This document summarizes the debate around who should pay for higher education and discusses self-financed courses in India. It notes that globally, there is a debate between those who believe higher education is a private good that students should pay for, versus those who believe the state should finance universities. In India, self-financed courses have a wide range of prices depending on the type of institution, with private universities charging the highest fees to cover all costs, while government colleges can only charge fees to cover recurring expenses. The document examines issues of pricing and quality for self-financed courses in India.

1. Self-fino nced Cou rses-
Economic Sustoinobility
& lnclusive Growth
' Edited by
Dr. SukamalDatta
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2. 94 Self-financed Courses in India -
Ec o n o m i c S u s I a i n a b i I i r"v- & In c I u s iv e G rou' t h
American Workforce November 2005. National Centre on Education
and the Economy (NCEE).
Johnstone Bruce (2006) Financing Higher Education: Cost-Sharing
in International Perspective. Boston College, CIHE, March, 2006.
Sudhanshu K. Mishra, On Self-Financing of Institutions of Higher
Learning in India, Working paper, NEHU Economics working paper,
October 3,2003.
95
Self-Financing Courses in Higher Education
Pricing and Quality Issues
Subir Maitra
AssociateProfessor of Economics
Heramba Chandra College (University of Calcutta)
Abstract
Self-financing courses are the need of the hour, not only to
meet the requirement of educated labour force for attaining higher
growth in the economy but also toreap the benefits of
"demographic dividend". In India, the prices of these courses vary
widely; so do their quality.The presence of informational
asymmetry' makes it more difficult to ascertain quality. This
informational asymmetry alsoactsasa boonto privateproviders.
Promotion of competition by way of giving a 'level playing field' to
all providers may improve quality of seltfinancing courses.
Providing incentives to the service providers to improve upon
quality may not work if the institutes have little interest in
maximizing its reputation or prestige. If an institute prefers to stay
at low level equilibrium with sole objective of maximizing its profit
or suqplus, market-based regulation system with focus on incentive
'and quality may not work at all.
Section I: Introtuction
Higher education holds the key not only to "knowledge
creation" but also tomeeting the labour supply requirements of an
eeonomy for faster growth.r In a knowledge driven society, higher
education is crucial for determining the competitive edge of an
economy in the global market as it fosters innovation and
development and dissemination of technologt'.ln case of India,
higher education has become utmost essential also for reaping the
benefits of what has been tenned as "demographic dividend".
Higher education is said to improve functional ability and effrciency
of an individual. It makes an individual 'employable' by the
industry or capable of launching a technology-driven 'start-up'.

3. 96 Self-financed Courses in India -
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largersize of educated 'employable' Iabour force is essential if we
ars to attain higher econornic growth. For this huge expansion of
higher education sector is necessary. Adequate provision of state
finance is arguably the best option for developing the higher
education sector. But given the size of fund requirement for
expansion of higher education, it is most unlikely that state would
be able to finance the entire exercise. Despite recent increases in
budgetary allocation for higher education, exploring alternative
sources of financing higher education remains quite important.
Private funding is necessary so is charging of fees to students for
higher education courses. The opening ofnew courses under self-
financing mode has nowadays beccme a policy option out of this
necessity.
This paper makes a brief review ofthe globally ongoing
debate on financing of higher education institutions befbre focusing
on the Indian scenario. Thc issues relating to pricing and quality of
self-financing courses have been discussed. In the concluding
section, the role of the regulator in maintaining the quality of these
courses have also been touched upon. This paper also suggests
some policy measures. The paper is divided into seven sections.
Insection I, an introduction to the subjectis given. Section II
focusses on the global debate on the issue: 'Who will pay for
higher education?' Section lll presents an account of the
h i ghereducation scenario i nlndia. SectionlVanalyses the system of
pricing of self-financing courses in India while Section Vmakes
diagrammatic presentation of the pricing mechanism. Section
Vlraises various issues relating to the quality of self-financing
courses. Section VII concludes this paper by highlighting the role
of the regulator in maintaining quality of self-financing courses and
making some policy suggestions.
