Citizens' Issues
Effects of Black Money Generated from Education Sector

A lack of vigilance towards how our education system is developing is going to end up causing long term harm to a wide swathe of Indian society.

In the previous article on black money generated through the education sector, we discussed the amounts generated and the wide swathe of educational fields where this practise is prevalent. This trend creates distortions in Indian society and is detrimental to Indian economy. Following are some of the most glaring distortions caused:

1. Tax evasion – The Indian government loses out on tax revenue on these huge sums, and while black money could be as easily found in many other parts of the Indian economy, this is one black money generating machine that has the most wide-ranging effects on our future generations.

2. Money mopped from various regular individuals concentrates in a few hands. The desparation among the regular middle class people to get the best education for their children means that they are willing to shell out huge chunks from their legitimate savings to get seats in various colleges.

3. The money is either parked in real estate or stashed abroad. If parked in real estate, this supports the artificially hiked real estate prices and creates another loop that feeds inflation and price distortion.

4. If stashed abroad, the money goes out of the Indian economy to support economies in tax havens.

5. Students have come to consider this as an investment and look to recover it as soon as possible. This ends up promoting unethical practises in all related fields. For example, the medical profession has become un-regulated un-accountable mafia, where most of the doctors involve themselves in unethical practices to recover their so-called investment.

6. When the student has paid money, he treats the degree as an entitlement and not something to be earned. This effects the quality of the students input and the graduates that we educate.

7. It is speculated that some of this money is deployed in stock market and commodities exchange market. The commodities exchange has been responsible for commodities inflation especially of food grain. The money is also used for hoarding of commodities, thus give raise to inflation. All this is possible only with tacit political support.

8. This money is about 73.5% of gross budgetary support to Ministry of HRD, Govt of India. If only one years collection is used for primary education and Ekal Vidyalayas (one teacher schools, a successful experiment in over 40,000 tribal villages by Vanvasi Vikas Kendra and Van Bandhu Parishad), primary schools with better facilities can be opened in all villages in India.

Challenge before Current Government

1. HRD Ministry – How to stop this loot? Make policies and channelize energies to improve education infrastructure, better teaching and quality education?

2. Health Ministry – How to break this eco-system from capitation fee till doctor’s loot mafia and provide better medical facilities to masses.

3. Finance Ministry – If nothing can be done by HRD and/or health ministry, at least make this loot official and collect tax on it. At a corporate rate of 33%, the tax will be about Rs. 16,000 crores per year. Then use it for educational purposes.

4. Prime Minister – This is a big challenge before Mr Modi. If he can tackle this menace, he can control many distortions in the society and economy.

We often find our academicians, politicians and economists waxing eloquent about India's demographic dividend. With the kind of higher education culture we have fostered in India, the dividend will soon become a curse. It is high time that the government took a hard look at how higher education is being monetised in India.

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Education sector's link to black money




Anil Agashe

3 years ago

Most politicians in Maharashtra have their own Trusts running educational institutes. One thing that needs to be done is for all colleges teaching professional courses the tax exemption must be revoked. Why should educational institutes that make profits have zero tax status?


3 years ago

In the most literate state of India, Kerala, there are too many educational institution have come up over the last decade. Most to these institutions are given special status under the guise of "minority institutions" by the Government.

Are all these institutions really "minority institutions" ? There needs to be an inquiry.

Gopalakrishnan T V

3 years ago

If there is a will there is a way,The whole world except perhaps our Income tax Department knows how black money is generated by the so called educational Institutions in the Country. Banks are also victims of this loot in a way. They sanction a good lot of educational loans and other loans to many which turn bad and this becomes a black money in the hands of these educational institutions.The generation of black money has been going on for decades with the blessings and support of politicians, banks, bureaucrats, educationists and wealthy section of the masses. Every state is indulged in these activities. The new Government decides to fix,the Government can find enough of resources to provide very good education, to fund infrastructure development and reduce the tax burden of middle and lower middle classes. The Charitable trusts are another area where conversion of black money into white and genertion of black money take place. Happy that after the new Government takes over,some true positions and revelations are coming out and if the Government really is serious resources for all its developmental activities can be easily found.Bringing in some order and ethics in the society would be a value addition and bonus. The authors have done an excellent job worth commenting.


Suiketu Shah

In Reply to Gopalakrishnan T V 3 years ago

Perfectly said that "charity orgainsation" are bredding ground to convert black into white.Lot of "failures in life senior citizens' in south mumbai claim they are doing work for charity to "give back something for the society"(in their own words) but the reality is they are doing this as they are unable to earn a living.This is a major reason lot of people have little int in charity organicasations as its an open secret main office bearers take the money home.


