CHAPTER 4

HUMAN CAPITAL FORMATION IN INDIA

What is Human Capital?

Human capital refers to the stock of skill, ability, expertise, education and
knowledge in a nation at a given point of time. The stock of physical capital is
essential in the process of economic growth of a country. If there is low investment in
human capital, utilisation of physical capital will be at low pace, leading to low level
of economic growth. An improvement in the mental capability, skill and expertise of
people, supports an increase in the human capital as it enables the human factor to
produce more.

What is Human Capital Formation?

Human capital formation implies the additions to the stock of abilities and skills
among the population of the country.

Human capital formation is the process of acquiring and increasing the number of
persons, who have the skills and expertise, which are important for the economic,
social and political development of the country.

The formation of human capital involves investment in human capital to make them
more efficient so that economic growth takes place.

Sources of Human Capital

(Q. Explain the different sources of human capital formation and discuss how
each source contributes to the overall development of human capital.)

1. Education

• Investment in education is considered as one of the main sources of human

capital.

• Expenditure on education is very important source of human capital formation

because it increases efficiency and skill of human capital.

• Spending on education by individuals is similar to spending on capital goods by

companies with the objective of increasing future profits over a period of time as
education enhances mental horizon of human resources.
• Likewise individuals invest in education to increase their skills and efficiency
resulting in higher earning capacity (income).

2. Health:

• Health is considered to be an important input for the development of a nation as

much as it is important for the development of an individual.

• Expenditure on health is important in having a productive labour force. Health

expenditure directly increases the physical and mental ability of human beings and
produces healthy labour force and is, thus an important source of human capital
formation.

• Expenditure on health is needed in the following areas: preventive medicine

(vaccination), Curative medicine (medical intervention during illness), social
medicine (spread of health literacy), provision of clean drinking water and good
sanitation facilities.

3. On-the-Job Training:

• On-the-job training is required to enhance the skills and expertise of human capital
in order to increase productivity of workers.

• Many firms spend on giving on-the-job training to their workers. This may take
different forms: workers may be trained in the firm itself by a skilled worker or
workers may be sent for off campus training.

• In both these cases firm incurs some expenses. Expenditure regarding on-the-job
training is a source of human capital formation as the return of such expenditure, in
the form of enhanced labour productivity, is more than the cost of it.

4. Migration:

• People migrate in search of jobs that fetch them higher salaries than what they may
get in the native places.

• Unemployed people from rural areas migrate to urban areas in search of jobs of
higher salaries that they may get in those countries.

• Expenditure on migration is also considered as a source of human capital formation

as the increased earnings outweigh the cost of migration.
5. Information

• People spend to acquire information relating to the labour market and other markets
like education and health.

• This information is necessary to make decisions regarding investments in human

capital as well as for efficient utilisation of the acquired human capital stock.

• Expenditure incurred for acquiring information relating to the labour market and
other markets is also a source of human capital formation.

Physical and Human Capital

(Q. Differentiate between Physical Capital and Human Capital, and explain how
both contribute to the economic growth of a country)

Meaning

The economic growth of a country is possible only when there is efficient use of
scarce (physical and human) resources. As physical capital is needed to make use of
physical resources for production. Similarly, human capital increases the efficiency of
human resources for production.

There are two types of capital used in production:

Physical Capital

It includes all those resources which are required for further production, like plant
and machinery, factory buildings, equipments etc.

Human Capital

It refers to the stock of skill, ability, expertise, education and knowledge in a nation at
a given point of time.

The stock of physical capital is essential in the process of economic growth of a

country. If there is low investment in human capital, utilisation of physical capital
will be at low pace, leading to low level of economic growth. An improvement in the
mental capability, skill and expertise of the people, supports an increase in the human
capital as it enables the human factor to produce more.
Comparison between Physical Capital and Human Capital

Physical Capital Human Capital

It is used to produce goods and services It increases the efficiency produce goods
and services
Physical capital is sold in the market It is not sold, only the services of human
capital are sold
It depreciates overtime due to continuous There is no depreciation of human
use or due to change in pattern of capital. However depreciation may occur
demand with ageing hence investment in human
capital are required to maintain
efficiency.
Formation of physical capital is an Formation of human capital is partly a
economic and technical process social process and partly a conscious
effort of processor of the human capital.

Human Capital and Economic Growth (Importance of Human

Capital Formation)
(Q. Discuss the importance of human capital formation in economic growth.
Highlight the key roles it plays in enhancing productivity, efficient use of
physical capital, technological improvements, development strategies, quality of
life, and changes in societal attitudes.)

