Structure of K-12 education in India

K-12 education refers to institutions offering schooling from kindergarten to class XII. These schools form the largest chunk of the educational services industry in India. Schools in this sector can be categorised as follows:

K-12 structure

Source: CRISIL Research

In India, the education sector is included under the Concurrent List. Hence, legislative powers governing the sector are distributed between the centre and the state. Educational institutions in India have to be run as not-for-profit entities as either trusts, societies, or companies under Section 25 of the Indian Companies Act. As a result, although these schools make a healthy surplus, the same cannot be withdrawn but has to be utilised for the development of the institution(s) instead. However, recently, the trusts have been permitted to transfer the surplus made by one institution to a sister concern under the umbrella of the same trust.

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Industry Information Service is a Product of CRISIL Research, a Division of CRISIL Limited. CRISIL Research has taken due care and caution in developing this Product based on the information in the public domain, but its adequacy or accuracy or completeness is not guaranteed. CRISIL Research operates independently of, and does not have access to information obtained by CRISIL's Ratings Division, which may in its regular course of operations obtain information that is confidential in nature. The views of CRISIL Research expressed herein cannot be compared with the rating assigned or outlook developed on the companies in the same Industry by the Ratings Division or any other Division or subsidiary of CRISIL Limited. CRISIL Research is not responsible for any errors or omissions in the analysis/inferences/views or for the results obtained from the use of the Product. CRISIL Limited has no financial liability whatsoever to the subscribers/users/transmitters/distributors of this Product. This Product is for the information of the subscriber only and no part of this Product may be published/reproduced in any form without prior written permission of CRISIL Research.

Government continues to dominate, targets 100 per cent enrollment by 2015

Government run schools continue to dominate the elementary education segment, accounting for 85 per cent of all institutions and 72 per cent of all enrollments*. In contrast, private schools have a greater share in enrollments (28 per cent) as compared to the number of institutions (15 per cent). This variation is attributable to the fact that private schools have higher number of enrollments per school (270) than government schools (120). Enrollments in this segment have been growing steadily at a CAGR of about 5 per cent from 2001-02 to 2007-08 resulting in the gross enrollment ratio (GER = total enrollments / total number of students in the corresponding age bracket) improving from 51 per cent in 2001-02 to 77 per cent in 2007-08. The government aims to achieve 100 per cent enrollment in elementary schools by the year 2015. * All demographics correspond to the 5-14 age bracket

Institutions

Source: DISE, CRISIL Research

Enrollments

Source: DISE, CRISIL Research

Rural areas account for over 70 per cent of the concerned population, which amounts to about 170 million potential students. Hence, more than 90 per cent (about 950,000) of all government schools have been set up in rural areas. Private participation in the form of aided schools and philanthropic organisations (NGOs etc) has also gained momentum, they now account for 11 per cent (approximately 120,000) of all institutions.

Rural Enrollments

Source: DISE, CRISIL Research

Urban Enrollments

Source: DISE, CRISIL Research

As a direct consequence of the concerted government efforts, rural areas have witnessed faster growth. However the rapid growth in enrollments in rural India is not indicative of the retention rate. According to the National Sample Survey 52nd Round, rural India witnesses higher dropout rates (number of students per 100 who drop out before enrolling in the next academic year), despite better enrollment. In an effort to increase enrollment, the Indian government introduced its two flagship schemes Sarva Shiksha Abhiyan (SSA) and the Mid-day Meal (MDM) scheme in the year 2001.

Flagship schemes by government for elementary education

Sarva Shiksha Abhiyan (SSA) The SSA was initiated in 2001 as a programme to develop infrastructure for elementary education on a community level. This scheme gained momentum over time and various other schemes run by the central and state governments such as the Kasturba Gandhi Balika Vidyalaya Programme (KGBV) were incorporated into it. Funding Post 2003-04, this scheme contributed to over 80 per cent of all new government schools established with the centre and state sharing the funding in a pre-determined ratio. Starting from the Eleventh Plan period, the funding will be shared in a 50:50 ratio between the centre and the states. An important provision of the SSA is that the allocation for Infrastructure development cannot exceed 40 per cent of the total annual allocation. Historically, the centre has been releasing 80 per cent of its allocations whereas states have been releasing only 50 per cent of their allocations due to the high levels of deficit faced by most states. Moreover, approximately 90 per cent of the released funds are utilised. The infrastructure allocations amount to approximately 35 per cent of total allocations, 75 per cent of which gets utilised. National programme for nutritional support to primary education The National programme for nutritional support to primary education, also known as the Mid-day meal (MDM) scheme is a government programme targeted at rural areas. It was implemented as a measure to tackle the two grave problems plaguing rural