3 years ago

Student’s educational fee and Teacher’s salary must be paid only through Banks

I personally know that in a prominent school, teachers are paid only paltry sum but they are forced to sign on blank registers on receipt of salary.

The Govt. is making it compulsory to open a bank account for citizens to receive subsidies directly. Why can’t the Govt. make it mandatory for educational institutions to pay salaries though a bank?

From Nursery schools to higher educational institutions, especially in urban areas, the Govt. must make it mandatory that the tuition fee of students also must be paid only through banks.



In Reply to MOHAN 3 years ago

the tuition fee of students should be accepted only through banks.

R Chandra Mohan

3 years ago

I don't understand why these private educational institutions are not taxed. Even when the hard working citizen is taxed on his meagre income at source why not the private/corporate schools, colleges and universities. As a person involved with private educational institutions I know how people just start the education business without any morals or ethics. Maybe its time to check all this and bring some relief to the people of India.

Building a Better India – Part12: Defence and Internal Security

India faces formidable security challenges and the only way to address them is to re-work the framework under which our services operate

India's armed forces are rightfully held in highest esteem and respect by citizens. They are brave, patriotic, highly disciplined and dedicated towards their duties. How can a soldier whose family is economically distressed guard our borders and fight with enemies to secure our lives?

In fact a separate and dedicated pay commission should be formed for fixing their remuneration, privileges, facilities, perks and post retirement benefits and to provide for the families of martyred.

The serious and highly neglected problem of obsolete arms (Almost half of the fighter planes have been lost in crashes during training in the last three decades, warships and submarines are aging, old Russian made tanks are deployed and no fresh procurement of modern heavy guns since 1984 when Swiss bofor guns were bought), shortage of ammunition and bullets, which is reportedly just enough to fight for a maximum of three weeks need to be addressed on priority. This task of procurement should be handed over to an autonomous constitutional body and implemented by a separate ministry under the direct charge of Prime Minister.

The long pending issue of appointment of a senior five star officer to head all three wings of the armed forces for proper, effective, quick and timely coordination is difficult to solve. The government is apprehensive of creating such a powerful post to avoid any chance of mutiny, although in our country such an event is nearly impossible. The viable option could be to appoint a coordination committee comprising of one senior most officer of four star rank from each wing, with the chairman being a retired chief of one of the services, with a system of collective decisions based on majority view.

The existing 26 different Acts on this subject should be simplified and consolidated in to three Acts:-

(A)  “INDIAN ARMED FORCES ACT”; in substitution of the following Acts:

Indian Reserve Forces Act, 1888
Indian Rifles Act, 1920
Indian Soldiers Litigation Act, 1925
Assam Rifles Act, 1941
Armed Forces (Emergency duties) Act, 1947
Air Force Act, 1950
Army Act, 1950
Army & Air Force (disposal of private property) Act, 1950
Commander-in-Chief (change in designation) Act, 1
Reserves & Auxiliary Air Forces Act, 1952
Indian Naval Armament Act, 1923
Naval & Air Craft Prize Act
Armed Forces (Special Powers) Act, 1958
Armed forces (Punjab and Chandigarh) special powers act 1983.
Armed forces (J&K) special powers act 1990
Works of defence act 1903
Fort William act 1881

(B) “INDIAN BORDERS SECURITY ACT”; to subsume and consolidate the following Acts:

Border Security Force act 1968.
Coast Guard Act 1978.
Indo Tibetan Border Police Force Act 1992
Territorial Army Act 1948

(C) “INDIAN INTERNAL SECURITY FORCES ACT”; to subsume the following Acts:

Central Reserve Police Force Act 1949.
National Cadet Corp Act 1948
Civil Defence Act 1968.
Central Industrial Security Act 1968/1999
Railway Protection Force Act 1957 /1985

A constitution body named the “Internal Security Management Commission (ISMC) should be set up to preserve, oversee and control the internal defence of India with the following duties, functions and powers:

To prevent, detect and combat terrorists and spies, both external and internal.
To requisition and take the services of police, CRP, paramilitary forces and if required of Indian armed forces at it’s sole discretion.

To detect, prevent and/or to crush communal and caste based riots. To detect and arrest people attempting to destroy public and government property.

To crush Naxalism completely with full forece, by directly coordinating with police and armed forces, in the event that Naxalites remain adamant in their unreasonable and unacceptable demands and refuse to have a peaceful settlement with the Central Government.

The institution of  ‘Intelligence Bureau’ should be disbanded and its officers and staff should come under ISMC and the latter will also select and recruit it’s own intelligence officers. It will post at least 4 officers in each district and in adequate numbers in cities and towns.

The DGP and head of CID of every state should submit a monthly report to ISMC by covering briefly, every important news and acts affecting internal security.

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Economic consequences of higher regulatory capital for banks
Higher regulatory capital or leverage ratio would mean involuntary monetary tightening as it were!