We know that labour skill of an educated person is more than that of an uneducated
person and educated person generates more income.

Increase in real national income of a country indicates economic progress. The

contribution of a literate person to economic growth is more than that of an illiterate
person. Health is also an important factor for economic growth as a healthy person
could provide uninterrupted labour supply for a longer period of time. There are
many factors like education, health, on-the-job training, job market information and
migration, which increase income generating capacity of human capital.

The important vital role of human capital formation in economic growth will be clear
from the following points:

1. Enhancement of productivity of human capital

• Human capital formation raises the productivity and production as skilled and
efficient workers make better use of the given resources.
• Technical skill can be acquired only by means of education, training and sound
health of the people.
• Investment in human capital produces such skills and expertise which increase their
productivity which is essential for economic growth.

2. Efficient use of physical capital

• Physical capital formation depends extensively on the human capital formation.

• The physical capital can be utilised effectively only by skilled and intelligent work
of human capital in the economy.
• Thus human capital formation raises productivity of physical capital which is
desired for economic growth.

3. Innovations and technological improvement

• Technological upgradation is important for structural changes. The human capital

formation not only increases the productivity of human resources but also
stimulates innovations and creates ability to absorb new technologies.
• Education provides knowledge to understand changes in society and scientific
advancements, thus facilitate inventions and innovations.
• The availability of educated labour force facilitates adaption to new technologies.
Human capital formation promotes innovations and discoveries to develop the
economy.

4. Key role in development strategy

• India recognised the importance of human capital in economic growth long ago.
Economic growth implies increase in national income of a country which is
possible only if its human capital is efficient.

The seventh five year plan says,

 "Human resources development (read human capital) has necessarily to be
assigned a key role in any development strategy particularly in a country with a
large population.”

• Accordingly, trained and educated people become an asset in accelerating

economic growth and in ensuring social change in desired directions.

5. Improvement in quality of life

• The quality of life improves due to quality education, health and skill formation
acquired by the people.
• Human capital formation enables them to enjoy a higher standard of living as they
are able to generate better remuneration for them and for the nation.

6. Positive change in attitude

• Investment in human capital makes people more knowledgeable, skilled and

modern in their thoughts and actions.
• It increases their outlook and attitude towards various aspects such as traditions, job
markets, mobility etc. which are helpful in development of the country.
• They are able to make rational choices in respect of job opportunities. It leads to
emergence of modern society desired for economic development.

Relation between Human Capital (Education and Health) and Economic

Welfare

• Empirical evidence to prove that increase in human capital causes economic growth
is rather nebulous.
• This may be because of measurement problems. For example, education measured
in terms of years of schooling, teacher-pupil ratio and enrolment rates may not
reflect the quality of education; and health services measured in monetary terms,
life expectancy and mortality rates may not reflect the true health status of the
people in a country.
• Using the indicators mentioned above, an analysis of improvement in education and
health sectors and growth in real per capita income in both developing and
developed countries shows that there is convergence in the measures of human
capital but no sign of convergence of per capita real income.
Human Capital and Human Development
(Q. Differentiate between Human Capital and Human Development. Explain
how their perspectives on education and health differ in terms of their impact on
individuals and society.)

Human Capital and Human Development may sound similar, but they have distinct
meanings and implications.

Human Capital refers to the idea that education and health are important because
they can make workers more productive. In this view, people are seen as tools or
resources to increase the production of goods and services. The focus is on how
education and health can enhance labor productivity. If investments in these areas do
not lead to higher output, they are considered unproductive.

Human Development, on the other hand, is based on the belief that education and
health are essential for human well-being. It emphasises that only when people can
read, write, and live long, healthy lives can they make valuable choices for
themselves. Human beings are seen as ends in themselves, not just means to an
economic end. In this perspective, improving human welfare through education and
health is important, even if it does not directly increase labor productivity.

Human Capital Human Development

Human capital considers education Human development on the idea that
and health as a means of to increase education and health are integral to
labour productivity human well being because only
when people are educated and
healthy they will be able to make
better choice
Human capital treats human beings as In the human development
a means to increase the productivity perspective, human welfare should
be increased through investment sin
education and health
Investment in education and health is Investment in education and health is
unproductive if it does not lead to rise productive, even if it does not lead to
in production of goods and services. rise in production of goods and
services, as every individual has a
right to be literate and lead a healthy
life. Basic health and basic education
are important in themselves.
State of Human Capital Formation in India

(Q. Discuss the role of government in the formation of human capital in India,
particularly in the sectors of education and health. Why is government
intervention necessary, and how does it impact the population's access to these
essential services?)

