CHAPTER 1

INTRODUCTION

Education is of vital importance for any country, as it is a powerful tool to

build a knowledge–based society. System performance, however, varies widely across

countries in terms of quality, coverage and efficiency. Many developing countries

spend a percentage of their national resources on education, equivalent to the amount

spent by most of the developed countries, but produce much lower outcomes.

Education investment is also crucial for the sustained economic growth that low–

income countries are seeking to stimulate, and without which long–term poverty

reduction is impossible. Inadequate education is one of the most powerful

determinants of poverty, and unequal access to educational opportunity is a strong

correlate of income inequality. Education plays a key role in creating human capital.

It has been observed that countries with similar levels of economic development

spend varying amounts on education sector. The size of spending on education also

changes within countries over time. Given this significant variation in expenditure on

education across and within countries, a natural question arises as to what factors help

to explain this difference. This issue is interesting from a public policy perspective

since spending on education has a significant positive redistributive effect such as

spending increases the human capital of the economy and can lead to direct growth

effects as well as indirect spill over benefits for the rest of the economy (Barro, 1991).

The role of education in economic development is recognised for quite some time in

mainstream economic literature. In terms of the macroeconomic importance of

education, Hanushek and Wobmann (2007) summarises the arguments of the

neoclassical and endogenous growth models as follows. First, education increases the

human capital inherent in the labour force, which increases labour productivity and

1
growth; second, education may lead to increased innovations in the economy; and

lastly, education facilitates the diffusion of such innovations. However, they argue

that it is the quality of education, and not mere enrolments that is crucial in bringing

about development. There is a general consensus in the literature that expansion of the

skills, knowledge, and capacities of individuals–increasing human capital–is critical

for economic growth (Krueger and Lindahl, 2001; Greenaway and Haynes, 2003).

The focus of the world economists, particularly those pertaining to the developing

nations, is increasingly shifting towards embarking on a twin policy of achieving

economic growth with human development. Economic growth alone, it is felt, is not

enough to generate sustainable development because the impact seldom percolates

down to the bottom–most sections of the society. Hence, policy–makers in the world

have placed an overriding importance on the provision of basic social services like

education, health and nutrition for all sections of society particularly the poor. In a

wider sense, education may be described as all the activities by which a human group

transmits to its descendants a body of knowledge, skills and a moral code which

would enable the group to subsist.

Thus, when people are well–educated, they can utilize the knowledge to make

reforms that lead to research and development. Education does not simply mean

bookish knowledge or learning things casually but holds a much deeper meaning.

Education has both intrinsic and instrumental value: it is desirable not only for the

individual but also for the society as a whole (Sen, 1999). In this sense, education

refers to the transmission to a subsequent generation of those skills needed to perform

tasks of daily living and further passing on the social, cultural, spiritual and

philosophical values of a particular community. Among the basic services, education

is of great intrinsic importance when assessing inequalities of opportunity. It is also an

2
important determinant of individual’s income, health (and health of their children),

and capacity to interact and communicate with others. Inequalities in education thus

may lead to inequalities in other dimensions of well–being. It is owing to this fact that

the United Nations Development Programme (UNDP) considers education as one of

the main components of its Human Development Index (HDI) which measures the

status of human choices of the countries in the world. Unsurprisingly, the second

Millennium Development Goal (MDG) is on achieving universal primary education.

In fact, even in meeting the other goals, education plays the central role. For instance,

in the eradication of extreme poverty and hunger, they argue that education empowers

people with the necessary knowledge and skills needed to create or access jobs for

themselves. In this way, they are able to increase production or income to reduce

hunger and malnutrition. Because, it provides knowledge and skills, encourages new

behaviour and increases individual and collective empowerment, education is the

centre of social and economic development.

Whether education in general and human development in particular are looked

upon as a right, or perceived as the goals of a social contract between the state and its

citizens to enhance the well–being of all individuals in the society, it is evident that

there is a significant role for public intervention. The responsibilities enjoined upon

the state in this regard necessitate expenditure on the provision and delivery of public

services of a certain minimum quality. This is especially true in developing countries

that suffer from high levels of poverty, inequality and market imperfections. Public

interventions in education can lead to an improvement in the future income stream of

individuals, enabling equitable distribution of wealth and helping to reduce poverty.

While the welfare–enhancing view of public expenditure on education is well–

recognised, the complexity of the nature of education in terms of increasing both

3
social and individual returns to investment makes the implementation of a financing

framework very difficult. As one progresses from the basic to higher levels of

education, private returns increase faster when compared to social returns. However,

in most of the developing countries of the world, governments allocate significantly

more public resources on per–student in university and higher education than in

elementary or secondary levels. These large differences cannot be explained fully by

scale economies in the provision of publicly funded school educational system. Such

differences are negligible for developed countries, indicating that possibilities for

reallocation exist as a country moves from the low–income to the high–income group.

Financing of education is a matter of great concern and major policy challenging

across all the countries. A country’s educational sector competes for public resources

with all other sectors and is in competition for resources within various sub–sectors of

education.

There was a time when the educational development of a nation occurred

exclusively with the availability of public resources and the private participation was

not considered as that much necessary and a good practice. The governments are

having sound budgets and are providing sufficient resources to the educational sector,

at least, up to the elementary and secondary levels. The present day advanced

economies and even the newly industrialized countries of East Asia have developed

their human resources with the strong backing of the public funds. However, the

situation changed considerably with the advent of economic reforms under the so–

called neo–liberal policies. As a consequence, the educational sectors of many

counties were opened up in the private sector on a massive scale. It has brought up the

issues of rising costs, cost recovery and financing of education on the forefront of any

discussion related to the education sector. For the past many years, not only in India,

4
but also across the world, public expenditure on higher education is declining at least

in real prices as in relation to state incomes and budgets. The decline in public

expenditure on higher education has emerged as a global crisis of higher education

sectors which is the most noticeable trend. Compelled by economic reform policies or

conceived of the rationale for reduced role of the state in funding higher education,

most of the countries have inflicted serious cuts in public budgets for higher

education. The decline is not confined to developing countries, though it is more

prevalent in the developing than that in the developed countries. There is a significant

fall even in the advanced countries such as the United Kingdom, Australia and New

Zealand. But, the higher education sector generally suffers much in the high income

countries. However, the decline has been steep in some countries such as Botswana,

Jamaica, Hungary and New Zealand (Tilak, 2006 a).

Considering the importance of education in nation–building and economic

development, along with the governments around the world, the central and state

governments in India have been allocating considerable share of their resources in the

field of education. Public education typically absorbs 2 to 5 percent of Gross

Domestic Product (GDP) and is often the largest (non–defence) sector in the overall

government budget in India. Additionally, private spending on education can often

represent an equivalent amount. In India, the policy makers have always emphasised

expansion of educational facilities. Governments can accelerate educational

development through their decisions regarding public expenditure. Allocated

appropriately, public expenditure can overcome market failures that exacerbate the

inability of the poor to borrow for education. The proponents of educational

development emphasise the importance of quality of education, rather than ‘quantity’.

However, it is important to recognize the fact that quantity is a first step to ensure

5
quality. In some of the developing countries where more than half of the population

have not been to the classroom, it is important to first get the children enrolled before

ensuring the quality of the educational system. Government of India (GOI) appointed

several educational commissions (Kothari Commission, 1964-66; and Tapas

Majumdar Committee, 1999) which have indicated that in order to provide proper

educational facilities to the millions of children in the country, huge amount of

resources need to be provided. Educational committees of GOI advocated committing

6 percent of the Gross National Product (GNP) for public expenditure on education by

a target year. Though the targeted expenditure levels have not been reached, a lot of

funds have been spent on education such as, building schools, increasing number of

teachers, providing text–books, teaching learning materials for improving

infrastructure facilities at schools etc in the last sixty years. As a result, we find a

significant increase in educational institutions during the last six decades in India and

the aggregated budgeted expenditure on education increased from `64.5 crores in

1950-51 and `194942 crores in 2009-10.

Thus, the high estimated rates of return to schooling are often cited as

justification for increased public investment in more and better quality schools. At the

same time, given budgetary constraints, many countries face important trade–off

between educational and other types of expenditure, such as domestic infrastructure.

