thuan Capta Foration

Human Capital Formation) Human Capital and Growth in Government

It is the process of acquiring and
Economic Growth Expenditure on Education
increasing the number of persons who Governnment expenditure on education can
Human capital formation contributes to the
have the skills, education and experience process of economic growth be expressed in two ways
which are critical for the economic and
political development of a country. (i) Change in emotional and material () As a percentage of total government
environment of growth. expenditure.
(ii) Higher productivity of physical capital. (ii) As apercentage of Gross Domestic
(ii) Innovative skills. Product (GDP).
Sources of Human (iv) Higher rate of participation and
equality.
Capital Formation
Educational Ächievements
(i) Expenditure on education
(ii) On-the-job training in India
(ii) Migration State of Human Capital Generally, educational achievements in a
(iv) Expenditure on health Formation in India cOuntry are indicated in terms of
(v) Expenditure on information India is afederal country with a union (i) Adult literacy level
Government, State Governments and (ii) Primary education completion rate
Local Governments (Municipal (iii) Youth literacy rate
Problems of Human corporations, municipalities and village
Capital in India panchayats). Accordingly, expenditures on
both education and health are carried out
() Rising population simultaneously by all the three tiers of
(iü) Brain drain government.
(ii) Inefficient of manpower
planning
(iv) Long-term process Future Prospects
(v) High poverty levels

Higher Education: Gender Equity : Education for All:

AFew Takers Better than Before Still aDistant Dream
The Indian education pyramid In gender equity still the need to The following factors makes education
is steep, indicating, lesser and promote education for women in India is still adistant dream
lesser number of people imminent for various reasons, such as (i) Large number of illiterates
reaching the higher education () Improving economic independence
level. (ii) Inadequate vocationalisation
(ii) Social status of women
(iii) Gernder bias
(iii) Health care of women and children (iv) Low rural access level
(v) Privatisation
(vi) Low government expenditure on
education
 5
Human Capital Formation
In India
The concept of human captial formation, source of human capital and its
growth is revealed in the chapter. It also deals with therelationship among human
capital, economicgrowth and human development.

> opic1 Concept and Sources of

Human Capital Formation
Just as acountry can turn physical resources like land into physical capital like
factories, similarly it can also turn human resources like students into engincers
and doctors. Societies need sufficient human capital in the first place, in the form
and trained as
of competent people who have themselves been educated
professors and other professionals, Good human capital is required to produce
other human capital, This means that we need investment in human capital out
of human resources.

Human Capital Formation

It is the process of acquiring and increasing the number of people who have
the skills, education and experience which are critical for the cconomic and
political development of acountry.
In other words,human capital formation is the process of adding to the stock
of human capital over time.

