The NEP set the vision. Now it’s time for India’s education financing models to catch up.
Image Source: Getty Images
This essay is part of the series “Five Years of NEP 2020: From Vision to Reality”
India’s National Education Policy (NEP), launched in 2020, sets a visionary target of building an inclusive, high-quality education system by 2040. With a comprehensive and forward-looking vision, the policy aligns well with the needs of the 21st century through its focus on Early Childhood Care and Education (ECCE), Foundational Literacy and Numeracy (FLN), teacher education and development, assessment reform, and governance and regulation.
Five years into the NEP, we are already seeing noteworthy improvements: 3,656 schools upgraded, 13,882 smart schools established, and 35,457 girls’ toilets constructed. Dropout rates have also declined to 1.9 percent for primary education, 5.2 percent for upper primary and 14.1 percent for secondary education. Most importantly, learning levels have improved. ASER 2024 reports that 23.4 percent of Grade 3 students can read a Grade 2-level text, up from 20.9 percent in 2018, and 33.4 percent of Grade 3 students can solve a basic subtraction problem, up from 28.2 percent in 2018.
Despite these concerted efforts, gaps in education financing persist. First, overall education expenditure continues to fall short of the 6 percent of GDP target set out in the NEP, currently hovering around 3 percent. At the same time, underutilisation of funds continues to be a challenge, with 15 percent of Samagra Shiksha funds remaining unutilised on average between 2018-19 and 2023-24.
However, India still has a long way to go. At the current pace, it may still take up to three decades to achieve universal FLN. The burning question facing the education sector is how to accelerate improvements, especially in a climate marked by shrinking global development financing and pressing demands on domestic financing. It is in this context that this article explores how outcomes-based financing (OBF) can enhance the efficiency of existing education funding and delivery systems.
Over the past five years, the Ministry of Education (MoE) has seen an increase in its allocated budget from INR99,311.52 crore in 2020-21 to INR1,28,650 crore in 2025-26, representing a 6.5 percent rise from the previous year, but the lowest such increase in the last four years. The allocation is distributed across two key departments: the Department of School and Literacy and the Department of Higher Education. The Samagra Shiksha Abhiyan remains the primary vehicle for implementing the NEP agenda, alongside other flagship schemes such as the Pradhan Mantri Poshan Shakti Nirman (PM-Poshan), Pradhan Mantri Schools for Rising India (PM-Shri), and the Strengthening Teaching-Learning and Results for States (STARS) programme.
Figure 1: Spending on Education as a Share of the Union Budget
Source: Demand for Grants 2025-26 Analysis Education. (2025)
Despite these concerted efforts, gaps in education financing persist. First, overall education expenditure continues to fall short of the 6 percent of GDP target set out in the NEP, currently hovering around 3 percent. At the same time, underutilisation of funds continues to be a challenge, with 15 percent of Samagra Shiksha funds remaining unutilised on average between 2018-19 and 2023-24.
Second, education financing is heavily input-driven — focused on infrastructure, recruitment, and material distribution. While these inputs are critical for access and equity, they often fall short of improving actual learning outcomes by themselves. There is limited accountability for end outcomes such as learning improvements, with minimal flexibility to innovate or course-correct.
Third, the policy discourse is often centred on the inadequacy of budgetary allocations, rather than on the efficacy and effectiveness of spending. Policymakers must take into account that increased spending does not necessarily translate into enhanced outcomes.
Outcomes-based financing (OBF) is a funding approach where payments are tied to the achievement of pre-defined, verified outcomes, as opposed to inputs or activities.
Over the past decade, India has emerged as a sandbox for innovations in OBF in education, with the utilisation of pay-by-results grants, debt-based models, development impact bonds (DIBs), social success notes, and other instruments, as shown below:
Figure 2: OBF Innovations in Education in India
Source: Prepared by the authors, British Asian Trust
The evidence emerging from these OBF instruments shows that while OBF is not a silver bullet, it holds the potential to improve accountability and efficiency in education funding in the following ways:
Strategic Planning and Utilisation: By linking funding to real changes such as improved learning, OBF creates a laser-sharp focus on outcomes, driving better planning, execution, and more effective fund utilisation. For example, the NITI Aayog’s EdTech pilot in four aspirational districts impacting 70,000 children tied 50 percent of funding to learning outcomes rather than input delivery, such as hardware installation or teacher training. This outcome-linked approach prompted implementers to proactively plan for and ensure fully functional labs, regular and consistent use of EdTech, quality content, and support teachers in adopting learning-focused practices, all of which were essential for EdTech to lead to better learning.