Section [I: Who will pay for higher education?
-The
debate
One of the most debatable issues of the 2lst century
worldwide is concerned with the question: 'Who will pay for
higher education?' In the dominant neoliberal ideology, higher
education is viewed as essentially a private, individualised
commodity and students should bear more of the costs (Economist,
)1
zAAq. The World Bank has adopted an approach for higher
education, founded on the salrle principle- The Bank in its
approach has put emphasis on (i) recovery of public cost of higher
education; (ii) promotion of education loans through the
development of a credit market with selective scholarships,
especially in higher education; and (iii) decentralisation of the
management of public education and encourage the expansion of
non-goyernment and cornmunity supported institutions- Thus,
charging user fees with a view to recovering the public cost of
higher education has been stressed upon even by the World Bank'
The three main sources of funding for higher education
institutions are governments, students and households, and other
private entities. Government fesources include operational grants
(for both teaching and research), capital investment and research
granrs paid directly to institutions- Student payments include tuition
fees and charges for ancillary services. Other private payments
and resources include private donations and gifts' and payments
for consulting patents, and other senrices.
Tilak and Rani (2003) argued that given the increasing
importance of higher education, the state should continue to take a
major responsibility of financing the universities. All other sources
of finances, including fees, should be viewed only as peripheral
ones, supplementing public expenditures.
Section III : Higher edueation scenario in India
Higher education institutions in India include universities,
colleges and other institutions. These institutions can be broadly
classified by three attributes: (i) Degree-granting power; (ii)
Legislative origin; (iii) Fundings. Universities can award degees in
India. Universities can be unitary, with a single or multiple
campuses, without any colleges affiliated to it. Rest of the
universities are of affiliating-type. These universities also offer
degrees to their own students as well as to the students of the
colleges affiliated to them. [n terms of legis]ative origin, uriversities
could be central universities, state universities and deemed
universities. Universities established by an act of the Parliament
are called central universities, by an act of the state legislatures

4. 98 Self-financed Ccturses in India -
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are known as state universities. Institutions rvhich are granted the
'deemed-to-be' universities status by the central government are
knorvn as deemed universities. On the basis of funding, higher
education institutions are broadly classified as Public institutions or
Private institutions. Public institutions include both government
institutions and aided institutions, whose major source oi fund is the
government, both the central and the state. Private unaided
institutions, however, sustain primarily on the fees charged to their
students. These institutions are all'not-for-profrt' institutions.
Section fV: Self-Financing Programmes in India: The issue
of pricing
The programmes which are financed by charging user fees
from the students are known as self-financing programrnes. The
govemment subsidy is normally not available for running such self-
financingprogrammes. However, there are wide variations in
thepricing cf self-financing programrnes in trndia depending on the
nature of the institutions offering them.Private universities. which
enjoys greater flexibility to introduce its own programmes and
admit students, charge higher fees tomeet the cost of the
educational programmes. Private deemed universities also can
introduce their own programmes. admit studsnts and charge fees
to meet the cost of theeducational prograrnme. However, for
private deemed universities, fees charged are subject to the
approval from the state level committees. Both these types of
universities need to recover the capital aswell as revenue
expenditure from the user-fees levied upon students. There is
noeffective regulatory control on the admission and fees in the
private universitiesa.
The colleges affiliated to state universities offer courses in
both general and professional disciplines. These colleges are of
three types: government colleges, privatelv managed but
government-aidedcolleges and privately managed but non-
governrnent-aided colleges. Most of the regular programmes
offered by the fbrmer two types of colleges are subsidized by the
government.These colleges can introduce any programme after the
approval of the affiliating universities but can charge fbes, as
x)
rJecided by the government. These institutions are allowed to
introduce seltfi nancing progrcmmes. Sincethese institutions have
ready infrastl-ucture, they can charge user-fees only to recover the
recurring expenditure. Private colleges not receiving any
government-aid can charge user-fees to cover capital as well as
the revenue cost fromthe stgdents. All the programmes delivered
are self-financing by nature in privatecolleges - general as well as
professional.
