Chapter-5 Human Capital Formation in India

(Indian Economic Development)

Notes
 Human Capital: It refers to the stock of skill, ability, expertise, education and knowledge embodied in
the people of a country at a point of time.

 Human Capital Formation: Human capital formation is the process of adding to the stock of human
capital over a period of time. It refers to development of abilities, skills, education and experience among
the population of the county.
It is the process of acquiring and increasing the number of persons who have the skill,
education and experience which are essential for the economic and political development of
a country.

 Sources of Human Capital Formation:

Sources of Human Capital

Formation

Expenditure on Expanditure Expenditure Expenditure on

Education on Health on Migration Information

Expenditure on giving
On-the-Job-Training

1. Expenditure on Education:
 Labour skill of an educated person is more than that of an uneducated person, which enables him to
generate more income than the uneducated person and hence contributes more to the economic growth.
 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. It increases productivity and efficiency of
labour. Thus, individuals invest in education with the objective of increasing their future income.
 Education is sought not only as it confers higher earning capacity on people but also for its other
highly valued benefits:
 I t gives one a better social standing and pride.
 It enables one to make better choices in life.
 It provides knowledge to understand the changes taking place in society.
 It also stimulates innovations.
 It facilitates adaptation of new technologies.
Thus, expanding educational opportunities in a nation accelerates the development process.

2. Expenditure on Health:
 It is an important source of human capital formation as it directly increases the supply of healthy
labour force.
 A sick labourer without access to medical facilities is compelled to abstain from work and there is loss
of productivity.

1
  The various forms of health expenditure are:
 Preventive medicine (such as vaccination);
 Curative medicine (medical intervention during illness);
 Social medicine (like spread of health literacy);
 Provision of clean drinking water and
 Good sanitation facilities.

3. Expenditure on giving On-the-Job-Training:

 Firms spend on giving on-the-job-training to their workers. This may take different forms:
 The workers may be trained in the firm itself under the supervision of skilled worker;
 The workers may be sent for off-campus training.
In both these cases firm incur some expenses.
 Firms will thus, insist that workers should work for a specific period of time, after their on-the-job
training, during which it can recover the benefits of the enhanced productivity owing to the training.
 It is a source of human capital formation as the returns of such expenditure in the form of enhanced
labour productivity is more than the cost of it.

4. Expenditure on Migration:
 People migrate in search of jobs that fetch them higher salaries than what they may get in their native
places.
 Unemployment is a reason for rural-urban migration in India.
 Technically qualified persons, like doctors, engineers etc. migrate to other countries because of higher
salaries that they may get there.
 Migration in both these cases involves cost of transport, higher cost of living in the migrated places and
psychic costs of living in a strange socio-cultural setup.
 The enhanced earnings in the new place outweigh the cost of migration; hence, expenditure on
migration is also a source of human capital formation.

5. Expenditure on Information:
 People spend to acquire information relating to labour market & other markets like education and
health. For e.g. people want to know the level of salaries associated with various types of jobs, whether
educational institutions provide the right type of employable skills and at what cost.
 This information is necessary to make decisions regarding the investment in human capital as
well as for efficient utilisation of the acquired human capital stock.
 Thus, expenditure incurred for acquiring information relating to labour market and other markets is
also a source of human capital formation.

 Difference between Physical Capital and Human Capital:

Physical Capital Human Capital
It refers to those inputs which are required for It refers to the stock of skill, ability, education
further production like plants, machinery, and knowledge possessed by an individual or a
buildings etc. society at a point of time.
Physical capital is tangible and can be easily Human capital is intangible; it is endogenously
sold in the market. built in the mind and body of its owner. Hence,
it cannot be sold in the market. Only the
services of the human capital are sold.

2
 Physical capital can be separated from its Human capita (like skills of a person) cannot
owner. be separated from its owner.
It is completely mobile between countries It is not perfectly mobile between countries as
except for some artificial trade restrictions. movement is restricted by nationality and
culture.
It depreciates with the passage of time. It also depreciates with ageing but the
depreciation can be reduced, to a large extent,
through continuous investment in education,
health etc.
It benefits the owner i.e. it creates only It benefits not only the owner (private benefits)
private benefits (i.e. benefit from a capital but also the society in general (social benefits/
good flow to those who pay the price for the external benefits). Thus, human capital creates
goods and services produced by it). both private and social benefits (For example
A healthy person by maintaining personal
hygiene and sanitation, stops the spread of
contagious diseases and epidemics).