The true potential of OBF can be unlocked when government budgets and education financing start adopting the principles of the approach in a meaningful manner. Global research suggests that a country needs five building blocks to institutionalise outcomes-based approaches: intent, evidence, data and measurement systems, regulatory frameworks, and market capacity.
Room for Innovation: With instruments such as DIBs, a separate class of investors provides working capital to delivery partners upfront and bears the performance risk. By reducing the risk to delivery partners, working with evidence-backed interventions, and providing support for performance management, DIBs provide flexibility and encourage micro innovations in delivery. Implementors have the freedom to do all it takes to achieve the end outcomes. For example, the Quality Education India (QEI) DIB led to a 2.5x learning improvement for students in comparison to peers despite experiencing Covid-induced disruptions for two years, largely due to the flexibility afforded to delivery partners to pivot their models based on need. The transfer of risk of failure away from partners and emphasis on end outcomes pushed partners to think out of the box, with some implementors introducing community classes and micro tech innovations to sustain student learning.
Adaptive, Evidence-driven Implementation: OBF requires regular monitoring, strong data systems, and evidence-based adaptation. These elements allow implementers — government bodies, schools, and NGOs — greater flexibility to design context-specific solutions, rather than following rigid and prescriptive approaches, as long as they deliver results. This aligns with the NEP’s goals of decentralisation and autonomy, while providing value-for-money by discontinuing ineffective practices. For example, in the LiftEd DIB, monitoring data helped identify and address a bias toward accessible schools among government middle managers. New mechanisms were introduced to ensure remote schools received attention, demonstrating OBF’s potential to drive adaptive, impactful interventions.
A Blueprint for Public-Private Partnerships: OBF lends itself well to public-private collaboration by clearly defining roles, aligning incentives, and fostering shared accountability. In all the initiatives mentioned above, a variety of capital providers — including government agencies, Corporate Social Responsibility (CSR) funders, large global foundations, and impact-oriented investors — have combined funding to enable learning improvements. Together, the OBF initiatives mentioned above have mobilised around US$30 million in the last decade from private funders for improving government school education.
The true potential of OBF can be unlocked when government budgets and education financing start adopting the principles of the approach in a meaningful manner. Global research suggests that a country needs five building blocks to institutionalise outcomes-based approaches: intent, evidence, data and measurement systems, regulatory frameworks, and market capacity.
Of these, while India has done well on intent and evidence, and has a vibrant provider market, the next iteration of the country’s OBF journey in education must double down on data and measurement systems. To realise the NEP’s ambitious vision and embed OBF, transparent and consistent tracking of inputs, activities, and end outcomes is essential, thereby ensuring that every rupee spent delivers the intended impact. While real-time systems such as the Vidya Samiksha Kendra (VSK) – which converges information from all schemes run by the MoE – are promising steps forward, the impact of such initiatives hinges on the availability of reliable and independently gathered data. By institutionalising a data architecture such that it is governed and overseen by the government but conducted independently, we can reduce the need and cost of bespoke evaluations, strengthen our public data systems, create the backbone for data-driven decision making and conduct a realistic assessment of the budgetary allocations.
Anchored on the five pillars of access, equity, quality, affordability, and accountability, NEP 2020 has laid a strong foundation for an education policy that can propel India into a high-growth orbit through a literate, skilled and productive workforce. OBF can help achieve these five objectives by creating a results-oriented, flexible, and accountable education system.
Anushree Parekh is Associate Director, Social Finance, at the British Asian Trust.
Shraddha Iyer is Manager, Social Finance, at the British Asian Trust.
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Anushree Parekh is Associate Director, Social Finance, at the British Asian Trust, leading the organisation’s pioneering outcomes-based finance programs in India. Anushree brings 15 years ...
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Shraddha Iyer is Manager, Social Finance at the British Asian Trust, where she primarily leads the education portfolio, particularly the implementation of LiftEd, a pioneering ...
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