Impact of transfers on elementary education expenditure and measuring equalisation transfers to Indian States

This study examines the impact of Central transfers on elementary education expenditure. It also estimates additional transfers required by the States to enable them to provide minimum and comparable level of elementary educational services. Using the data for 28 Indian States from 2009–10 to 2020–21, and the static panel data methodology, it initially estimates the Elementary Education Expenditure Function. Based on the estimated values from the expenditure model and two benchmarks: all States’ average and top three States’ average per student expenditure on elementary education, it computes the expenditure gap in each State and transfers needs. Findings of the study reveal that the existing transfers mechanism has failed to compensate the lagging States. While grants have a positive and significant impact on expenditure, there is no evidence of a flypaper effect, which indicates that specific purpose transfers would be more effective. Bihar, West Bengal, Uttar Pradesh, and Madhya Pradesh have a large expenditure gap and hence require maximum transfers. Given the target of 6% of GDP to the education sector, the additional transfers estimates are quite reasonable. The findings of the study will aid policymakers and researchers to develop appropriate strategies and design a transfer mechanism that would ensure equity in elementary education.