India, namely, malnutrition amongst children and poor school enrollment rate. Under this scheme, each student is provided with one free meal per day that supplies the basic nutritional requirements of growing children. The MDM scheme has played a major part in improving rural enrollment rate, as can be seen from the superior GER of rural India vis--vis that of urban India. Funding Central funding for these two schemes comes from two sources, i.e. collection of the Educational Cess, which is transferred to the Prarambhik Shiksha Kosh (a non-lapsable fund), and budgetary allocations. The budgetary allocations are being funded through various soft loans taken from international agencies such as the International Development Authority (IDA) of the World Bank, the UK governments Department for International Development (DFID) and the European Commission. Where enrollments are concerned, urban areas are still lagging far behind. Private schools account for 60 per cent of all urban enrollments. Hence, in an effort to increase participation from private schools in the enrollment mission, the government passed the landmark RTE Act.

Right to Education Act

The Right to Education Bill was introduced as part of the 86th Amendment in the Indian Constitution. The main provision in the Bill was the reservation of 25 per cent seats for disadvantaged children in all private schools (for class I-VIII). However, due to strong opposition from private schools, the introduction of the Bill was delayed and was finally passed and enacted in July 2009 as a part of the UPA governments 100 day plan. The salient features of the RTE Act are as follows:
z z

It is the duty of the government to provide free and compulsory education to all students from the ages of 6-14 Reservation of up to 25 per cent for economically weaker section (EWS)* students in the neighbourhood (as per the Indian Census definition) in private unaided schools

Minimum 25 per cent (or higher depending upon the extent of government aid) reservation for EWS students in private aided schools

z z z z z

No capitation fees for admission (donation) No interviews during admission No detention or expulsion No denial of admission No member of the school faculty is allowed to take private tuition

* While this has not been defined in the RTE, we estimate EWS to be households with income < Rs 40,000 p.a., similar to the latest government circular pertaining to low income housing The Act entails that the government provide reimbursement to the private school to extent of the actual cost of educating the reservation candidate incurred by the school or to the extent of government expenditure per child per year, whichever is less. In case of metro cities, this amount, on an average, will range between Rs 5,000-6,000.

Disclaimer:
Industry Information Service is a Product of CRISIL Research, a Division of CRISIL Limited. CRISIL Research has taken due care and caution in developing this Product based on the information in the public domain, but its adequacy or accuracy or completeness is not guaranteed. CRISIL Research operates independently of, and does not have access to information obtained by CRISIL's Ratings Division, which may in its regular course of operations obtain information that is confidential in nature. The views of CRISIL Research expressed herein cannot be compared with the rating assigned or outlook developed on the companies in the same Industry by the Ratings Division or any other Division or subsidiary of CRISIL Limited. CRISIL Research is not responsible for any errors or omissions in the analysis/inferences/views or for the results obtained from the use of the Product. CRISIL Limited has no financial liability whatsoever to the subscribers/users/transmitters/distributors of this Product. This Product is for the information of the subscriber only and no part of this Product may be published/reproduced in any form without prior written permission of CRISIL Research.

Government investments of Rs 520 billion required to achieve 100 per cent enrollment by 2015
Government aims to achieve 100 per cent enrollment rate by the year 2015. According to CRISIL Research estimates, private schools will account for 30 per cent of all enrollments by this time. On the government front, the first step towards achieving the target will be the setting up of infrastructure for new schools. These new schools will be set up under the framework of the RTE Act. Based on our demographic projections and the current number of children requiring education (about 55 million), CRISIL Research estimates that approximately 255,000 government schools would have to be set up to achieve the target.

Methodology for estimation of infrastructure expenditure

Source: SSA portal, CRISIL Research

States consistently fail to meet SSA funding requirements

The funding mechanism for SSA has three levels, namely, allocation, release and expenditure. The allocations are decided on the basis of the estimated requirements of a state. The overall allocation is then split in a pre-determined ratio (currently 50:50) between the centre and the state. The central and state governments then release funds, which are utilised as prescribed, constituting expenditure. As mentioned previously, the central government has been releasing 80 per cent of its allocations annually, whereas the states release only 50 per cent.