Sources of Human Capital Formation

Investment in education is considered as one of the most important sources of
human capital formation, There are several other sources as well. Investment in
health, on-the-job training, migration and information are the other sources of
human capital formation.
 hee souNedre diwwned below
5. Expenditure on Information
1 Expenditure on Education People spent to acquire information relating to the
labour market and other markets like educaris
The cducation expendiuuneis animponan indicator of the health, etc.
importance of educationin an economy. It is an important
MOuCeol humanapial tomation. ior example. people seek information regarding salaries
and other facilities available in different labour markets
Indvdual invet in cducationwith tbe objectine of
() ineasing ther luure icOme. so that thecy can choose the right job. Expenditure
() gencraung tehnical skills and creating amanpowet, incured for acquiring information regarding labour
markets and other markets like education and healrh
well suited lor improving labour productivity and have also becomes an important source of human capital
thus, sustaining vapid economic developnent. fornation.
( ) tending to bring down birhrate which inturn, brings
deline in population growth rate. It makes more
resources available per peIsOn. Human Capital and Physical Capital
() cducaion also resul1S in social benetits since, it also
sprcads to others, not directly skilled. 1. Human Capital
It refers to the stock of skill, ability, expertise, education
2. Expenditure on Health and knowledge in a nation at a point of time.
Hcalth is anoher important source of human capital Human capital formation depends on inner conscience
tormation. A Nick labourer without access to medical as whether a human being wants to raise his earnings or
facilitics is compcllcd to abstain from work and there in a not. Human capital formation process is partly social
loss of productivity. The various forms of health
process and partly aconscious decisions of the possessor
Cxpcnditurc arc preventive medicine, curative medicine, of the hunman capital.
social mcdicinc. provision of clean drinking water, etc.
2. Physical Capital
3. On-the-job Training All inputs which are required for further production
Expenditure regarding on-the-job training is a source of such as machine, tools and implements, factory
human capital fornmation as the return of such expenditure buildings, etc are called physical capital. Physical capital
in the form of cnlhanccd labour productivity is more than formation is mainly an economic and technical process.
the cost of it.
Firms spend huge on giving on-the-job training to their Difference between Physical and Human Capital
workers. It may be in diflerent forms like a wvorker may be Physical Capital Human Capital
traincd in the firm itsclf or under the supervision ofa skilled It is tangible and can be easily sold in
workcr or can be sCnt for oll campus training, the market like any other commodity. It is intangible, built in the
body and mind of its owner. It
The firms, thus insist that workers should work for atleast is not sold in the market, only
some timc in the company so that they can recover the its services are sold.
benefits of he cnhanced productivity owing to the It is separable from its owner. It is inseparable from its
training. OWner
It is completely mobile between It is not perfectly mobile
4. Migration Countries except some artificial trade
restictions.
between countries as
l'cople sometimes migratc from onc pace to the oher in movement is restricted by
scarch of better jobs that fech them biglher salaries than It can be built even through imports.
nationality and culture.
what they may gct in their native places, I incdudes It is to be done through
migration of people from rural arcas o urban areas in conscious policy
India. Unemployment is the reason for the rural uban formulations.
It ueates only pevate benetit Itreates both private and
migration inIndia and teclnically qualitiedpeople migrate social benefits.
from onc counry to another in order to get high salaries.
 >opic2 Economic Growth and State of
Human Capital Formation in India
Human Capitaland Economic Growth Human Capital and Human Development
India recognised the importance of human capital in Human development is the broader term than human
conomicgrowth long ago. The Seventh Five Year Plan says, capital.
Human resources development has necessarily to be assigned
, kev role in any development strategy, Human capital considers education and health as a
country with a large population'.
particularly in a means to increase labour productivity. Human
Ir is very difficult to establish relation of cause and development is based onthe idea that education and health
effect are integral to human well-being because when people have
from the growth of but till growth in each sector probably has the ability to read and write and the ability to lead a long
reinforced the growth of every other sector. and healthy life, they will be able to make other choices they
The contribution of the educated person to value.
growth is more than that of an illiterate person. If economic
a healthy In human capital view, any iinvestment in education and
person could provide uninterrupted labour supply for a long health is unproductive, if it does not enhance output of
neriod of time. Then health is also an important factor for goods and services. In the human development perspective,
cconomic growth. human beings are ends in themselves. Therefore, basic
So, education and health alongwith many factors like, on education and basic health are important in themseives,
the-job-training, job market information and migration, irrespective of their contribution to labour productivity.
increase an individuals income generating capacity.
This enhanced productivity of human beings or Deutsche Bank and World Bank
capital contributes substantially not only towards human Report on Indian Economy
labour productivity but also stimulates innovations increasing
and
creates ability to absorb new technologies. According to two independent reports; one from
Deutsche and other from VWorld Bank have
Education helps in understanding changes in the society that India would growfaster due to its identified
human capital formation. strength in
and helps in absorbing scientific advancements. This facilitates
In inventions and innovations. In the same way According to Deutsche Bank (a
labour force facilitates adaption of new technologies. educated on Global Growth Centres, it hasCerman Bank)'s report
been
India willemerge as one among four identified that
In other words, the human capital growth in major growth
centres in the world by 2020. This report
cOuntries has been faster but the growth of per developing
capita real between 2005 to 2020, we expect a40% aiso says that
income has not been that fast. rise in the
average years of education in India, to just above7
years.