• We have seen that expenditure on education, health, on the job training, migration,
and information are sources of human capital formation. Out of these sources,
education and health are very important sources of human capital formation.

• Expenditures on education and health are to be carried out simultaneously by all the
three tiers ie., union government, state governments and local governments
(Municipal Corporations, Municipalities and Village Panchayats).

• Education and health care services create both private and social benefits and this is
the reason for the existence of both private and government sector institutions in
education and health service markets.

• Government intervention is required to avoid monopoly situation in education and

health sector so that unnecessary exploitation of the service seeker can be avoided
and his/her interest is protected.

• The role of government is to ensure that the private providers of education and
health services adhere to the standards stipulated by the government and these
charge the correct price for their services.

• In India, the ministries of education at the union and state level, departments of
education and various organisations like National Council of Educational Research
and Training (NCERT), University Grants Commission (UGC) and All India
Council of Technical Education (AICTE) facilitate institutions which come under
the education sector. Similarly the ministries of health at the union and state level,
departments of health and various organisations like National Medical Commission
and Indian Council for Medical Research (ICMR) facilitate institutions which come
under health sectors.

• Hence government intervention is necessary in regulating the fee structure in

education and health care services because of the following reasons :

(i) Large sections of the population live below poverty line, many of them cannot
afford basic education and health care facilities.

(ii) Substantial section of population cannot afford to reach higher education and
super speciality health care.
 (iii) It is also essential that government should provide basic education and health
services free of cost to deserving citizens and socially oppressed classes
because basic education and health care is considered as a right of the citizens.

• Expenditures on health care services have been increased to develop human

resources.

• Over the years both the Union and State Governments have been increasing
expenditures in education to fulfil the objective of cent percent literacy and
considerably increase the educational attainment of Indians.

Education Sector in India

(Q. Evaluate the role of education in human development and economic growth
in India. Discuss the trends in government expenditure on education and analyse
how the allocation of resources across different levels of education impacts the
country's development goals.)

Human development is based on the idea that education and health are integral to
human well being because only when people have the ability to read and write and
the ability to lead a long and healthy life, will they be able to make other choices
which they value. Education is a very essential component of expenditure on human
capital.

Education implies the process of learning at three levels, viz., primary, secondary and
higher levels of education. It is a wider term than literacy. Literacy just refers to the
ability to read and write, whereas education is the process of gaining knowledge and
developing necessary skills to participate in the growth process of the country.

Importance of Education
Education is very important for the development of human capital and the nation. Its
importance may be clear from the following points:

• It helps in developing necessary skills and knowledge essential for the smooth
functioning of the economy. It produces good citizens of the country by enhancing
their abilities and skills.

• Education provides knowledge to understand changes in society and scientific

advancements, thus facilitate inventions and innovations. Availability of educated
labour force facilitates adaptation to new technologies..
• Education enhances their income earning capacity (as national income rises) and
improves their standard of living and quality of life.
• With education and training, economically weaker sections can get themselves
engaged in gainful employment and thus helping in reducing inequalities of
income.

Growth in Government Expenditure on Education

The expenditure by the government on education is expressed in two ways :

(i) as a percentage of total government expenditure

(ii) as a percentage of Gross Domestic Product (GDP).

• The percentage of 'education expenditure of total government expenditure' indicates

the importance given to education in government plans.

• The percentage of 'education expenditure of GDP' expresses how much of our

income is being committed to the development of education in the country.
• During 1952-2014, education expenditure as percentage of total government
expenditure increased from 7.92 to 15.7 and as percentage of GDP increased from
0.64 to 4.13.

• Elementary education (Primary and middle school education) takes a major share
of total education expenditure and the share of the higher/tertiary education
(institutions of higher learning like colleges, polytechnics and universities) is the
least.

• On an average, the government spends less on tertiary education, 'expenditure per

student in tertiary education is higher than that of elementary (because number of
students in higher education is very less). This does not mean that financial
resources should be transferred from tertiary education to elementary education.

• As we expand school education, we need more teachers who are trained in the
higher educational institutions; therefore, expenditure on all levels of education
should be increased

• In 2014-15, the per capita public expenditure on elementary education differs

considerably across states from as high as 734,651 in Himachal Pradesh to as low
as 74088 in Bihar. This leads to differences in educational opportunities and
attainments across states.

• There is inadequacy of the expenditure on education, if we compare it with the

desired level of education expenditure as recommended by the various
commissions. About 55 years ago, the Education Commission (1964-66) had
recommended that at least 6 per cent of GDP be spent on education so as to make a
noticeable rate of growth in educational achievements.
• Compared to the desired level of education expenditure of around 6 per cent of
GDP, the current level of a little over 4 per cent has been quite inadequate.