 Physical Capital Formation vs Human Capital Formation

Physical Capital Formation Human Capital Formation

The ownership of physical capital is the Human capital formation is partly a social
outcome of the conscious decision of the process and partly a conscious decision of the
owner – the physical capital formation is possessor of the human capital.
mainly an economic and technical process.
Physical capital formation can be built Human capital formation is to be done through
through imports. conscious policy formulations in consonance
with the nature of the society and economy and
expenditure by the state and the individuals.

 Difference between Human Capital and Human Development:

Human Capital Human Development
It is a narrow concept. It considers education It is a broader concept. It is based on the idea
and health as a means to increase labour that education and health are integral to
productivity. 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.

It treats human beings as a means to an Human development treats human beings as

end; the end being the increase in end in themselves. Human welfare is the basic
productivity. Any investment in education objective to be fulfilled in the society. It should
and health is unproductive if it does not be increased through investments in education
enhance output of goods and services. and health even if such investments do not result
in higher labour productivity.

3
Note: According to Human Development perspective, every individual has a right to get basic education and
basic healthcare, irrespective of their contribution to labour productivity. This means that every individual has
the right to be literate and lead a healthy life.

 Importance or Role of Human Capital Formation:

 Effective use of physical capital – The growth and productivity of physical capital depends extensively
on the human capital formation. Educated, skilled and healthy people make use of physical capital in
an effective manner and raise productivity of capital.
 High productivity and production – Labour skill of an educated person is more than that of an
uneducated person, which enables him to generate more income than the uneducated person and hence
contributes more to the economic growth. Similarly, a healthy person could provide uninterrupted
labour supply for a longer period of time. This implies human capital formation raises productivity and
production.
 Inventions, innovations and technological improvement – The human capital formation stimulates
innovations and creates ability to absorb new technologies.
 Increases life expectancy – Formation of human capital raises life expectancy of the people. Health
facilities and availability of nutritive food enable people to live a healthy and long life. This in turn,
adds to the quality of life.
 Improves quality of life – Educated and healthy people lead a good quality life.
 Control of population growth – It has been observed that educated persons have smaller families as
compared to illiterate families. So, spread of education is necessary to control the population growth
rate.

 Relationship Between Human Capital and Economic Growth:

Economic growth means the increase in per capita real income (or increase in per capita availability of goods
and services) of a country.
 The contribution of an educated person to economic growth is more than that of an illiterate person.
 Similarly, a healthy person also contributes to economic growth by providing uninterrupted labour supply
for a longer period of time.
 Thus, both education and health, along with many other factors like on-the-job training, job market
information and migration, increase an individual’s income generating capacity.
 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.
 Similarly, the availability of educated labour force facilitates adaptation to new technologies.

 Cause and Effect Relationship between Human Capital and Economic Growth
Human capital formation stimulates the process of economic growth. However, economic growth also
impacts human capital formation. Growth implies increase in per capita real income (or increase in per
capita availability of goods and services). Higher income facilitates higher investment on education and
skills implying human capital formation. On contrary increase in human capital leads to efficient/ better
utilization of fixed capital, better quality of life, higher life expectancy, implying increase in productivity/
efficiency leading to increase in GDP growth.
However, it is difficult to prove cause and effect relation between human capital and economic growth,
due to 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;
 Similarly, health services measured in monetary terms, life expectancy and mortality rates may not reflect
the true health status of the people in a country.

4
 Hence it is difficult to establish a relation of cause and effect from the growth of human capital (education
and health) to economic growth. However, growth in each sector has reinforced the growth in every other
sector. It is believed that the causality between human capital and economic growth flows in either
directions ie.
 higher income causes building of high level of human capital and
 high level of human capital causes growth of income.

Note: The 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. The analysis of the indicators (crude death rate, infant
mortality rate, life expectancy and literacy rates) show that human capital growth (improvement in
education and health sectors) in developing countries has been faster but the growth of per capita real
income has not been that fast.