SSA allocation, releases and expenditure

Source: SSA portal, CRISIL Research

Key states releases to allocation ratio

Source: SSA Portal, CRISIL Research

Key states expenditure to releases ratio

Source: SSA Portal, CRISIL Research

An analysis of state funding of the SSA Scheme shows that even the better performing states, in terms of SSA expenditure, have at best been able to release only 60-65 per cent of their allocations. Furthermore, most states in the country are burdened with large fiscal deficits. As a result, the proportion of state fund releases as compared to their allocations is expected to remain low, translating into lower expenditure levels.

GER to fall short of target, touch 90 per cent mark by 2015

As a result of the continued low contribution from states, in 2015, the expected infrastructure allocation is likely to be around Rs 445 billion, out of which an estimated Rs 335 billion will be spent. Consequently, the number of government schools to be added is expected to be 160,000 as opposed to the estimated requirement of 255,000. With around 55,000 private schools anticipated to come up during this period, we believe the GER to increase to approximately 90 per cent as against the government target of 100 per cent by 2015. Herein, rural GER and urban GER will stand at approximately 94 per cent and 85 per cent, respectively, up from 88 per cent and 62 per cent in 2008.

Urban institutions and GER

Source: CRISIL Research

Rural institutions and GER

Source: CRISIL Research

Disclaimer:
Industry Information Service is a Product of CRISIL Research, a Division of CRISIL Limited. CRISIL Research has taken due care and caution in developing this Product based on the information in the public domain, but its adequacy or accuracy or completeness is not guaranteed. CRISIL Research operates independently of, and does not have access to information obtained by CRISIL's Ratings Division, which may in its regular course of operations obtain information that is confidential in nature. The views of CRISIL Research expressed herein cannot be compared with the rating assigned or outlook developed on the companies in the same Industry by the Ratings Division or any other Division or subsidiary of CRISIL Limited. CRISIL Research is not responsible for any errors or omissions in the analysis/inferences/views or for the results obtained from the use of the Product. CRISIL Limited has no financial liability whatsoever to the subscribers/users/transmitters/distributors of this Product. This Product is for the information of the subscriber only and no part of this Product may be published/reproduced in any form without prior written permission of CRISIL Research.

Despite being not-for-profit, private schools reap healthy returns

Private institutions comprise of private aided schools (government funded), philanthropic organisations and schools set up by other private players. The steady growth in private educational institutions has been largely led by other private players. This is because, despite educational institutions in India being not-for-profit organisations, private schools still manage to earn healthy returns from it, as can be seen from the analysis below. In the following analysis, we have considered three different schools located in a metro, charging varying fee levels. All three receive a land subsidy both before and after the implementation of RTE.

Analysis of school profitability

Assumptions for analysis of school profitability

Private sector investment in education to grow

As can be deduced from the above analysis, all three types of schools enjoy significant profits despite the fact that these schools are run as not-for-profit institutions. Additionally, even though we have not assumed any cross subsidisation, the schools remain relatively unaffected by the enforcement of the RTE Act. Although the returns and profitability of different institutions will vary based on their location, size, operational efficiency and other such parameters, we believe that these institutions, if run efficiently, will exhibit similar trends. Moreover, there are models in existence whereby the substantial profits garnered by the private schools can be transferred to the owners or investors. Some of these practices include withdrawal of the surplus from the trusts and transferring it either as lease rentals or management fees to privately held entities. Therefore, we believe that private investment in this sector will continue to grow despite the regulatory constraints.

Disclaimer:
Industry Information Service is a Product of CRISIL Research, a Division of CRISIL Limited. CRISIL Research has taken due care and caution in developing this Product based on the information in the public domain, but its adequacy or accuracy or completeness is not guaranteed. CRISIL Research operates independently of, and does not have access to information obtained by CRISIL's Ratings Division, which may in its regular course of operations obtain information that is confidential in nature. The views of CRISIL Research expressed herein cannot be compared with the rating assigned or outlook developed on the companies in the same Industry by the Ratings Division or any other Division or subsidiary of CRISIL Limited. CRISIL Research is not responsible for any errors or omissions in the analysis/inferences/views or for the results obtained from the use of the Product. CRISIL Limited has no financial liability whatsoever to the subscribers/users/transmitters/distributors of this Product. This Product is for the information of the subscriber only and no part of this Product may be published/reproduced in any form without prior written permission of CRISIL Research.