Pre-crisis, luxuriant supply of liquidity in an exceptionally low interest rate environment led banks to expand credit in any way they wanted, and inflate in the bargain the now infamous credit bubble, with all its cataclysmic consequences. All through the inflating of this bubble, banks actively engaged in excessive leveraging of their balance sheets. The regulators asked no questions, ostensibly because banks were consistently Basel 2 compliant based on their risk weighted assets. One very compelling reason for this, was that banks were looking for ways to pay excessively high  executive compensations. This was linked to a given NIM (net interest margin) and a given level of borrowing costs, resulted in ever increasing compression of RoA (Return on assets) parameters, which in turn, left no choice for banks but to correspondingly increase leverage with a view to keeping shareholders happy by delivering competitive equilibrium ROE (Return on equity); this reached a point where hedge funds, traditionally considered a byword for leverage, looked like apostles of defensive strategy in comparison. 
After the fact, regulators became wiser and thought up Basel 3 norms, which mandate a minimum leverage ratio of 3%, or a  maximum leverage of 33 times! Given that even this 3% is rather low, one can imagine where banks were on this parameter before the cataclysm. Even this rather modest number seems very ambitious if one reckons the fact that even this has to be complied with only by March 2018. Significantly though, this is a redeeming feature,  because any quicker transition would be counterproductive for the real economy given the state in which it currently is. 
To have a sense of what a quicker transition could mean for the real economy, it is instructive, intuitively appealing and insightful to model changes in output/growth in the real economy through an analogy of ICOR ( incremental capital to output ratio) by conceptualising IAOR (incremental assets to output ratio). Any quicker increase in regulatory capital will, as it already has, result in de-leveraging or shrinking of growth in bank balance sheets, hurting output and jobs. Specifically, the IAOR for India is empirically estimated at 2.5, which means that for every 1% decline in bank assets, output will decline by 0.4 %. This then is the  powerful and intuitively compelling way to model the impact of  an increase in the regulatory capital or leverage ratio for banks on the real economy and explains the caution on the part of  regulators, in calibrating the phased application of higher regulatory capital and leverage ratio. 
The other way higher regulatory capital and leverage ratio will hurt growth/output/jobs is expressed by the Taylor Rule. In this formulation, higher regulatory capital or leverage ratio would mean involuntary monetary tightening as it were. This would happen because all else being equal, which means NIM-RoA also remaining unchanged, RoA would need to rise for banks to be able to continue to deliver  market competitive equilibrium return on equity (RoE) to attract equity capital. With no further cost cutting and efficiency gains immediately possible, this in turn will, through corresponding increase in NIM, increase borrowing costs for the real economy. The effect of which would be the same as that of involuntary monetary tightening. It is precisely to mitigate this adverse impact on growth/output/jobs that a calibrated transition to higher regulatory capital/leverage ratio has been envisaged, although the 3% leverage ratio itself is rather low and needs to be higher at around 5 % to 7%. Indeed, Indian banks are already here and therefore, already 2.5 times Basel 3 compliant. Of course, the upside of a longer transition would be that in spite of increasing RoA, banks may even succeed over time  in reducing, or even minimizing, NIM-RoA via endogenous business process re-engineering and technology upgradation, resulting in reduced  borrowing costs for the real economy.
Incidentally, but significantly, Indian banks being already 2.5 times Basel 3 compliant, with leverage ratio of 7% plus, will need to increase equity capital only to maintain their existing leverage ratio; i.e. to remain compliant with themselves and not at all to comply with Basel 3 as is widely, but erroneously, made out in many quarters!
(The author is a former Executive Director, Reserve Bank of India)



Gopalakrishnan T V

3 years ago

The article is highly technical and carries a strong message that higher regulatory capital or leverage ratio would mean involuntary monetary tightening as it were. This is true provided the balance sheet is drawn strictly as per the regulatory prescriptions and accounting staandards.Is this happening in India is a major question? Fudging and window dressing of balance sheets is an established practice in India and the ratios referred to in the article cannot be given a serious weightage as such. The NIM,ROA,Capital Adequacy Ratio etc are all to a great extend only showing indicative trends and not necessarily the correct position. The NPAs are grossly underestimated and the off balance sheet items which get converted into risky assets do not seem to be getting a realistic assessment. The regulatory capital ratio exceeds the requirement level by a wide margin cannot be taken as a correct and comfortable picture. The ratio of pure equity capital in relation to all risky assets is perhaps a better assessment as regulatory capital has some components which are manipulative in nature.If pure equity capital is taken as a yard stick,the Indian banks particularly Public Sector banks cannot be said to be showing a comfortable position as increase in pure capital ie equity capital may not be proportionate to the increase in risk weighted assets.

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