 Indicators of Educational Achievements in India:

(a) Adult Literacy Rate (per cent of people aged 15+)
(b) Primary completion rate (per cent of relevant age group)
(c) Youth literacy rate (per cent of people aged 15+ to 24)

 State of Human Capital Formation in India:

 India recognised the importance of human capital in the Seventh Five Year Plan.
 Trained and educated on sound lines, a large population can itself become an asset in accelerating
economic growth and in ensuring social change in desired directions.
 India is a federal country with a union government, state governments and local governments
(Municipal corporations, Municipalities and Village Panchayats). The constitution of India mentions
the functions to be carried out by each level of government.
 Accordingly, expenditure on both education and health are to be carried out simultaneously by all
the 3 tiers of the country.
 The Draft National Education Policy 2019 states that “India aspires to take its place beside the United
States and China as the third largest economy by 2030-2032… By 2030-2032 we will be the third
largest economy at over ten trillion. Our ten trillion economy will not be driven by natural resources,
but by knowledge resources. Thus, we need a knowledge society based on a robust education system,
with all the requisite attributes and characteristics in the context of changes in knowledge demands,
technologies, and the way in which society lives and works”. This policy vision suggests how human
formation in India will move its economy to a higher growth trajectory position.
 India as a Knowledge Economy - The Indian software industry has been showing an impressive
record over the past two decades. Entrepreneurs, bureaucrats and politicians are now advancing views
about how India can transform itself into a knowledge-based economy by using information technology
(IT). There have been some instances of villagers using e-mail which are cited as examples of such
transformation.

 Need for different forms of government interventions in education and health sectors:
The expenditure on education and health assume a great importance in the formation of human capital.
The government intervention in the education and health sectors is important because of the following
reasons:
a) The education and health care services create both private and social benefits and this is the reason for
the existence of both private and public institutions in the education and health service markets.
Expenditure on education and health make substantial long-term impact and they cannot be
easily reversed. Hence, government intervention is essential.
b) Individual consumers of these services do not have complete information about the quality of services
and their costs. In this situation, the providers of education and health services aquire monopoly power

5
 and are involved in exploitation. The role of government in this situation is to ensure that the private
providers of these services adhere to the standards stipulated by the government and charge the
correct price.
c) Regulatory authorities 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 and National Medical Commission and Indian Council for Medical Research
(ICMR) facilitate institutions which come under the health sector.
d) In India, a large section of the population is living below the poverty line and they cannot afford to
access basic education and health care facilities. Moreover, a substantial section of people cannot
afford to reach super specialty healthcare and higher education. Furthermore, when basic education and
health care is considered as a right of the citizens then it is essential that the government should
provide education and health services free of cost for the deserving citizens and the socially
oppressed classes.

 Problems in Human Capital Formation:

a) Inadequate resources - The resources allocated to the formation of human capital have been much
less than the resources required. Due to this reason, the facilities for the formation of human capital
have remained grossly inadequate.
b) High growth of population - The continuous rise in population has affected the quality of human
capital as it reduces per head availability of the facilities.
c) Brain Drain - People migrate from one place to another in search of better job opportunities and better
salaries. This leads to the loss of a class of skilled labourers like doctors, engineers etc. who have high
caliber and are rare in a developing country. The cost of such loss of quality human capital is very
high.
d) Lack of proper manpower planning: There is an imbalance between demand and supply of human
resources of various categories, especially in case of highly skilled personnel. The absence of such
balancing has resulted in the wastage of resources.
e) Low academic standards: The quality of education imparted by many of our educational institutions
is far below the international standards. In respect of education, the performance is unsatisfactory
especially in the field science and technology and development of modern technology.

 Future Prospects:
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.
In 2009, the Government of India enacted the Right of Education Act to make free
education a fundamental right of all the children in the age group of 6-14 years.
 Still we are not able to achieve the target of 100 percent literacy in India.

Note:
 Government of India has started leving 2% ‘education cess’ on all union taxes. The revenues from
education cess has been earmarked for spending on elementary education.

6
 In addition to this the government sanctions a large outlay for the promotion of higher education and new
loan schemes for students to pursue higher education.

Gender Equity — Better than Before:

 The differences in literacy rates between males and females are narrowing signifying a positive
development in gender equity;
 However, still there is a need to promote women education in India because —
 It improves economic independence and social status of women.
 Women education makes a favourable impact on fertility rate and healthcare of women and children.
 If the women are educated, there is a greater probability that the children in family would be educated
and hence it may help in achieving better literacy rates.

Higher Education - A few takers (Problems in higher education/ tertiary education)

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

Click on the following links for videos on this chapter:

1. https://www.youtube.com/watch?v=1BSkamH8TS4&feature=youtu.be
2. https://www.youtube.com/watch?v=g33gM2M1Odg&feature=youtu.be