For example, fiscal austerity programmes often make it necessary for countries to

make difficult choices about which components of public expenditure should be

reduced or reallocated within the overall budget. This is especially true for a transition

economy like India where acute financial constraints force the government to make

critical and sometimes unpopular choices. It means opening your minds up to learn

new things and pursue different options. The two dimensions of educational

6
investment i.e. quantity and quality, depend upon investment by the individual or

household and by institutions such as government and other organisations. Individual

investment refers to the investment made by the students and/or their parents on their

education. So it is also referred to as household or family investment in education.

Institutional investment is referred to as public and, if properly defined, government

investment in education. Both public and household investment in education is highly

significant not only because of their magnitudes, but also because of their nature and

characteristics. While public investment can provide educational facilities, only

household investment will enable its utilisation. The two are so inter–related and

inter–dependent that, in the absence of either of them, there is likely to be under

allocation of resources for education.

Educational accomplishment is one of the most important factors that

distinguish Kerala from the rest of India. Kerala is much ahead of other major Indian

states in achieving the goal of universal elementary education, which is reflected in

the literacy rate of over 90 percent and almost cent percent enrolment and very low

dropout rates at the primary and middle level (Nair, 1981; Tilak, 1994; Dreze and

Sen, 1995). In contrast to the tardy growth of education elsewhere in the country,

Kerala experienced a continuous process of educational expansion since the last

decades of the eighteenth century. This spectacular development approach of high

social development along with low per capita income is the combined result of many

facets of human life in the state. One of the major aspects of the existing pattern of

development is the concomitant result of the widespread equitable development of

education sector in Kerala. The educational development in Kerala is spectacular

which is exemplified from the high rate of literacy for both men and women, and

growth of other educational sector facilities throughout Kerala. Governments, private

7
agencies and several progressive and social reform movements have contributed

significantly to this achievement. Currently, Kerala focuses on quality of education

rather than mass education. Growing concerns on quality education force people to

deviate from public to private institutions. Exploiting the concerns of quality

education along with the resource constraints of government accelerated the problems

in educational sector. Thus Kerala witnessed a re–emergence of unprecedented

growth of unaided and self–financing institutions that had vanished from Kerala about

half a century ago. These profit–oriented institutions made education a consumer

product rather than a social investment. People with high purchasing power can buy

quality education with high price. Restoration of old educational system, which was

extinct from Kerala, gave managements freedom for commercialization of education,

through admissions and appointments.

It is interesting to note that the private educational agencies and individuals in

Kerala implement the spirit of Smith’s (1776) theory on education. According to

Smith, education is another category of industry, which can be treated like any other

forms of fixed capital. While people with higher purchasing power procure quality

education and thereby invest more fixed capital, people with less purchasing power

procure less quality education and less capital investment. This unequal capital

investment influences returns, which in turn affects the income distribution and

widens income gap of the society. Families may or may not be willing to borrow

money for education, as education is a ‘risky’, and more over, the credit market for

education is yet to be developed in many developing countries including India. Thus,

it is mostly felt that the levels of investment of households in education are related to

income and education. Generally, it is found that high–income households spend

more on education than poor income households. Households may feel compelled to

8
invest in education, if public efforts, as reflected in the quality of physical and human

infrastructure, available in schools are perceived to be inadequate. Under such

circumstances even poor households spend on education out of compulsion. So, the

poorer the quality of infrastructure and other facilities in public schools, ceteris

paribus, the higher could be the level of expenditure of the households on education.

The quality of school infrastructure could be measured in terms of a large number of

indicators, such as its availability within the habitation, the type of buildings, the

quality and quantity of teachers. The quantity and quality of school facilities could

also be measured in terms of public expenditure on per–student in a country. If the

facilities in public schools are better, families may not feel the need for incurring

expenditure. Therefore, it can be argued that household investment substitute public

investments in education, as they fill the gap in investments caused by cuts in (or

inadequate) public expenditure on education. On the other hand, it is also argued that

if government spends well on education and provides good quality education,

households feel enthusiastic and would willingly contribute to education and thus

supplement public efforts. In short, household and government investment in

education are related, either substituting each other or complementing each other. The

set of school related factors seem to be important in determining the extent of

household investment in education. It is crucial to analyze and understand the

empirical and theoretical studies in the area of education.

1.1. Review of Literature

Empirical evidence from studies conducted by social scientists makes it clear

that there is significant scope for expenditure on education in influencing the

economic and social situations of people. The existing empirical literature is focused

on the following six aspects: a) The relationship between education, economic

9
development and economic growth, b) Public and household expenditure on

education, c) Financing of expenditure on education, d) Impact of expenditure on

education so as to measure the impact of public and private investment on education

and economic growth and the determinants of household investment on education e)

Problems of educational systems and various aspects of education and f) The

inequality and comparison of educational outcomes based on various yardsticks.

1.1.1. Education and Economic Development

There are enough empirical literature which explores various aspects of the link

between the expenditure on education and other dimensions. The first among them

pertains to the relationship between the educational structure, economic development

and economic growth. These studies evaluate the relative merits of developed

educational systems and their impact upon the economic development. A large body

of cross country studies concludes that the public and the private expenditure on

education positively contribute to the economic development through the creation of

education, employment and empowerment.

Barro (2001) examines the role of education as a determinant of long run

economic growth by using data of 100 countries with various levels of economic

development. The results show that the growth is positively related to the average

year of school attainment of males at the secondary and higher education level. The

study adds that workers with high educational background would be complementary

with new technologies which can diffuse the technology. The study also concludes

that both quality and quantity are important while quality is more important to

economic growth.

Pitchett (2001) studied about the mixed result of human capital achievement in

increasing the rate of growth of output per–worker. The study found that the

10
development impact of education varied widely across the countries for possible

reasons such as institutional governance, environment, overall supply and demand for

labour and the educational quality. He concludes that the extent and mix of this

phenomenon vary from country to country in explaining the actual economic impact

of education to the economic development.

Matsushita et al (2006) measured the contribution of education to the real per

capita GDP in Australia over the period between 1969 and 2003. They found that the

contribution of secondary enrolment to economic growth is negative because of their

further schooling while the net outcomes were positively influenced by economic

growth. The result shows that 13.7 percent of the annual growth in real GDP per

capita is because of the quality of the labour force. The study concludes that

secondary and higher education with a proper mix of vocational education are the

important determinants of growth.

Ansari (1986) explored the relationship between the expenditure on education

and economic development in India. He finds that on an average an increase in the

national income by `100 have led to an increase in total expenditure on education by

`3.7 during the study period. The result suggests that the magnitude of additional

expenditure on education associated with each unit of increment in national income

has declined during the period under consideration. The study has also revealed that

the growth of expenditure on education is largely determined by the increase in real

income.

James (2008) studied the contribution of age structure to the change in the

economic growth in India. The study has found that, there is a clear, positive and

significant relationship between age structure and economic growth. The study

suggests that the educational achievements and health conditions of the people are far

11
from the desirable position. The study concludes that the government should improve

the health and educational conditions which can reap the real benefits of demographic

dividend1 to the country.

Hong et al (2009) investigated to impact of public goods such as education on

the per capita income and poverty reduction in India. Results show that the

Government expenditure on education and health has a large and positive significant

impact on per capita income with substantial reduction in the poverty of the nation.

The study concludes that other development expenditure also have significant positive

effects on growth. However, it is only about one half of the share of spending on

education and health.

The international and national level studies conclude that education investment

and achievements are necessary for the growth and development of an economy.

Therefore, it is important to examine the Kerala level studies to recognize the status of

education in Kerala. It is empirically proved that people are a type of economic asset

and that increased investment in health, skills and knowledge provide an increase in

their human capital investment, thereby enhancing their earning capacity and income

level, which in turn contribute significantly to the economic liberation of the weaker

sections of Kerala (Velayudhan, 2010). Educational development in Kerala

contributed significantly to the complex processes of technology dissemination,

individual earnings, reduction of poverty, development of healthy families, gender

equality, creation and sharing of values, responsibilities of citizenship, and quality of

life. According to Dreze and Sen (1996), Kerala’s experience powerfully brings out

the dialectical relationship between educational progress and social change: the spread

of education helps to overcome traditional inequalities of castes and gender. Kerala

made an early start down that road, in the nineteenth century, leading to wide–ranging

12
social achievements later. Education elevated the self–esteem of the most oppressed

and is one of the reasons for loosening the rigid social structure and greater civic

involvement ranging from more participation in political decision–making to more

parental involvement in local schools. Unlike other States of India, people in Kerala

are more politically conscious and are active in the democratic process indicating the

significant role of education (Franke, 1994). Education empowers women, who

influences birth and mortality rate in Kerala.