India as a Knowledge Economy World's Bank report India and the

Economy Leveraging Strengths andKnowiedge
The Indian software industry has been showing an states that India should make a Opportunities
transition to the
impressive record over the past decade. Entrepreneurs, knowledge economy and it it uses
bureaucrats and politicians are now advancing views about much as lreland does, then the per its knowiedge as
how India can transform itself into a knowledge based lndiawill increase trom a little over capita income of
US $1000 in 2002
economy by using Information Technology (I). to US S3000 in 2020. It
tfurther states that the Indian
There have been some instances of villagers using e nmail economy has all the key ingredients for making this
which are cited as exarnples of such transformation. transition such as, a crtical mass of skilled
wellfunctioning workers. a
and technology democracy and a diversified science
Likewise, egovernance is being projected as the way of
the future.
Out the fact thatintrastructure. Thus two reports point
The value of IT depends greatly on the existing level of lndia will move itsfurther human capital formation in
economic development. economy to a higher growth.

Human Pesources Development I refers to the

Sector or economy. development of the set Of iioviduas that nahe upp the workforce ot an
oroanisatioo bi
State of Human Capital Formation in India (iv) Long-term Process The process of
India is a federal country with aUnion Government, State Governments human development is a long-term
policy because skill formation takes
and Local Governments (Municipal Corporations, Municipalities and
Village Panchayats). Expenditures on both cducation and health are carried time. The process which produces
skilled manpower is thus, slow. This
out simultaneously by all the three tiers of government.
also lowers our competitiveness in the
Education and healthcare services create social and private benifit international market of human
therefore, both private and public institutions exist in education and health capital.
service markets. Expenditure made on education and health make (o) High Poverty Levels A large
long-term impact, so government intervention is necessary.
proportion of the population ives
Problems of Human Capital Formation below poverty line and do not have
in India access to basic health and educational
The main problems of human capital formation inIndia are facilities. A large section of society
cannot afford to get higher education
() Rising Population Rapidly rising population adversely affects the or expensive medical treatment for
quality of human capital in under developed and developing major disease.
countries like India.
It reduces per head availability of existing facilities like sanitation, Human Development Index
employment, drainage, water system, housing, hospitals,
education, food supply, nutrition, roads, electricity, etc. The Human Development Index (HD) is
acomposite statisticof life expectancy,
(ii) Brain Drain Migration of highly skilled labour termed as 'brain education, and income indices rank
drain'. This slow down the processof human capital formation in countries into four tiers of human
thedomestic economy. development.
(n) Inefficient of Manpower Planning There is inefficient manpower It was created by economist Mahbub Ui
planning in less developed countries where no efforts have been Hag, followed by economist Amartya Sen
made either to raise the standard of education at different stages or in 1990, and published by the United
Nations Development Programme. India
to maintain the demand and supply of technical labour force. It is has 136th position in the World Human
a sad reflection on the wastage of human power and human skill. Development Index.
 (i1) Absorptive Capacity Advanced technology can be adopted only if the skills and knowicdge
required for using that technology is present in the country. Investment in education and
on-the-job training help to create these skills and knowledge base and thus, helps in absorptio1
of new technologies which lead to higher production and thus, economic growth.
(iv) Participation Rate Human capital formation makes a greater proportion of population
capable of participatingin the economic, social and political activities of a nation. Thus. raising
the participation of people in the process of economic growth.

