures, as seen in institutions like the IITs, can generate sustainable non-governmental income without burdening students. Finally, regulating private institutions more rigorously – particularly on fee transparency and academic quality – would help ensure that the private sector’s growth contributes to rather than undermines national educational goals.

The financing of higher education is ultimately not just a fiscal matter. It reflects a society’s values: who deserves access to knowledge, who bears the cost, and what kind of institutions a nation wants to build.

What do you think? Should India move towards a model where well-off students cross-subsidise the education of those from economically weaker backgrounds within public universities – and would that be a fairer solution than the current trajectory of privatisation? And with public funding for higher education declining in real terms, what responsibility do alumni and the private sector have in sustaining the institutions that trained them?

References

1. https://www.ugc.gov.in/
2. https://www.ijrti.org/papers/IJRTI2311012.pdf
3. https://prsindia.org/budgets/parliament/demand-for-grants-2024-25-analysis-education
4. https://opportunities-insight.britishcouncil.org/analysis/indias-national-education-budget-202425
5. https://www.intechopen.com/chapters/79738
6. https://www.ugc.gov.in/oldpdf/xplanpdf/incentive_resource_mobilisation.pdf
7. https://ccs.in/sites/default/files/2022-10/Funding%20by%20University%20Grants%20Commission.pdf
8. https://scoop.eduncle.com/ugc-research-projects-guidelines-for-teacher
9. https://www.ugc.gov.in/oldpdf/xplanpdf/assistantstre.pdf
10. https://www.emerald.com/pap/article/28/3/337/1308044/Revolutionizing-higher-education-rethinking
11. https://wenr.wes.org/2023/11/higher-education-privatization-in-south-asia-current-trends-and-future-outlook
12. https://www.outlookindia.com/national/beyond-the-trillion-increased-privatisation-and-policing-of-education
13. https://www.education.gov.in/en/university-grants-commission
14. https://files.eric.ed.gov/fulltext/EJ1350613.pdf