The birth rate in Kerala shows a rapid decline before the intensification of

family planning programme and the impact of this fall has already begun to be felt in

the growth rate of primary school enrolment (Nair, 1974, 1994). There is no reason

other than the influence of education for better performance in demographic changes

of Kerala (Velayudhan, 2010). Educational development helped economic

development of Kerala by increasing economic efficiency, improving quality of life

and producing both public and private benefits. The repressed groups and

untouchables passionately sought the opportunities of education as a means of

liberation from caste disabilities since social situation in Kerala was wretched during

the late eighteenth and early nineteenth century (Tharakan, 1984). In short, Kerala

experience reveals that education improves capabilities of individuals and becomes a

catalyst for all the closely interrelated economic, social, cultural and demographic

changes, creating socio–economic conditions for economic growth.

Pillai (2008) examined the chain reaction between the human capital

development and economic growth in Kerala. He defined development in its truest

sense in terms of duality of availability including accessibility and quality. He

concludes that Kerala had, in the field of social infrastructure, achieved only the quasi

13
capability or q–capability enhancement and she is yet to strive for the true

development or the freedom from quasi–freedom.

There is a second strand of research attempted to study the role of public

authorities, including the centre and the state governments from a functional point of

view to develop the educational institutions and their participation. Researchers in this

school investigated the contribution of public institutions in the provision of education

to the people especially the poor sections of the society.

1.1.2. Expenditure on Education

1.1.2.1. Public Expenditure on Education

Public spending on education is justified from the standpoint of society so as

to enhance social returns from education. Government subsidization of education will

reduce the gap between private and social returns, so that individual incentives to

invest in education are no longer distorted. One of the main arguments for

government subsidization is that education generates positive externalities, for

instance, people exchange knowledge through social interaction outside the

conventional market transactions. These human capital spills–over drive a wedge

between social and private returns to education. When education creates positive

externalities, public funding or provision of schooling, or even compulsory schooling

laws, can, in principle, move society closer to efficient outcomes. A large body of

cross–country studies concluded that public and private expenditure on education

have positively contributed to the economic development through the creation of

education, employment and empowerment.

Ghosh et al (2008) studied the impact of the composition of government

spending on long run real growth on a panel data of 15 countries including India over

the period between 1972 and 1999. They found that the current expenditure is more

14
productive than capital expenditure because of non–optimum level of capital

spending. The study concluded that the expenditure on health and education had a

negative impact on the growth rate mainly by the distorted incentive structure,

bureaucratic inefficiencies and corruption inherent in these economies. The study

added that existing projects rather than new projects are better to enhance the

productivity with a given infrastructure.

Goolsbee (1998) investigated the impact of government’s Research and

Development (R and D) spending in the United States of America. He found that the

major proportion of the Government research and development spending crowd out

private spending by raising wages and reduction in the total labour force in this sector.

The study concluded that research and development can be an inventive activity rather

than a chance for windfall gains to the R and D workers.

Shariff et al (2000) analyzed the various aspects and dimensions of public

expenditure on education in India. They found that public expenditure on education as

a percent of GNP declined from 4.1 percent to 3.8 percent during the period from

1990 to 1996. The decline in the share of elementary education was seen coupled with

the reduction of per–pupil expenditure especially in low income states. The study

recommended that central government should expand its role in contributing

resources to poor states in the context of structural adjustment programmes.

Tilak (2004) evaluated the impact of public subsidies on education in India.

He found that the subsidization helped to create a large reservoir of scientific and

technical personnel. He added that the fee subsidies and other specific subsidies are

very effective but inadequate to meet the needs of poor people. The study concludes

that the percentage of students receiving free education systematically declined at

higher level of education.

15
 Hong et al (2009) investigated the impact of public goods such as education on

the per capita income and poverty reduction in India. The study results show that

Government expenditure on education and health had a large and positive significant

impact on per capita income with substantial reduction of poverty in India.

Banerji (2000) investigated the schooling of children in the urban metros such

as Mumbai and Delhi. The study found that the main reason of poor attendance of

slum children is their economic circumstances and the school accessibility problems.

The study yielded the insight that main reason of slum children not being in school

has less to do with their economic circumstances than with the school systems short

comings. The study recommended that the infrastructure and the quality of

government schools in the metros should be improved.

George et al (2005) investigated the change in the educational sector of Kerala

in the broad context of the economy, society and polity. They found that the share of

education in the state’s budget has substantially declined. The study concluded that

the growth of unaided self–financing institutions in the professional education leads to

a totally student–financed system in Kerala.

1.1.2.2. Household Expenditure on Education

Household expenditure on education is quite sizeable in India. Households

spend a lot on acquiring education even in rural India (Tilak, 2002). The willingness

of a household to invest in education is affected by a number of factors. These could

range from existing national legislation to the quality of education on offer at state

schools. These factors do vary considerably between member states and even vary

down to the level of individual households. National level estimates based on NAS

also reveal that household expenditure on education in India is sizeable. For instance,

this expenditure constituted 2.5 percent of GNP in 1970-71 (Tilak, 1985). The view,

16
that the government meets the entire expenditure on education and household

expenditure on education in India is negligible and hence could be ignored, prevailed

until some information was made available on the extent of household expenditure.

From a quick look through the meagre research available on household expenditure

on education, it was clear that the earlier presumptions were wrong (Shah, 1969).

It was found that household expenditure was sizeable in India and Kerala.

Panchamukhi (1965) and Kothari (1966) estimated the total costs of education

included not only public or government costs but also household costs. Majority of

the empirical studies estimated the role of actual expenditure on education.

Accordingly, they found that the total costs of education constituted about 6 percent

of GNP in 1959 to 1960. Based on a small sample of students in Baroda, Shah (1969)

estimated that tuition and non–tuition costs incurred by the families on elementary

education, by various income groups are significant in India.

Ray (2002) investigated the determinants of child labour2 in Nepal and

Pakistan. The study found that there is a joint endogeneity of child labour, child

schooling and child poverty. The study seeks to empirically prove that there is a sharp

tradeoff between child labour and child schooling with a gender bias. The study

recognized the positive role of adult education levels of the household and realized

that the increased public awareness has a positive influence in reducing child labour

hours. The study concludes that inequality and credit–constraints3 may increase the

child labour hours. He recommended that an enrolment subsidy coupled with the mid

day meal programme can encourage the parents to keep their children in school and

out of employment.

Behrman et al (1999) made a pioneering study by using the data from Vietnam

on the role of household income on child schooling. They also studied the

17
intergenerational mobility and equality of opportunity. Their results suggest that the

children of high income households have shown good education results with a minor

degree of gender bias. The study concluded that the policies of progressive school

fees are less meaningful in the sense that they are only about one–third of what

households actually paid to schools in Vietnam.

Cameron et al (2001) studied the impact of crop loss on the expenditure on

education of the households in Indonesia. They find that the expenditure on female

student is a luxury good4 and it is reduced or eliminated when hardship hits on the

family. The study revealed that the cutback in expenditure on girl child is strictly to

those households which are not able to smooth their consumption expenditure.

Paul (2003) examined the impact of parental death on schooling of children in

Indonesia during the period 1994-1996. The study finds that family wealth is the most

crucial factor in determining the nature of impact on the education of children. He

concludes that parent’s recent death has a large effect on a child’s enrolment and there

is little differential treatment based on the gender of the child.

Schady (2004) explored the impact of macroeconomic crises on the spending on

the human capital of children in Peru. He also tested if there is any possibility of

transmitting poverty across generations via macro economic crisis. He found that the

parents were reluctant to cut back in key human capital investment of their children.

