Schools need profit motive to run effectively
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SIDDHANT THAKUR
Every year, parents scurry for school admissions, highlighting the rising school fees, hidden charges, and harassment from private schools. They share concerns that schools prioritise profits. However, in India, a private school cannot legally make a profit. Ironically, the very rule that prohibits private schools from making a profit enables them to make exorbitant profits.
Education is the only sector where private institutions are not allowed to profit. However, the not-for-profit rule also effectively prohibits the entry of new schools and edupreneurs. Banks and other financial institutions often refuse to lend to passionate educators because educational institutions can’t turn a legal profit and are, therefore, unlikely to be able to repay loans. This has led to stagnation in the supply of high-quality private schools.
On the other hand, the demand for private schools has risen. Due to increasing disposable incomes, more parents are choosing to send their children to private schools. Parents prefer private schools over “free” government schools because of their quality of education and accountability. A 2020 report from Central Square Foundation confirms that more than 50 per cent of school-going children attend private schools. This percentage has been rising for several decades, and is likely to continue.
Supply-demand mismatch
The increasing demand for private schools and outdated not-for-profit rules have led to a supply-demand mismatch, where the demand for quality schools far outstrips the supply. Despite massive government funding, the quality of government schools has not improved. This is because government schools aren’t held accountable for improving the educational standards.
To make matters worse, the Right to Education Act of 2009 has led to the closure of thousands of private schools across the country, further reducing the supply of schools. The Act imposes stringent regulatory norms. Low-budget private schools often lack the resources to comply with these regulations. Further, private schools also face harassment from local school inspectors.
The origin of the not-for-profit rule is a classic example of judicial overreach. In 1993, in Unnikrishnan JP vs State of Andhra Pradesh, the Supreme Court stretched the fundamental Right to Life to include education.
This inadvertently damaged the school education system. This is because the profit motive is the key driver of private enterprise. Profits motivate the private sector to open new schools. It encourages private schools to invest in research and adopt innovative teaching methods. It incentivises private institutions to lower costs and increase quality to attract parents and students.
Even the governments have recognised the profit motive of private enterprise. This has created space for the industry in telecommunications, power, air transport, infrastructure, space, healthcare, banking, and even defence. Motivated by profits, private players have made these sectors efficient, accessible, and consumer-friendly. It is bizarre that hospitals are allowed to make profits, but not educational institutions.
In TMA Pai Foundation vs State of Karnataka (2002), the Supreme Court conceded its misstep, allowing for a reasonable revenue surplus for the “development of education”. It, however, continued to emphasise the charitable nature of education.
A sensible policy reform would be to allow educational institutions to make a profit and subject them to corporate taxation, just like hospitals. This will attract investment in education, which will translate into higher quality of education as well as lower fees. This will also generate significant tax revenues for the government.
Sharma is Associate Professor of Economics at RV University, and Kotiyal is pursuing BA LLB at OP Jindal Global University
Published on July 17, 2025