>opic3 Education Sector in India

Education implies the process of teaching, Expenditure on
training and learning especially in schools or Elementary Educationin India
colleges, to improve knowledge and develop skills.
Elementary education takes a major share of total educacion
Following points explain the important or objective exnendinure and rhe shareof the higher/tertiary education is he least
of education education.
() lt produces good citizens. on an average government spent less on tertiary
Expenditure per student on tertiary education is higher than that of
(i) It develops science and technology. elementary.
(in) It acilities use of natural and hunan As we expand school education, we need nore teachers who are
resources of all regions of the country. trained in the higher educational institutions, therefore, expenditure
(iv) It expands mental horizon of the people. on all levels of education should be increased. The per capita
education expenditure is as high as 2005 in Himachal Pradesh to as
low as 515 in Bihar.
Growth in Government Expenditure This leads to differences in educational opportunities and
on Education attainments across states.
Government expenditure on education can be
expressed in two ways
() As a percentage of total government
Free and Compulsory Education
The Education Commission (1964-66) had recommended that
expenditure.
atleast 6% of GDP to be spent on education so as to make a
(i1) As a percentage of Gross Domestic Product noticeable rate of growth in education as achievements.
(GDP).
In December 2002, the Government of India, through the 86th
The percentage of education expenditure of toral Amendment of the Constitution of India, made free and compulsory
government expenditure indicates the importance
education afundamental right of all children in the age group of 6-14
of education in the scheme of things before the years. Government of India in year 1998 appointed.
governmnent.
Expenditure on education out of our GDP shows The Tapas Majumdar Committee, which estimated an

how much we are committed towards the expenditure of around 1.37 lakh crore over 10 years (1998-99 to
development of education in our country. 2006-07) to bring all Indian children in the age group of 6- 14 years,
During 1952-2010, education expenditure as under the purview of schooleducarion. Desired level of expenditure
Percentage of total governnment expenditure an education is 6o of GDP but the current level is little over 4%
Increased from. 7.92% to l1.1% and as percentage which is not inadequate. It is necessary to rcach the level of 6% which
is considered as must for coming years.
of GDP increased from 0.64% to 3.259%. During
this period expenditure on education was not Recently, Government of India has started levying a 20%
constant. There was irregular rise and fall. 'education cess' on all Union taxes. The revenues from education cess
has been earmarked for spending on elementary education.

Government Expenditure It refers to money that goverrnment spends on goods and services.
 Educational Achievements in India Gender Equity : Better than Before
Thedifferences in literacy rates between
Generally, educational achievements in a country are indicated in terms of males and females are narrowing signifying
() Adult literacy level
(i) Primary education completion rate a positive development in gender equity:
(i) Youth literacy rate still the need to promote education for
women in India is immninent for various
These statistics for the years 1990 to 2010 are given in the following table reasons, such as

EducationalAttainment in India () Improving economic independence.

(i) Social status of women.
Particulars 1990 (%) 2000 (%) 2005-10 (%) (iiü) Healthcare of women and children.
Adult Literacy Male 61.9 76.7
Therefore, we cannot show the
68.4
Rate satisfaction about the upward movement in
Female 37.9 45.4 54.9
literacy rates as we have miles to go in
Primary Male 78 85 96 achieving cent percent adult literacy.
Completion Rate
Female 61 69 95 In India, Mizoram, Kerala, Goa and
Youth Literacy Male 76.6 79.7 88 Delhi are the states having high literacy
Rate
Female 54.2 64.8 74 rate, while Bihar, Uttar Pradesh, Rajasthan
and Arunachal Pradesh are the
educationally backward States. The
Future Prospects educational backwardness is due to social
India government considers education a key sector where considerable and economic poverty of the people.
growth and development is required. Thus, it has set some future prospects for Higher Education : A
Few Takers
framing its policies. The Indian education pyramid is steep,
These prospects are discussed below indicating lesser and lesser number of
people reaching the higher education level.
Education for AIl : Stilla Distant Dream
Although the education level in India has raised for both adults as well as
As per NSSO (National Sample Survey
Organisation) data, in the year 2007-08,
for youth. Stillthe number of illiterates in India are as much as the population the rate of unemployment for youth with
was at the time of Independence. education up to secondary level and above
In 1950, when the constitution of India was passed by the constituent was 18.1% whereas, the rate of
assembly, it was noted in the directive principles of the constitution that the unemployment for youth with education
government should provide free and compulsory education for all children up up to primary level was only l1.6%.
of the
to the age of 14 years within 10 years from the commencement Therefore, the government should
constitution. increase allocation for higher education and
The following factors makes education still a distant dream also improve the standard of higher
() Large number of illiterates (i) Inadequate vocationalisation education institutes, so that students are
(iui) Gender bias (iv) Low rural access level imparted emplovable skills in such
(v) Privatisation (vi) Low government expenditure on education institutions