He concluded that the children exposed to the crisis were most likely to combine work

with school and had completed more grades than children unexposed to crisis.

The impact of birth order and family size on the educational attainment of

children in Norway was studied by Black (2005). The study found that there is a

negative correlation between family size and children’s education while the inclusion

of birth order or twin birth as an instrument which affect of family size is negligible.

18
The study concludes that adult earnings, employment and teenage childbearing have

strong bearing for birth order effects with these outcomes particularly among women.

Richard (2009) investigated the factors that influenced the parental spending

on children’s primary education in Malawi. The study found that the level of

household income both in rural and urban areas had positively and significantly

affected participation as well as expenditure on education decisions. The study proved

that the elasticity of spending on education of rural households is more sensitive to the

changes in income compared to their urban counterparts.

Tilak (2002) in his pioneering study empirically evaluated the determinants of

household expenditure on education in rural India. He found that household income,

education level of the head of the household, size of the household and caste are

found to be important variables in determining expenditure on education of the rural

households. Moreover, results suggest that school related variables and government

expenditure on education can positively affect the household expenditure on

education in rural India.

A comprehensive work on the food and expenditure on education of farmers in

shishwala village of the Bhiwani district in Haryana is done by Singh (2008). His

study reveals that the relative share of vegetarian food items declines as the size of

holding increases. The results indicated that expenditure on education show a clear

difference between male and female child and it is favourable to the male child.

Kumar (2004) studied the private household cost of medical and paramedical

education in Kerala. He found that the education background of parents and the nature

of the schools had influenced the entry barriers of students to these courses in Kerala.

He also proved that the entry into the medical education is extremely difficult to the

profile of lower income group of the society.

19
 Nair (2004) studied the various aspects and dimensions of household cost of

school education in Kerala. He found that the role of private sector in the education

system of Kerala is significant. Around two–thirds of the pre–primary students are

under the aided and unaided management. The total per–student cost varies

considerably between the types of management. He argues that the rise in income

through the remittances and other related developments leads to the rise of unaided

schools that which preferred by a large number of parents.

Salim (2004) analyzed the magnitude of entry barriers in the professional

education in Kerala. He found that the parental costs are substantially higher for the

joined students than for others. He argued that the lower income households with

annual income of less than fifty thousand rupees secured only 14 percent of the seats

in professional education. He found that against the mounting private costs, students

of higher education got a meager help from the state as incentives.

Kumar et al (2009) analyzed the impact of the mushroom growth of self–

financing colleges in Kerala. They found that the reach of self–financing professional

institutions is limited to only five to ten percent of the households in the state. They

concluded that the influence of commercialization and communalization entered into

the educational system has far reaching long term problems to the whole of Kerala

society.

1.1.3. Financing of the Expenditure on Education

It is widely accepted that education is poor collateral in the financial system. It

is important to examine the sources, time and end–use of financing of expenditure on

education across the world. Majority of these studies conclude that the role of

education loan is comparatively low especially in the developing and under–

developed countries in the world.

20
 Keane (2002) examined the impact of borrowing constraints and financial aid

programmes like guaranteed student loans and tuition subsidies in the college

attendance of the United States of America. He finds that borrowing constraints have

a little effect on the college attendance decisions while tuition subsidies play a modest

role in reducing inequality in schooling and earnings. He concluded that the inequality

appears to be driven by unequal human capital acquired prior to the college

enrolment.

Christian (2007) examined the relationship between the liquidity constraint

and the cyclicality of college enrolment in the United States of America. He found

that the liquidity constraints coupled with business cycles and its impact upon the

college enrolment depend on various factors like demographics, opportunity cost and

type of ownership of assets, borrowing ability of households, income level, interest

rate, tuition fee and the college earnings premium.

Tilak (1992) investigated the role of student loan in financing higher

education in India. He found that, confronted with declining public budgets for

education on the one hand, developing countries like India have been examining

alternative methods of financing higher education. The study concluded that student

loans had made little contribution to the efficiency and equity of higher education in

India.

Tilak (1993) made a comparative analysis on the various alternative sources of

financing higher education in India. He found that all the methods of financing have

various problems and benefits in the wake of privatisation. The study concluded that a

proper mix of public and private sources will be beneficial for the development of

education in India.

21
 Chattopadhaya (2007) made a comprehensive study on the modes and

alternative sources of financing of the higher education in India. He found that

deregulation of fees, education loan, human capital contracts, income contingent

loans5, graduate tax, education vouchers, self financing market determined courses,

reduction in the peer student cost and tax financing are the main alternative routes to

enhance the resources and efficiency in the higher education.

Tilak (2008) analyzed the political economy of external aid for education in

India. According to him, the effects of external assistance are very serious and have

dangerous long term effects on the development of education and on the society at

large. He argues that if the country goes for external aid to launch an umbrella of

programmes it may be effective in a short term basis only to fill the resource gap.

1.1.4. Returns from Education

Over the last two decades there is an outpouring of empirical work exploring

the impact of ‘human capital’–a concept of worker quality and skills generally

measured by formal education, on the level and growth of productivity. Returns from

education are the rewards for investing in education. This reward can be in the form

of earnings and other social returns like honour, status, accommodating attitude etc.

Though the importance of education as a determinant of earnings was recognized by

Adam Smith himself, only recently the implications of the approach have been spelled

out by Mincer (1958) and Becker and Tomes (1979,1986) in the now famous human

capital approach. Since then number of studies have estimated earnings functions

which demonstrated a strong relationship between years of schooling and earnings

(Mincer, 1974; Bhagwati 1975; Psacharopoulos, 1977; Tilak, 1987; Currie, 1995;

Card, 1999). Social disadvantages in education, experienced earlier in life, also have a

strong impact on adult life chances and earnings.

22
 Blundell, Dearden, Goodman and Reed (2000) have classified returns from

investment in higher education into three main categories: a) Private financial return

to education–acquiring education improves the earnings and/or employment prospects

of individuals, b) Private non–financial return from education, it includes

improvements in individual’s welfare that are not a part of measured earnings (e.g,

easy access to highly paid jobs, better working environment and so on) and c) Social

returns from education. Acquiring of education may have a benefit to other

individuals of the society. It is over and above private returns from education. It

would occur in the form of positive externalities of the education.

Returns from education generally vary with the level of education. Empirical

analysis of returns from education has shown mixed results. Psacharopoulos (1994)

summarized the patterns of rate of return from education prevailing throughout the

world as: a) rate of return from education diminishes with the levels of education, i.e.

primary schooling has more returns than those of secondary schooling and the

secondary education gives more returns than even higher education, b) The returns

from education are higher in the private sector than that of public sector. The

difference is the outcome of the productivity enhancement role of education in the

private sector and fixed and rigid pay structure in the public sector, c) The pattern of

returns from education remains almost stable as far as the developed countries are

considered and d) Female’s private returns from education are higher than their male

counterparts. The rates of return from education in developing countries are higher

than those in developed countries. Studies on education and earnings in several

countries support a positive relationship between the two. The positive and significant

impact of education on earnings is considered to be encouraging the younger to

continue their studies beyond the compulsory level of education. More educated

23
workers get, on an average more returns than their less educated counterparts. They

can perform a wider range of tasks and they can easily be trained in new skills.

Educated workers get higher wages, more respect and dignity, stable and sustained

employment and higher horizontal and vertical mobility. So, education as a measure

of human capital accumulation plays an important role in one’s wages and earnings

differentials. Kruger and Summers (1988) have rigorously analyzed the wage

differentials between private and public sectors in the industrial world and found that

dispersion in wages across the industries and sectors were substantial.

1.1.4.1. Financial Return from Education

A prominent group of researchers investigated the return of the education

investment on the nations, firms and households. They have found that educational

investment is highly positive and it can provide monetary and non–monetary returns

and thereby develop the nation and equip its people with a good standard of living.

Psacharopoulos (1995) examined the profitability of education by using

household data of Venezuela and Guatemala. He found that the overall private return

in Guatemala is over and above 15 percent while the rate of return is high to the male

workers in private sector. The study added that it is due to the high level of literacy

while primary education had shown high rate of return in the country.