• In principle, a goal of 6 per cent needs to be reached - this has been accepted as a
must for the coming years. In 2009, the Government of India enacted the Right of
children to free and compulsory education Act to make free education a
fundamental right of all children in the age group of 6-14 years.

• Government grants a huge expenditure to promote higher education and new loan
schemes to encourage higher education.

Educational Achievements in India

1. Adult literacy rate. Adult literacy rate refers to the ratio of literate adult
population to the total adult population in a country.

• In case of males, the adult literacy rate increased from 61.9% in 1990 to 82% in
2017-18.

• In case of females, the literacy rate increased from 37.9% in 1990 to 66% in
2017-18.

2. Primary completion rate. It refers to percentage of students completing the last

year of primary school.

• In case of males, the primary completion rate increased from 78% in 1990 to 93%
in 2017-18.

• In case of females, the rate increased from 61% in 1990 to 96% in 2017-18.
3. Youth literacy rate. It is the percentage of people in the age group of 15-24 who
can, with understanding, read and write a short, simple statement on their everyday
life.

• In case of males, youth literacy rate increased from 76.6% in 1990 to 93% in
2017-18.

• In case of females, the youth literacy rate increased from 54.2% in 1990 to 90% in
2017-18.
Future Prospects of Education
(Q. Discuss the challenges and future prospects of achieving universal education
in India. Evaluate the progress made towards gender equity in education and the
issues related to higher education, particularly in terms of employability and
government support.)

Future prospects of education can be made clear from the following points :

(a) Education for all — Still a distant dream

Though literacy rates for both - adults as well as youth - have increased, still the
absolute number of illiterates in India is as much as India's population was at the time
of independence.

In 1950, when the constitution of India was passed by the Constituent Assembly, it
was noted in the Directive Principles of the constitution that the government should
provide free and compulsory education for all children up to the age of 14 years
within 10 years from the commencement of the constitution. Had we achieved this,
we would have 100 percent literacy by now.

(b) Gender equity - Better than before

The differences in literacy rates between males and females are narrowing signifying
a positive development in gender equity; still the need to promote education for
women in India is imminent for various reasons such as improving economic
independence and social status of women and also because women education makes a
favourable impact on fertility rate and health care of women and children.

Therefore, we cannot be complacent about the upward movement in the literacy rates
and we have miles to go in achieving cent percent adult literacy.

"Beti Bachao, Beti Padhao" campaign was launched in 2015 by Government of India
to ensure survival and protection of the girl child. It also aims at encouraging
education of the girl child.

(c) Higher education - A few takers

The Indian education pyramid is steep, indicating lesser and lesser number of people
reaching the higher education level. Moreover, the level of unemployment among
educated youth is the highest.

As per NSSO data, in the year 2011-2012, the rate of unemployment among youth
males who studied graduation and above in rural areas was 19 percent. Their urban
counterparts had relatively less level of unemployment at 16 percent. The most
severely affected ones were young rural female graduates as nearly 30% of them are
unemployed. In contrast to this, only about 3-6% of primary level educated youth in
rural and urban areas were unemployed. The situation is yet to improve as indicated
by the Periodic Labour force survey 2017-18.

Therefore, the government should increase allocation for higher education and also
improve the standard of higher education institutions, so that students are imparted
employable skills in such institutions.

EXERCISES

1. What are the two major sources of human capital in a country?

2. What are the indicators of educational achievement in a country?
3. Why do we observe regional differences in educational attainment in India?
4. Bring out the differences between human capital and human development.
5. How is human development a broader term as compared to human capital?
6. What factors contribute to human capital formation?
7. How government organisations facilitate the functioning of schools and hospitals
in India?
8. Education is considered to be an important input for the development of a nation.
How?
9. Discuss the following as a source of human capital formation
a. Health infrastructure
b. Expenditure on migration.
10. Establish the need for acquiring information relating to health and education
expenditure for the effective utilisation of human resources.
11. How does investment in human capital contribute to growth?
12. ‘There is a downward trend in inequality world-wide with a rise in the average
education levels’. Comment.
13. Examine the role of education in the economic development of a nation.
14. Explain how investment in education stimulates economic growth.
15. Bring out the need for on-the-job-training for a person.
16. Trace the relationship between human capital and economic growth.
17. Discuss the need for promoting women’s education in India.
18. Argue in favour of the need for different forms of government intervention in
education and health sectors.
19. What are the main problems of human capital formation in India?
20. In your view, is it essential for the government to regulate the fee structure in
education and health care institutions? If so, why?