Pricing education: An example from Uttar Pradesh

by Bhuvana Anand and Shubho Roy.

School shutdowns across the country have sparked disagreements between parents and schools about fees. Parents filed a plea in the Supreme Court seeking more time to pay schools due to COVID-19. The Supreme Court refused to hear the petition, arguing that it had to be tackled by the executive first. Schools need money to pay their staff, including teachers, and are threatening to cut off access to online classes in case of non-payment (here, here and here). Both parties have approached High Courts in at least 15 states for a ruling (for example, in West Bengal, Madhya Pradesh, and Gujarat).

COVID-19 has only exacerbated an old fight. School fees have been an oft litigated issue in India. Courts have pronounced judgements against capitation fees, profiteering and fee hikes for over two decades (See 1992, 1993, 2002, 2004 and 2019). Several states also enacted laws to regulate school fees. Such price regulations are a poor way of addressing the underlying issue of market failure in school education. The primary reason for fee disputes with parents is that the entry of new schools in India is severely restricted due to a cumbersome regulatory environment.

In this article, we discuss the fee regulation architecture across India. In particular, we focus on the legislative drafting and implementation of the UP Self-Financed Independent Schools (Fee Regulation) Act, 2018.

Regulation of school fees in India

Nine states and union territories in India have stand-alone Acts regulating the collection of fees. These Acts were passed between 2009 and 2019 and mandate a Fee Regulatory Committee to hear fee-related complaints and proposals.

Bihar limits fee hikes to 7% over the previous year’s fee. Schools which wish to increase charges beyond 7%, need to seek approval from a divisional fee regulatory committee. These committees are usually composed of parents, private school representatives, and government officials.

Gujarat law empowers the district fee regulatory committees to determine fees for schools. However, schools charging fees below a specified amount are exempt from the regulation.

Rajasthan and Maharashtra require a school-level committee to approve fee hikes. The school-level is composed of representatives from school management, teachers and parents. If the school-level committee fails to agree on the increase, the school can approach a divisional fee regulatory committee.

The Maharashtra law adds a nuance, missing in Rajasthan. Schools can choose between a block declaration or capped revision. During admission, schools can declare fees for a block of classes (for example, grade 1 to 5). Or, a school can revise fees subject to a cap. Under this option, costs cannot be raised more than 15%, once every two years. In case of unforeseen circumstances, schools may increase fees beyond this cap. But, such increases, above the cap, has to be approved by either 76% of the parents, or the school-level committee. The Act also allows for management and parents (not less than 25% of parents in the affected standard/school) aggrieved by the decision of the school-level Committee to approach the divisional fee regulatory committee.

Other states pass orders and notifications to regulate fees but struggle with implementation. In Delhi, districts are supposed to set up Fee Anomaly Committees. But these are either not constituted or defunct, so parents raise their complaints to the Directorate of Education (Agarwal et al. 2019).

Uttar Pradesh

Uttar Pradesh enacted the UP Self-Financed Independent Schools (Fee Regulation) Act, 2018 to control fees for schools. Sadly, the law suffers from two drafting problems: a contradiction in fee fixation provisions, and the lack of clear instructions on the price index to use.

Section 3(1) of the law lays down the heads which the school can take into consideration. It is the governing principle of the law on fixing school fees. It reads:

"A recognised School shall determine its fee structure under subsections (1) and (2) of Section 4 … commensurate to, inter alia, meeting its operational expenses, providing for augmentation of facilities and expansion of infrastructure and for providing facilities to the students, to generate reasonable surplus to be utilised for development of educational purposes including establishment of a new branch or a new school under the management of the same eligible educational entity;"

The law is refreshingly pro-school in this provision. It recognises that a fee increase is not just to meet operational expenses. Schools have to augment facilities, expand infrastructure (build new classrooms, maybe a swimming pool), provide facilities to students. The law also recognises that a school must be allowed to generate some reasonable surplus and may wish to expand by opening new branches or schools. It is a surprisingly frank and forward-looking recognition of the myriad expenses that a school faces. In India, where price controls laws rarely recognise the costs that the provider has to undertake, the provision stands out as one recognising the genuine needs of the school.

Section 3(1) states that the process of determining fees is laid down in Sections 4(1) and 4(2).