A comprehensive study by Mincer et al (1974) attempted to find out the

impact of education on the determination of income. The study proved that there is a

clear influence of education on household income. They concluded that the major

determinants of earnings of women are family investment, rate on human capital,

depreciation rates, family size, formal post school training, effect of mobility and

residual variables.

24
 Orazem et al (1995) examined the impact of transition to a market economy on

the structure of wages and employment during the period from 1987 to 1991 on

Slovenian workers. According to them, the employment and real wages fell

dramatically over the period, while the losses were the highest for the least skilled

employees. The study concluded that women workers gained more when compared to

the men primarily because women occupied safe sectors which was unaffected by

transition in the country.

Angrist (1995) analyzed the economic returns from schooling in the West Bank

and Gaza Strip. He found that the wage differences between the schooling groups fell

by over one and half percent mainly because of the large increase in the size of the

educated labour force in the area. The study recommended that low economic return

or unemployment cannot be an indicator for further investment in education

especially in a developing economy even with a low rate of social return from

education.

Hameresh (1998) examined the determining forces in the decision to work and

leisure of a person in the United States. The study found that the tradeoff between the

work and leisure is based on time budgets, economic and non–economic incentives at

the time of work and leisure are the major determinants of decision making in USA.

The impact of the head of household’s education in the determination of total

household income was studied by Jolliffee (2002). He found that the maximum level

of educational attainment of the head of the household is a crucial factor in

determining the total household income. The study concluded that the schooling

distribution across the male and female members may also influence the long term

household income of the study area during the study period.

25
 Holmund et al (2006) estimated the impact of the gap years between the high

school and university enrolment on the earnings of an individual based on Swedish

data. They found that the postponement of higher education is associated with a

persistent and non–trivial earnings penalty. The main source of the persistent penalty

experience appeared to be the loss of work experience after studies. The study added

that the postponement of higher education reduces the present value of life time

earnings by nearly one half of one year’s peak earnings in the economy.

Unni (2002) examined the nature of education and the earnings among the

ethnic groups in rural India. She found that the households whose major source of

income came from salaried jobs had on an average the highest household incomes in

all ethnic groups. The results showed that across various ethnic groups, the scheduled

castes, scheduled tribes and Muslims were the groups which were having the lowest

income. The Christian households had the highest mean years of education with least

gender difference while the Hindu households had invested the most in education.

Tilak (1981) analysed the education and return to education and discrimination

in the labour market in the West Godawari district of Andhra Pradesh. He found that

there is high rate of return to education to the backward castes than non–backward

castes purely on economic grounds in spite of the wage discrimination against them.

The high level of initial investment leads to a low rate of returns mainly because of

their consumption component of educational investment which is motivated by

cultural factors.

Dutta (1985) investigated the investment in schooling and earnings of Udaipur

city. He found that the shape of supply and demand for human capital is determined

by a variety of factors like aptitude, ability, and family wealth, socio–economic

position of households and availability of non–human capital. He pointed out that the

26
schooling and parental backgrounds together determine the labour market position of

an individual. He suggested that poor background may perpetuate and will be

transferred to the generations which may increase their inequality.

Ramesh (1990) studied the impact of education on household savings in

Warangal city. The study revealed that household savings are positively related with

the educational attainment of the head of the household and it is systematic and

statistically significant. The study concludes that both the marginal propensity to

consume and average propensity to consume have increased for scheduled caste and

scheduled tribe households.

Husain (2005) examined the demand for primary education to the Muslim slum

dwellers in Kolkata. He found that the boys are satisfied with primary education and

the perceived returns from education are different for Muslims and non–Muslims. The

study concluded that majority of the boys and girls did not reach at higher level of

education. He recommended that as the state spending towards slum education are

scarce, it needs urgent attention

Devi (2002) investigated the inter–linkages of education, employment and job

preference of women in Thrissur district of Kerala. The results show that the

residential and marital status, presence of relatives, mother’s employment status and

family income are the statistically significant variables in determining the female

labour force participation. The study concludes that marital status and family income

negatively affect the female labour participation in the district.

Raman (2004) examined the nature of entrepreneurship in rural Kerala based

on a sample of 100 entrepreneurs in the Ernakulum district of Kerala. The study found

that in general, the entrepreneurs with small business units are not highly educated.

The results suggest that entrepreneurship was the second or third corner in the case of

27
majority of samples. The study concluded that the success more or less depends on

various exogenous and endogenous factors.

1.1.4.2. Non–Financial Return from Education

Education has various types of returns. It varies from social returns to private

non–financial return from education. This section evaluates the empirical studies

which deal with the non–financial returns from education.

Muney (2005) tested the causal impact of education on health in USA. The

study proved that the additional year of education lowers the probability of dying in

the next 10 years by approximately 1 to 6 percentage points. The study concluded that

education can increase life expectancy which implies that returns from education

measured in terms of earning increase had substantially underestimated the truer

returns from education.

Antonovies (2005) investigated the impact of women schooling on the rest of

the generation. The study found that an increase in the schooling of women would not

have beneficial effects on the schooling of their children. The results suggest that

educated mothers will spend more time in the labour market and hence less time is

spent with their children. But, other outcomes like children’s health may positively be

influenced by them. The study concluded that these results may not be applicable to

the rural India. The study has also added that elimination of endowment effects and

the husband schooling reduce the impact of woman schooling on their children.

Fedderke et al (2008) investigated the interaction of human capital investment

and the development of social and political institutions based on South African time

series data. They found that human capital matters for growth through its quality

dimension for distributional conflicts by raising political aspirations. The study

concluded that human capital does not stand alone as either the level of economic

28
development matters or distributional conflicts influence the human capital

investment decisions. The social, human and political capital as well as economic

dimensions is densely interwoven in the webs of association.

Psacharopoulous et al (2009) explored the returns to schooling by using US

data and found that the education coupled with experience and skills can generate

many non–conventional pecuniary returns like self–accomplishment, social

interaction, independence and occupational prestige. The study reveals that education

reduces the chances of the unemployed, and it improves the position in labour and

marriage market. They concluded that skills learned in school could also lead to better

health, happier marriage and more successful children.

Tulasidhar (1993) analysed the effects of maternal education and female

labour participation on child mortality in India. He found that child mortality is

inversely related to both maternal education and female labour force participation in

India. Disaggregated analysis showed that female labour force participation had no

impact on child mortality among females with fewer than seven years of education.

The study concluded that the relative impact of maternal education on child mortality

is three times stronger than that of female labour participation

Parikh et al (2001) enquired the effectiveness of female literacy in reducing

the fertility in Andhrapradesh and Uttarpradesh. They found that female literacy

reduced the birthrates of these states while the magnitude of the reduction is

comparatively small. The study concluded that female literacy coupled with other

variables such as economic development, work force participation of women,

provision of health and family planning can increase the effectiveness of female

literacy in these states. Fourth strand of literature focuses on the various problems of

educational systems such as externalities, bottlenecks, shocks and credit–constraints.

29
These studies generally concluded that the problems are inevitable in the course of

development and that they can be solved by a proper plan and action by public and

private authorities.

1.1.5. Problems of Educational Systems

Equitable distribution of education enhances human capital investment of the

underprivileged leading to increase in earning capacity and income level. Improved

education leads to greater income equality, which, in turn is likely to favour higher

rates of growth. As education becomes more broadly based, low–income people are

better able to seek out economic opportunities. Empirical researches on education and

social inequality in various countries have often linked observable measures of

educational achievement to various aspects of disadvantage. These include child

poverty, parental education and income, parental attitudes and neighbourhood factors.

There is by now a sizable body of evidence (Hanushek et al, 2005) that educational

achievement is significantly lower for children from disadvantaged backgrounds.

Some researchers have found an association between schooling opportunities (and

attainment) and household or father’s occupation. It is found that parental education

(Sengupta, 2002) has an extremely strong positive influence on school participation.

The impact of mother’s education seems to be considerably stronger than that of the

father’s (Alderman et al, 1997).