Thus, the pricing of self-financing courses has two distinct
patterns in India : firstly, the government colleges and the aided
colleges under the supervision and control of the afliliating
universities are allowed to charge fees just sufficient to recover the
revenue expenditure. Secondly, the private universities, private
deemed universities and private non-aided colleges affiliated to the
state as well as the private universities can charge feesto recoYer
both capital as well as revenue expenditures.Forsome of the self-
financing professional courses such as engineering and medical,
howeveq regulatory authorities frx the fees. For the rest, there is
no effective regulation andmonitoring of fees. Even so, they cannot
raise their fees to any levelbecause of trwo reasons: Firstly, by
fixing higher fees, they may lose their prospective buyers
(students). Secondly and the most imporlantly,educational institutes
in India are not allowed to make 'profit' by fixing higher fees'
What they can make is a 'reasonable surplus'- ln the famous Pai
Foundation case, the apex court has allowed educational institutes
to make 'reasonable surplus' but the reasonable surplus eamed by
such institutions can only be utilised for the purpose of education,
i.e. for the expansion and augmentation of education and not for
any other purpose.The reasonable surplus should ordinarily vary
from 6Yo to l5oh.
Section Y: Demand, Suppty and Pricing of Self-financing
courses
We can analyse the issues relating to the pricing of self-
financing courses in higher education with the help of demand and
supply. We classify courses in two categories: Subsidized coursQs
and Self-financing courses. In Figure: 1, the market of subsidized

5. r
t00 Self-financed (-ourses in India _
Econontic Sustainobilit-v & Inclusive Growth
l0l
If, however. the price (fee) is fixed abovo , say at , then an
excess supply Eu wiltr be created and some of the seats of self-
financing coursei will not be tilled up. This rnay cause closure of
some of the institutions offering selGfinanced courses-
courses in higher education is shown. These courses taught in the
public institutions are subsidized courses. Since the number of
public institutions is fixed in the short-run, the suppry of such
course (in terms of total nurnber of students to be admitted) is
given. Therefore, the supply curve of subsidised courses (SC) is
vertic.al-S... The demand curve of such courses is highly elastic.
This is because most of the 'buyers' of subsidised corrses co*e
from the poor or middle crass famiries whose demands are price-
sensitive. The course fees are fixed by the governrnent at u to*
Ievel P.., which is substantiaily rower tharrper unit cost of the
course '!'_
!"-Pr.) is the per unit government subsidy for the
course which is paid to the public institutions offering the course.
As the demand of subsidised course exceeds its suppry; a section
of the students would not get admitted, as shown by qQ,. If this
section of the students is to be accomodated, the capacity of the
public institutions to accommodate students has to be increased.
This means the vertical s,ppry cu*,e is to be shifted rightrvard to
51.. For this new public investment in higher edrcation is
necessary. But given the size of fund requirement for expansion of
higher education, it is most unrikery that state wourd be able to
finance the entire exercise. Then, the option is to open self_
financing courses either in pubtic institu;ions or under private
initiatives. Figure: 2 shows this. since, 'c' is the per unit cost of
higher education, for a price d" c, the serf-financing
"ou."",
wourd
not be offered and the suppry wourd be zero. As the price Iever
rises, self-financing courses would be started in ihe pubric
institutions. New private institutions would also be set up to oflbr
self-financing courses- Thus the suppry curve is positively sroped as
shown in Figure:2. The demand curve of such course is Ds,.. If
the price (fee) is decided by the market, the equiribrium prici^(fee)
will be Pr... In this case, institute offering such course will enjoy
a per unit surplus of (- c). If the regulating authority fixes a
price (lee) for self-financing courses at a level below , say at ,
then there will appear an excess demand ED. rf the number of
institutions offering self-financed courses inlreases, the suppry
curve will shift rightrvard to . This will eliminate excess demana.
{ Iuit sutrsidr
Psc
o
Figure 1: Market of Subsidized Courses
q 4t
Excess tlcrnalxl
f Psrc
I nrr
'rullu.