Section 4(1) completely undermines the approach of Section 3(1). It reads:

“A recognised school may revise its fee annually for its existing students by itself for each grade/class/level of school equivalent to average percentage per capita increase of monthly salary of teaching staff of previous year, but the fee increase shall not exceed latest available yearly percentage increase in consumer price index [CPI] + five per cent of the fee realised from the student;”

(emphasis added)

Gone are the grounds recognised in Section 3. Section 4(1) reduces all those grounds to only one: teacher salaries. No more can schools increase fees to pay for expanding infrastructure, providing facilities, opening branches or generating a surplus. The only amount that the school can raise fees is the increase in salaries. If a school does not increase teacher salaries but wants to build a new auditorium, it is out of luck. Buying a new computer lab? Section 4(1) will not allow you to raise money for it. School’s financial reserves are low? Section 4(1) has no solution for management. The only criteria for school fees increase are teacher salaries. All the good ideas in Section 3 have been washed away by the restrictions in Section 4.

The pegging of fee increases to teacher salary is indicative of a deeper problem in Indian education: teacher interest domination. Too often, laws designed for education end up protecting teachers. For example, the only performance measure that the Right to Education Act enforces in the parent legislation itself is the teacher-to-student ratio, even when the evidence of the effectiveness of this measure is weak. This one measure is baked into the Parliamentary law. All other performance measures are left to be decided by the government through subordinate legislation.

The second problem in the UP Act arises from the formula under Section 4(1). The law provides a cap on the fee hike. Fee hikes have to be less than CPI + 5% per year. The drafters have left out defining CPI. In India, there are two bodies which provide five types of consumer price indexes. The Labour Bureau publishes two indexes, (CPI industrial workers and rural workers) and the Ministry of Statistics publishes three indexes (Rural, Urban, and Combined). Narrowing down to the applicable index is not the end of your problems. These indexes are published monthly, while the fee increase is supposed to happen once a year. The law is silent about which CPI to use and how to convert the monthly numbers into a yearly value. Predictably, different district fee regulatory committees have come up with different values for the maximum fee hike. Gautam Budh Nagar calculated the maximum fee hike as 7.88% (5+2.88), and Varanasi calculated the same as 8.71% (5+3.71).

This problem could have been solved by clearly cross-referencing to the specific index that the schools should use. Since the value of the index does not change across districts, there is no need for each district committee to decide the CPI. This function could have been done at the state level itself and saved schools from the confusion.

Conclusion

Why is the UP law drafted so poorly? The underlying reason is that the legislators have misidentified the problem. The best way to regulate prices is through a market mechanism. Parents should have a wide choice of schools at different price points. Sadly, we do not have that in India. Regulatory burdens imposed on schools reduce the supply of private schools. State governments control the availability of land in urban areas, mandate minimum salaries for teachers, and impose many requirements on schools through state school laws and the Right to Education Act. The consequence of these laws is two-fold: it raises the costs of running a school and makes it difficult to set up new schools. In turn, the existing schools raise fees. The entry barrier to new schools ensures that they do not face any competitive pressure to reduce fees.

Instead of encouraging competition in private schooling, the laws put administrative controls over the fee setting mechanism. An administrative price-setting usually misprices the fees. A government committee is in no better position in deciding what the price of education in a school should be. Even the legislature is unable to articulate any principles by which such committees should determine fees. The U.P. law starts with a wide range of costs that a school may incur. But when it comes to the implementation clause, it narrows down to just teacher salaries.

The price control laws are trying to solve a problem which should not exist in the first place. It would be much better if we tried to identify and dismantle the entry barriers to setting up low-cost private schools in the first place and encourage competition.

References

Does Class Size Matter?, Ronald G. Ehrenberg, Dominic J. Brewer, Adam Gamoran and J. Douglas Willms, Scientific American, November 2001.

How are private school fees regulated?, Ritika Agarwal, Atreyi Bhaumik, Adit Shankar and Anindya Tomar, in Anatomy of K-12 Governance in India, Centre for Civil Society, October 2019.

Bhuvana Anand is a researcher at Centre for Civil Society and Shubho Roy is a researcher at the University of Chicago. The authors thank Tarini Sudhakar at Centre for Civil Society for research support.