Demographic factors like family size exert strong negative influence on

schooling. A child’s own labour force participation substantially reduces his/her

chances of schooling. Girls from the Muslim and scheduled caste/ scheduled tribe

families have lower probability of entering school, higher chances of dropout and

lower grade completion levels, compared to those from the Hindu general caste

families. Social disadvantage also matters for the phase of higher education, where it

30
is evident that educational inequalities linked to family background tend to persist and

become larger work looking at participation in higher education. More specifically,

university attendance has shown that people from lower income backgrounds have

significantly lower participation rates (Raju, 1991). The other feature of higher

education and its connection to social disadvantage is that people from poorer

backgrounds who participate tend to enroll on courses, or in institutions, that yield

lower economic and social benefits. This includes a lower likelihood of studying at

‘elite’ universities and also a higher probability of studying for a vocational

qualification rather than an academic qualification (Feinstein, 2004).

Sabni et al (2004) examined the implications of General Agreement on Trade in

Services (GATS) for the higher education system of India. They found that the

absence of pressure groups in third world countries and late participation in the

discussions and early opening of markets will have an adverse impact on India’s

higher education sector. The study concluded that the early opening of sectors other

than education will have a long term negative effect on Indian economy.

Kumar et al (2005) evaluated the overall conditions of higher education in the

context of globalization and privatisation in Asia. The study reveals that the Asian

countries can address the issue of poverty and development through higher education

reforms. It concludes that the high inequalities in income and literacy disparity can be

directly attributed to the higher education at policy level.

Tarar (2006) explored the impact of globalization on the higher education

system in Pakistan. He found that the neoliberal policies of the World Bank can help

the system only if there is an active regulation and financial intervention by the state.

He concluded that government’s total allocation to education in terms of GDP should

be enhanced to supplement the private spending on education.

31
 Upadhaya (2007) explored the extent of wastage in Indian higher education

system. He found that the inefficient and ineffective subsidy system, scarcity of

trained faculty, lack of reorganized educational structure and lack of vocationalsation

of women education are the major causes of the wastages in the Indian higher

education system. The study concluded that there are supply and demand side

problems in India’s higher education system.

Chattopadhyay (2009) analysed the various problems associated with the

market operations in higher education in the context of marketisation of higher

education in India. He found that the market logic may seriously compromise the

value and quality of higher education and this weakens the ability to build an

inclusive society. He recommended that the private participation may be helpful with

the objectives of expansion and excellence for the Indian education system.

Tilak (2001a) examined the status of higher education in Kerala. The study

suggested that it is due to the neglect of higher education system that Kerala had

lagged behind in the economic performance compared to other states of India. The

study concluded that improvement in the quantity and quality of higher education may

improve Kerala’s economic performance compared to other states in India.

1.1.6. Comparison of Educational Systems

Another area where there is recent empirical work on the various kinds of

disparities in the education systems of the world includes India and Kerala. The

disparities are found in the areas of geography, level of education, quantity and

quality of education, expenditure on education and nature of educational institutions.

Klasen (2002) examined the impact of gender inequality in education on the

long run economic growth. He found that gender inequality in education may

negatively affect the economic growth by lowering the average level of human capital

32
via the low investment on education and high population growth. The study

concluded that there is a difference of per capita income between 0.4 to 0.9

percentage points in the East Asia, Sub–Saharan Africa, South Asia and Middle East.

Psacharopoulos (2002) compared the relative importance and returns of

human and physical capital based on the data of countries. The results showed that the

investment in education behaves more or less similar to the investment in physical

capital. In advanced countries the return from human and physical capital tends to be

equated at the margin. He concluded that data reaffirm the validity of human capital

theory in majority of the countries.

Ichimura et al (2002) made a comparative study to estimate the effect of

various types of tuition subsidies. The results show that each type of subsidies has

various types of merits and demerits. He found that the tuition subsidies are effective

with a marginal increase in the schooling of lower income population. The study

concluded that education subsidies in general and tuition subsidies in particular can

help the educational achievements of students.

Kingdon (2003) investigated the gender bias in the household expenditure on

education in India. The study suggested that there are differential enrolment rates for

boys and girls. The study concludes that there is a clear gender bias against the female

children in India. However, the gender bias varies according to the nature of the

households. She has also found that only person based rather than household based

data can accurately capture the full extent of gender bias in India.

Altbach (2009) made a comparative study of the higher education systems of

India and China. The results show that China developed a strong vocational

educational system compared to India. However, India had improved its position in

terms of quantity and quality. He found that China made considerable progress with

33
its high quality institutions. However both in India and China have to enforce reforms

to improve the overall quality of higher education.

Pradhan et al (2000) made a detailed study about the rural and urban

disparities of expenditure pattern in India. Evidences indicate that there are wide

disparities in the social and economic indicators in rural and urban India. They find

that, the per capita annual expenditure on education is `101 in rural and `455 in urban

areas of India. The study concludes that the expenditure on education was the lowest

for agriculture wage earners and the highest for the salaried households.

Majumdar (2005) made a comparative study of the vocational secondary

schooling across the states like Andhrapradesh, Kerala, Maharashtra and Tamil Nadu.

The study finds that aided and un–aided schools perform better than government

schools while it is inaccessible to the disadvantaged groups of the society. The study

concluded that the strengthening of aided schools by narrowing the gap between the

privileged group and their disadvantaged poor is an effective means to improve the

participation of all groups in these states.

Eapen et al (2002) examined the relationship between the education status of

women and family structure in Kerala. They came to realize that education and

employment decisions of women channel them towards the marriage prospects of

girls. They also suggested that women have poor say on the property rights,

education, marriage and property decisions. The work concluded that there is a clear

gender bias against women in Kerala.

Naidu et al (2007) compared the education sector facilities during the period

from 1970-1971 to 2000-2001 in the districts of Kerala. The results suggested that the

pattern of educational development is more or less even in the state. However, in

certain backward districts like Malappuram, Idukki, Wayanad and Kasaragode lags

34
behind when compared to other districts. The study concluded that the disparity in

development is mainly because of the skewed availability of higher educational

institutions in those districts.

1.2. Statement of the Problem

India has a very large number of people below the poverty line. Therefore, a

significant number of policies introduced require a substantial increase in social sector

expenditure. For instance, budgetary allocation for education has steadily increased

(from around 1 percent of GDP in 1950-51 to 3.76 percent in 2009-10) in India.

However, this falls short of the desired target of six percent of GDP to education as

outlined in the recommendations of the Education Commissions in 1966 and

reiterated by the national education policies of 1986 and 1992. Moreover, given the

resource constraints faced by a developing country like India, there are certain limits

on the expenditure increase, especially when it is not accompanied by an increase in

income. Consequently, late 1980s saw cut backs in expenditure on social services due

to fiscal stringency. This was further accentuated with the introduction of new

economic policy in 1991 and the government has been encouraging participation of

private agents in sectors that hitherto have been public monopolies. However, there is

no in–depth study regarding the impact of economic reforms on the education sector

particularly education financing in India. The latest trends and pattern of government

expenditure on education and related changes in the household expenditure on

education also requires attention. Thus, it is relevant to study the expenditure on

education in India especially in higher education. Therefore, it is important to

examine the trend and pattern of expenditure on education in India in the context of

economic reforms. Majority of the people lives in the rural areas in India. But, there

are no serious studies regarding the nature of rural and urban differences of household

35
expenditure on education in India. The enrolment and other educational indicators are

biased against the rural areas in India. Further, it is important to examine the role of

residence of the student in the household expenditure on education in India.

Therefore, it is important to compare the rural and urban of household expenditure on

education in India.

Kerala is one of the educationally developed states in India and the social

developments of the state are comparable to the developed countries of the world. The

present study, hence, selected Kerala as the region for a focused study. This is mainly

because of its unique educational features when compared to the other states in India.

It is well known that school education and literacy rate are well developed in the state

when compared to the other states in India. However, the quality of education is low

in Kerala compared to other states in India. Generally, education related studies in

Kerala concentrate on government expenditure on education and school education.