{
o"
clv
Figure 2: Market of self-financed Courses
Section VI: Issues relating to quality of self-financing
courses
There has been an explosion of self-financing institutions in
India since 1991 offering courses in engineering, medicine,

6. t02 Self-financed Courses in India -
Econarnic Sustainabiliry & Int'lusiv'e Growth
pharmacS architecture. management, law, media, fashion.
journalism, tourism etc.The fastest grorvth has taken place in
engineering, with the number of AICTE-approved engineering
colleges increasing frorn 309 in 1990 to 3389 in 2015. The number
of institutions offering management courses has also boomed. lhis
rather unusual growth in higher education, primarily due to private
participation, raises several questions about its propriety. In India,
where education is a not-for-profit sector, the proliferation of
private universities and institutes is quite intriguing. If private
operators cannot make profit, what are they working for? Is it
pure philanthropy? Research has revealed the ulterior motives of
many, if not the most, of the operators. They are "not-for-prof,rt'
de-jure, but are 'for-profit' de-facto" They siphon off funds in lieu
of profit. This has damaging impact on quality. As employability is
linked with the quality of rnost of the self-financed courses, the
employability of students graduating from these institutions suffer
due to this. However, due to the presence of asymmetric
information, which has been confirmed by a survey amongst
students by this author. a prospective student often makes wrong
decisions about course and institute. The unscrupulous operators
also take advantage of the asymmetric information and provide
their students with technical education of such quality which is
much poorer than what they promised to deliver. A layer of
asymmetric information seems also to exist between the institute
and its regulators, due to which regulators often fail to realise about
the quality of education.
When higher education is treated more as a commercial
venture for making money, unscrupulous entrepreneurs are sure to
take advantage of this situation to make maximum profits. They
would take recourse to siphoning off funds under different heads
which would apparently look like valid expenses. They would also
nurture various malpractices in relation to payment of rent,
salaries, non-existent facilities etc. Many of such cost-cutting
exercises would affect quality of education. The majority of
graduates from these institutes will come out as 'unemployable'
and their so-called 'degrees' just won't have the right fundamental
education behind them'. There are some exceptions as r,l,ell. The
r0l
institutes r,vhielr atre rnore concerned about their reputation would
not g0 firr rnaxirnurn Prc'fits.
Section VII: Conclusion and Policy Suggestions
Gtrobally" thcre has occurred an ideological shift towards
the market as a cgordinating mechanism in higher education.
Today in many countries, including lndia, higher education
increasingly functions in quasi-markets, where governments
(through some regulators) play an important guiding and facilitating
role. The state as a'market engineer'is central to the notion of
market govemance5. This concept refers to the use of the market
mechanism of supply and <lernand in govemance processes. In this
governance mode, government interventions are focused on the
shaping of a level playing field, which facilitates self-regulation
(Jongbloed 2003; de Boer et al. 2008)" Devising an appropriate
incentive scheme for qualitative development of higher education is
of vital importance in this system. Although quality is observable
for experience good (service) like higher education, it is not
verifiable. If the quality is verifiaLrle, its level can be costlessly
described ex ante in a contract and ascertained ex post by a
court. When quality is unverifiable, tlre regulator rnust recreate the
incentives of an unregulated institution to provide quality: (i) it must
reward the regulated institute on the basis of output; (ii) the
possibility of non-renewal of a regulatory license, of deregulatign
or of missing future output-contingent rewards' ln case of
experience good like higher education, incentives to supply quality
and those to reduce cost are inherently in conflict, at least in the
short run.
Such incentive schemes may not, however, work if higher
education institutes have little interest in maximizing its reputation
or prestige. If a higher education institute prefers to stay at low
level equilibrium with sole objective of maximizing its profit or
surplus, market-based regulation system with focus on incentive
and quality may not work at all. Regulators will face both adverse
selection and moral hazards problems while dealing with such
institutes. By developing a ranking system of institutes, the
regulators may be partly successful in sensitizing some institutes,

7. 104 Self-linanced Coarses in India -
' Economic Sustainabilily & Inclusive Growth
but majority of institutes may remain neutral. some of them may
prefer exiting to going.through the elaborate process of evaluation
and ranking
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