Endogenous Growth Theory Serving Lessons for India: Education Budget 2020

While the government’s responsibility while drafting budget had to be a daunting task, it surely had most of us expecting more than mere acknowledgement of India having the largest working population in the world by 2030. The education budget was presented under the umbrella of an ‘aspirational India’ theme. The theme itself kept me wondering if it just meant a meagerly increased spending and a few ‘new’ schemes like always, or did it really mean a stronger emphasis on ‘quality of education’.

I am restricting my article to highlight the theory of endogenous growth model as given by Romer(1986) and Arrow(1962), and what lessons could our government borrow from them. Firstly, a Solow-ian steady state is characterized by the state in which the macroeconomic variables like consumption, capital stock and the economic output, all grow at a constant rate. This implies that any changes in technology by say an increase in rate of capital accumulation i.e. savings, would result in high temporary per capita growth rates in the short run but render the long run per capita growth rates unchanged. Thereby implying that in the long run, technological progress fails to increase productivity of other factors of production, primarily labour. Questioning the prevalence of a long run positive per capita growth in advanced economies like the United States, the neoclassical growth theories assert that it is possible for an economy to grow at a long run positive growth rate if technology is allowed to improve over time. Indian production function in light of its expanding workforce population can be characterized by a labour augmenting technological progress, wherein its marginal productivity could be increased at the hands of an exogenous technology factor(say, savings rate) or an endogenous technology factor(say, policy decisions by the central planner). It is the latter factor which allows us to model a long run positive growth rate endogenously which should be the present government’s ultimate objective. For India, whose spending on education as a percentage of GDP has hovered around 4% for the past two decades, a slew of policy actions especially in light of current slowdown could be as follows- increased spending on a purposeful activity like research and development carried out in universities and government or corporate entities, creating a stock of knowledge as a by-product of investment, hiring of more teachers especially at school level to enhance the student-teacher ratio, teacher training programmes to build progressive teaching models, and basically an education policy based on innovation, skilling and research. However new education policy should be at best in the look out for the aforementioned decisions, it would have been interesting if budget laid out a concrete outline on the same. All of these policy decisions can help an economy enhance its productivity thereby doing away with the diminishing returns to factors and stepping into the long run positive growth rate characteised by even increasing returns at times. Hence, rather than a focus on sending our brilliant brains abroad for work, it’s time we emphasise on making the Indian population job ready to work ‘in the home country’. Additionally, as growth theories argue, we can perceive capital stock as the broader form of capital input comprising human capital too. This would imply that accumulation of this form of capital and knowledge sharing as a by product of its accumulation (learning by doing models and knowledge spillover by Arrow, 1962) can come only when educational institutes and corporates are incentivized to do so. This could have been made achievable by increasing funding for research to not just STEM but STEAM institutions, reducing GST rates for online education courses, relaxing GST on the inward services acquired by higher education institutes and tax credits for corporates that spend on employee training programmes amongst others. Lastly, while long run positive economic growth is desirable, it can be made inclusive too by understanding India’s demographic structure and investing in our ‘future generation’ i.e. human capital today or we may make our demographic boat heavier with a huge dependent and independent population waiting for the government to serve!