Therefore, it is important to examine the role of households, especially in the context

of revised education loan scheme (commenced from the financial year 2001-02) and

the mushroom growth of self–financing educational institutions in Kerala. Therefore,

it is important to delve in to the details of Kerala education system. Educational

financing in Kerala also is undergoing changes in a number of fronts. On the one

hand, the financing of education is becoming multi–level and multi–channel while, on

the other hand, normative specifications and personal financing decisions are

dominating discussions in the public policy arena. In this context, an exercise in

determining the factors that influence expenditure on education by the state as well as

the households is not only informative but also essential to understand the process that

underlies a successful transition of the education sector. High levels of household

investment in education are favoured in Kerala mainly on three grounds: a)

36
government lacks adequate resources to finance education and hence households have

to necessarily finance their education at least partly, b) the belief that household

expenditure, such as fees would improve efficiency in the system, by making the

children more serious with studies and c) the necessity to fully exploit the ability and

willingness of households to pay for education as reflected in the household

expenditure on education. Thus, it is important to examine the trend, pattern and

rural–urban nature of government and household expenditure on education in Kerala.

The present study is primarily concerned with the question: that is, why do

households invest in education in India and Kerala? In other words, which are the

determinants of household expenditure on education in India and Kerala? Household

investment in education is influenced by a wide variety of factors. Household

decision–making for investment in education can be understood at least partly in

terms of economic factors. Primarily, households invest in education, as they

anticipate economic and non–economic benefits from education. If the income of the

household is low, effective demand for education can be low and there can also be

serious under–investment in education. Preliminary studies in this regard conclude

that public expenditure on education has a crucial role in determining the household

expenditure on education in rural India. The link between the macro economy and the

household expenditure on education is also not very conclusive. Rigorous empirical

studies using more recent data and the advanced techniques are required for making

any meaningful conclusion. Despite the growing awareness of mass emancipation and

regeneration through the process of education in Kerala, little attention has been paid

so far to the determinants of educational facilities and their consequent impact on

educational attainment and social development. The present study is a modest attempt

to fill this lacuna. The in–depth studies with regard to household expenditure on

37
education are scanty both in India and Kerala. The studies regarding household

expenditure on education, its determinants and financial return are meager in all

aspects. It is important to identify the determinants and financial return from

household expenditure on education in Kerala. The studies related to expenditure on

education are concentrating on the involvement of public and other private agencies

and their participation in education. In the context of these problems the study moves

with the following objectives.

1.3. Objectives of the Study

Following are the specific objectives of the study:

1. To analyse the trend and pattern of government expenditure on education in India

and Kerala.

2. To compare the rural and urban household expenditure on education in India and

Kerala.

3. To identify the determinants of household expenditure on education in India and

Kerala.

4. To examine the expenditure on education, its financial return and educational

problems of rural and urban households of Thrissur district in Kerala.

1.4. Data and Methodology

The study is both theoretical and empirical in nature. The research emphasizes

the fact that, in view of the differences in the socio–economic background of different

regions, specific studies are necessary to understand the intricacies in government and

household expenditure on education. To get a global perspective on educational

developments and expenditure on education, the present study has used the sources

such as Education for All–Global Monitoring Reports, Global Research and

Development Reports and United Nations Scientific and Cultural Organisation

38
(UNESCO) data Series. The data for financing education was obtained from

government documents. Analysis of Budgeted Expenditure on Education (Department

of Higher Education, Ministry of Human Resources Development (MHRD)), Selected

Educational Statistics (Department of Higher Education, MHRD), various five year

Plan documents, Planning Commission and state government budget documents are

the other major sources of the study for analyzing the economic aspects involved in

the expenditure on the educational institutions in India.

The study has also used the sources like Statistics for Planning in Kerala,

various issues of Kerala Economic Review and publications of department of

economics and statistics of Kerala. There are two main types of database on

household expenditure on education in India. First, the Central Statistical

Organisation (CSO) publishes every year data on household expenditure on ‘private

final consumption expenditure’ on education (and other food and non–food items)

based on estimates made by the National Sample Survey Organisation (NSSO) in the

National Accounts Statistics (NAS). But, the NAS does not give any details regarding

the composition of the expenditure on education by items and levels of education.

National Accounts Statistics, however, enables time–series comparisons, besides

being national in coverage. The second important source is the household surveys of

the National Sample Survey Organisation (NSSO). The several rounds of the NSSO

on employment and unemployment and on household consumer expenditure regularly

collect and provide data on household expenditure on education in India. These

regular rounds also do not provide any additional details on the levels of education or

on the components of expenditure on education. These are, of course, available for

rural and urban areas separately and also by expenditure (monthly per capita

expenditure) groups.

39
 More importantly, the NSSO occasionally conducts surveys concentrating on

education. One such was the 42nd round conducted in 1986-87. The survey was

repeated in 1995-96 and 2007-08 of 52nd and 64th rounds respectively. Elaborate and

comparable results on household expenditure on education are given in 52nd and 64th

rounds. Therefore, present study focused on these rounds results for analysis. These

surveys provide a lot of detailed information that helps estimation of the rate of

participation of people in education, and household expenditure on education, by

levels of education, by items of expenditure, by different characteristics of population

such as region, gender and by household expenditure groups. There are other

variables which supplement the analysis of the household expenditure on education in

India and Kerala. These variables include GDP of India, per capita income of India,

recognised educational institutions in India, education loan disbursal in India,

personal disposable income in India, various types of measures of unemployment in

Kerala, remittances to Kerala, Gross State Domestic Product (GSDP) of Kerala and

per capita income of Kerala are taken to identify the determinants of household

expenditure on education in India and Kerala. The sources of these variables are

Reserve Bank of India (RBI), Central Statistical Organisation (CSO), Ministry of

Human Resource Development (MHRD), India Economic Survey, Kerala Economic

Review and various issues of Kerala Migration Surveys.

The methodological framework followed in each chapter is explained in the

following section. Primary data is collected from the rural6 and urban7 areas of

Thrissur district in Kerala. In order to analyze the trend and pattern of public

expenditure on education, national level data for the relevant years were collected.

Firstly, percentage change of the data is estimated. Percentage change of variable can

be analyzed with the equation as follows: (Succeeding year value–Current year

40
value/Current year value) x 100. Percentage change will be helpful to analyze the

relative change in the value with respect to different years. This time series data are

used to study the trends in public expenditure on education. In addition, the present

study has used Compound Annual Growth Rate (CAGR) to infer the trend of

expenditure on education in India. The following trend equation is estimated for each

of the variables.

Y = abx = a (1+g) x (1), which on taking the log became

Log Y=log a + x log b (2)

Log bx =log (1+g)x (3)

Then [anti-log of b–1] x 100 will be annual compound growth rate of each

variable. Equations are estimated by ordinary least square method, separately for each

variables and growth trends and growth rates are derived. The CAGR equation is used

in chapters 3, 4, 5 and 6 also.

To analyze the rural and urban household expenditure on education, the present

study has used two main tools: ratio of urban to rural household expenditure on

education and percentage change over the period. The ratio of urban to rural

household expenditure on education is a tool to derive the relative divide of rural and

urban household expenditure on education in India. As a tool, it will be unity or equal

to one when the rural and urban household expenditure on education is the same. If

the ratio of urban to rural is greater than one, it is biased in favor to urban areas. On

the contrary, if the urban–rural ratio is less than one it is biased towards rural areas. Its

extent and degree depend on the value of the ratio of urban to rural household

expenditure on education in India. Percentage change is helpful to analyze the relative

change in the value with respect to different years. Percentage change is separately

estimated for rural and urban household expenditure on education in India.

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 After the identification of trend and pattern of government and household

expenditure on education in India, it is important to examine the trend and pattern of

household expenditure on education in Kerala. The present study has focused on

Kerala. The study has used the tools like percentage change, CAGR and ratio of urban

to rural household expenditure on education in order to analyze the trend and pattern

of household expenditure on education in Kerala. Besides this, the study has used

percentage wise allocation to know the distribution of expenditure among various

items of education. The primary objective of the study is to find out the determinants

of household expenditure on education in India and Kerala. The determinants are

analyzed from macro as well as micro level perspectives in Kerala. Aggregate

variables are analyzed through regression techniques and time series data for India

and Kerala.

