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% of the population pays for almost all the income tax collected in India. Add to it that they pay the lions share of corporate taxes, one gets the simple result that more than 60% of all taxes are paid by just 10% 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 isnt there some way that the rich share in this burden of adjustment It turns out there isstart asking the rich to pay more for tuition at government-run institutions of higher learninghereafter colleges. These colleges, like their counterparts in the private sector, come in different sizes and shapes of quality. Many are first rate colleges, though it is particularly sad, and surprising, that none of our finest colleges figure 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 highly unclear whether the students are attending government colleges for their quality, or their cheapness.
All forms of education have externalities. That is why educationwhether primary, secondary, or higheris 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 subsidisedbut 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 taxesR1.8 lakh a year. So a large majority of those who go to collegeprivate or publicbelong to the top 20% 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% of college-age-going cohort goes to college in India. This is about half the international average, with both China and Brazil close to this average of 25%.
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 isntbut by increasing fees for the top half of university entrants more of the bottom of the top 20% 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 from each household member as to the type of college attended, tuition fees paid to the college, expenditure on books etc. The simple resulton average, fees at private colleges were R30,000 a year and fees at government colleges R6,000 a year. Projecting the data to 2012-13 on the basis of information available, one obtains the result that private colleges now charge as tuition an average of R60,000 and government colleges R8,000. The number of students going to collegeapproximately half in each, or 22 million students in all.
Government expenditure in higher education is provided by both the state and the Centre, with the former accounting for about two-thirds of the total of R90,000 crore a yearfor about 11 million students. Rounding off, one obtains that the government spends about R1 lakh per college student per yearand collects less than 10% in tuition. The education cess yields about R32,000 crore with about a third, around R11,000 crore, going towards higher education. The present structure of tuition fees yields another R10,000 crore. The higher education subsidy is therefore close to R70,000 crore, or about 1.3% 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 market for those who can afford it, and subsidise those who cannot. Cant we do the same
Yes, we can. So the modest proposal is as follows. About 60% of college-going students can pay for an increase in annual tuition of R15,000. Many students pay multiples of this level for high school educationremember, their parents are in the top 5% of all income earners. The revenue generated from R15,000 a year, from the top half of college goers attending government colleges (approximately 25% of 22 million or 5.5 million) is R8,250 crore a year, or approximately 0.08% of GDP. Our fiscal deficit is slated to be reduced to 4.8% of GDP, a decline of 0.5 percentage pointsa modest cut in education subsidy alone yields 16% of this reduction.
Will there be protests if tuition is raised for rich students Let me seethese 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 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.
Surjit S Bhalla is chairman of Oxus Investments, an emerging market advisory firm, and a senior advisor to Blufin, a leading financial information company. He can be followed on Twitter: @surjitbhalla