The analytical framework to identify the determinants of household

expenditure on education in India and Kerala is presented in chapter 6. Household

level variables are collected from Thrissur district of Kerala. Sampling framework to

collect the primary data is given in chapter 7. The study has focused on the

household’s higher secondary and higher expenditure on education on their children

during the year 2001-02 and the occupational achievement and financial income of

these students/children during the year 2010-11. For this, the study collected the

primary data from the households who have higher secondary or more or higher

expenditure on education in the year 2001-02. This is to know the financial return

from household expenditure on education within a ten year period (2001-02 to 2010-

11). However, the data was collected for the year 2010-11 also. In a nutshell, the

study selected primary data from two types of household groups from the Thrissur

district. The data regarding the household expenditure on education in the year 2001-

42
02 and its financial impact in 2010-11 were collected from a set of households in the

year 2010-11. This group has marginal or negligible amount of expenditure on

education in the year 2010-11. But, it is important to know the current trend and

pattern of expenditure on education. Therefore, the data regarding the current

expenditure on education were collected for the year 2010-11 from another group

from the district.

1.5. Significance and Scope of the Study

Education has both intrinsic and instrumental value; it is desirable not only for

the individual but also for the society as a whole. Education as private good benefits

directly those who receive it, which in turn affects the individual’s future income

stream. At the aggregate level, a better educated workforce will increase the stock of

‘human capital’ in the economy and increase its productivity. Considering the

externalities in education, it is widely accepted that the state has an important role to

play in ensuring equitable distribution of educational opportunities to the entire

population. The government of India launched a series of economic reform measures

in July 1991. These measures included consistent and coordinated steps to reduce

protection and liberalise controls over industry and foreign investment and to increase

competition in areas dominated by monolithic public sector enterprises. These

policies had serious implications for social sector, as it led to drastic reduction in

public subsidies and development expenditure, particularly on social services. This is

against the traditional goal of India’s social policy to promote equal opportunity.

The reason for investigating the social outcomes of learning, therefore, relates

to the traditional goal of equity and social justice embedded in most social

programmes. The increased focus of active social policies means that governments

need to focus more on education and education policy, to make sure that a group of

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disadvantaged individuals is not left behind. Moreover, since educated parents are

more likely to send their children to school, the benefits of education are perpetuated

from one generation to another generation. In fact, the indirect spill–over benefits of

education are so substantial, that they are often considered to be of greater importance

than the direct financial benefits that accrue from it. Thus, the analysis of household

investment in education and the levels of education attained among different

subgroups in the population are of major concern for policy–makers. The present

academic research hopes to provide some insight into the relative merits of

educational policies or other social policies aimed specifically at the socially

disadvantaged groups. This study about the household expenditure on education is a

study about the important determinants of educational expenditure. It is important to

examine the various aspects of household expenditure on education in India and

Kerala. This is a modest attempt to study the trend and pattern of expenditure on

education in India and Kerala, its determinants and financial return from expenditure

on education in Kerala. These aspects are being neglected in education related studies

especially because they have had little access to the modern and recent data available

at present.

Generally, researchers involved in ‘dynamics’ to study how a physical system

might develop or alter over time, study the causes of those changes. The role of

education in economic development is recognized for quite some time in mainstream

economic literature. It is clear that education investment, especially household

investment, determine the accessibility of educational infrastructure in the country.

Therefore, the study about the household expenditure is highly important and

relevant. Educated and trained people can determine the growth and development of a

country. The present study may be used as a guideline to plan and design the

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education developments in India as well as Kerala. Households should increase the

productivity of their investment on children. Economic reforms are very crucial in

India’s economic history. Therefore, the trend analysis can help one to realize the

future actions in this direction. Subsequently, further studies can consult the findings

of this work as a basis for continuation in this direction.

1.6. Limitations of the Study

The scope of the present study is limited to explore the extent of household

expenditure on education and its various dimensions. Specifically, it studies the link

between the household expenditure on education and the macroeconomic variables,

and the study tries to make a preliminary step in this regard. There are discrepancies

in the various sources of secondary data. However, part of the analysis of the present

study is based on the secondary data mainly from NSSO education surveys. The

analysis of secondary data on per–student household expenditure on education is

limited to two periods 1995-1996 and 2007-2008. The study has not analyzed

participation, dropout and discontinuance of relevant age groups in India. The primary

data collected from respondents comprise two periods 2001-2002 and 2010-2011,

since the households may not keep the expenditure details, it is difficult to get the

accurate information for the questions.

There are qualitative and quantitative aspects to educational services.

Qualitative aspects include literacy, educational level attained, current attendance,

enrolment, drop–out, reasons for drop–out etc. Quantitative aspect of educational

services includes expenditure incurred by governments, households and other private

agencies, with its break–up on various components. The present study has focused

mainly on the household financial direct expenditure on education in India and

Kerala. Moreover, the study has other limitations viz., selection of only one district

45
for primary survey, limited analysis on returns to education and non–consideration of

opportunity cost of educational investment in the analysis.

The present study has focused on two major contributors of total expenditure

on education in India and Kerala. They are households and public agencies. However,

other private agencies like NGOs, charitable institutions etc also contribute to the total

expenditure on education in India as well as in Kerala. But, non–availability of data

was a major limitation to these sources of spending in India and Kerala. Similarly,

non–consideration of non–financial return from education, limited explanatory

variables and focus on determinants of total household expenditure on education,

especially in the macro determinants household expenditure on education in India

may remind one of the limitations of this work. Despite the limitations, present study

is a serious attempt to identify the determinants and related aspects of household

expenditure on education in India and Kerala.

1.7. Scheme of the Study

The study is divided into eight chapters. Chapter 1 provides an introduction to

the research problem, objectives of the study and data and methodology. Second

chapter gives a detailed view of the theoretical perspectives which explain the relation

between economic development and household expenditure on education and other

related aspects. Chapter 3 gives a detailed account of public and household

expenditure on education in India. The rural–urban comparison of household

expenditure on education in India is given in chapter 4. Trend and pattern of

government and household expenditure on education in Kerala is given in Chapter 5.

Chapter 6 presents the determinants and financial return from household expenditure

on education in India and Kerala. Chapter 7 discusses the results of the primary

46
survey of the rural and urban households of Thrissur district in Kerala. Findings,

recommendations and relevant conclusions are presented in the final chapter.

End Notes
1. Demographic dividend is a window of opportunity in the development of a society or nation
that opens up as fertility rates decline when faster rates of economic growth and human
development are possible which can be combined with effective policies and markets. Over the
next two decades the continuing demographic dividend in India could add about two
percentage points per annum to India’s per capita GDP growth.
2. Child labour refers to the employment of children in any work or activity that deprives children
of their childhood, and /or interferes with their ability to attend regular school, and that is
mentally, physically, socially or morally dangerous and harmful to their overall development.
3. From an economic perspective ‘credit–constraints’ means people would not be able to borrow
or lend in smoothing out year to year fluctuations in income, to produce a smooth consumption
stream. Credit–constraints in education are potentially harmful to both efficiency and equity. It
worlds with credit–constraints, shocks to income get reflected as shocks to consumption. They
lead to an inefficient allocation of resources and may work to perpetuate and widen income
inequality across generations.
4. Luxury good is a good for which demand increases more than proportionally as income rises,
and is a contrast to a necessity good, for which demand is not related to income

5. The Income Contingent loan (ICL) is a method of repaying education loan and easier for
students who intend to pursue jobs with lower salaries, such as careers in public service. It does
this by pegging the monthly payments to the borrower's income, family size, and total amount
borrowed. The monthly payment amount is adjusted annually, based on changes in annual
income and family size. The crucial feature to understand is that in an income-contingent
repayment arrangement, the repayment burden (percentage of earnings that must go to loan
repayment) is stipulated in the loan contract, but not the repayment period. This contrasts with
conventional loan repayment contracts (like most mortgages and current student loans) where
the repayment period is stipulated in the contract, but the annual relative burden of
repayment—the relationship between fixed repayments and current income—varies.

6. The entire revenue village or panchayath is considered as rural area.

7. Urban area is that which follows all places with a Municipality, Corporation or Cantonment or
Notified Town Area all other places which satisfy the following criteria :a minimum
population of 5, 000,or at least 75percent of the male working population is non-agricultural, or
a density of population of at least 400 sq. Km i.e. 1000 per sq. Mile.

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