ECONOMICS HUMAN CAPITAL FORMATION IN INDIA

Human Capital Formation in India

Topics covered
Meaning of human capital
Sources of human capital formation
Human capital and economic growth
Human capital and development
Education sector in India

Meaning of Human Capital

 Human capital is intangible and built in the body and mind of its owner.
 Whether a human being wants to raise earnings depends on inner conscience.
 Cannot be sold, but only its services can be sold in the market.
 Creates both private and social benefits.
 Required to use physical capital more productively.
 Need human capital to produce other human capital such as doctors, lawyers and engineers.

Sources of Human Capital Formation

Investment on human beings helps to produce more human capital. It enables an increase in the work
participation rate and thus productivity. Major sources of human capital formation are as follows:

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1. Expenditure on education  Expenditure on educational investment enables one to develop
intellectual skills, earn higher income, make better choices
in life and provides knowledge to understand the changes taking
place in society to stimulate innovation.
 It provides better social standing and pride.
 It not only enables to have higher earning capacity but also helps
seek highly valued benefits.
 Quality of human resources is determined by the level of
expenditure on education.
 So, higher the educational expenditure, faster is the growth of
human capital formation for economic development of a
nation.
2. Expenditure on health  The role of health in the development of human capital is vital.
 To prevent the population from being a liability on a country, the
government must pay adequate attention towards the health
of the public.
 This is possible only with government expenditure on health
infrastructure.
 Educated people will spend on their child's health and education,
thus providing the nation with a bright future.
 The level of income earned increases with the expenditure on
health because the productive capacity of the working
population depends on health expenditure.
 Over the last few decades, India has developed health
infrastructure and manpower at all levels of government and
private health care centres.
 This enables progress in improving the health of the
population.
3. On-the-job training

 Expenditure on on-the-job training is a source of human capital

formation because it provides returns in the form of increased
labour efficiency and productivity.
 The benefits of training are more than the cost of training given
to workers.

4. Migration  People migrate from one place to another in search of better

jobs and higher earnings than a previous job.
 Most migration is from rural areas to urban areas or from one
country to another to receive good returns for their work.
 It involves the cost of transport and cost of living in different
places.
 However, people tend to migrate as the benefit is higher than
the cost of migration.
 In this way, spending on migration can be considered a source of
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human capital formation.
5. Expenditure on information
 Many people acquire information about the demand for a
product and ways to acquire efficient skills to improve production
efficiency.
 This enables the producer to satisfy the consumer’s demand and
optimise production.
 However, the actual potential productivity will be higher than
the cost of acquiring information.
 Thus, expenditure on information of market conditions and
specialised skills contribute to human capital formation.

Physical and Human Capital

Physical Capital Human Capital

 It is tangible.  It is intangible, built in the body and mind of
its owner.
 It is separable from its owner and can be sold  It cannot be sold, but only its services can
in the market. be sold in the market.
 It is completely mobile between countries,  It is not perfectly mobile and is restricted by
barring some artificial trade restrictions. nationality.
 It can be built through imports and creates  It depends on a person’s conscience as to
only private benefits. whether he/she wants to raise earnings. It
creates both private and social benefits.

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Investment in human capital plays a vital role in economic growth

Human Capital Human Development

 Human capital is a narrow concept.  Human development is a broad concept.
 It indicates that education and health are  It indicates that education and health are integral
means to increase labour productivity. to human well-being. When people have the
ability to read and write, then they can lead a
healthy life.
 It treats human beings as a means to an  It is an end in itself. It refers to the development of
end, the end being an increase in individuals as personal value develops by
productivity. obtaining education and health.

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 It states that investment in education and  It states that human welfare should be
health is unproductive if it cannot increase increased through investment in education and
the output of goods and services. health though such investments cannot result in
higher labour productivity.

State of Human Capital Formation in India

Government organisations incur huge investments to facilitate the functioning of schools and hospitals. As
the poor are unable to afford the high prices for obtaining these services from the private sector, the
government facilitates their availability at subsidised rates for the poor.

Regulation of schools and hospitals by government organisations

Education: National level

 National Council of Education Research Training (NCERT) is involved in designing study

material up to the senior secondary level.
 All India Council for Technical Education (AICTE) implements rules and regulations related to
technical education.
 University Grants Commission (UGC) raises funds for university education and implements rules
and regulations for higher education.

Health: National level

 Indian Council for Medical Research (ICMR) implements rules and regulations related to
education in the health sector.
 National Institute of Health and Family Welfare (NIHFW) is committed to provide public health,
family welfare and health management system more efficiently and effectively.

Main problems of human capital formation in India

 Increasing population
o An increase in the population has an adverse effect on the quality of human capital in
developing countries such as India.
o It leads to a reduction in per head availability of existing services such as employment,
education, health care, sanitation, housing, electricity, transport and nutrition.
 Poverty
o People who live below the poverty line cannot afford basic education and healthcare facilities.
o Poverty is one of the main problems of human capital formation in India.
 Migration
o Highly educated individuals migrate from one place to another for better employment
opportunities.
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o Economic growth and development is negatively affected by this migration of highly skilled
labour.
 Inappropriate planning
o Inappropriate planning of human resources in India is the major obstacle in human capital
formation.
o Supply of workforce does not match with growing demand.
o No effort to maintain the demand and supply of technical labour force and to raise the standard of
education.
o Increases the rate of unemployment in the country.
 Low quality of health and education facilities
o Most health and education institutions provide poor health facilities and an inferior quality of
education.
o Negatively affects human capital formation.

Education Sector in India

Government expenditure on education

 Government expenditure on education can be expressed on the basis of percentage of total

government expenditure and percentage of gross domestic product (GDP).
 During 1952–2014, the allocation of educational expenditure as a percentage of total government
expenditure increased from 7.92% to 15.7% and as a percentage of GDP increased from 0.64% to
4.13%.
 About 50% of the Eleventh Plan outlay was devoted to elementary education and literacy, 20% to
secondary education and 30% to higher and technical education. \

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Regional differences in educational attainment in India

 Pattern of educational opportunities and attainment across states can be associated with the level of
government expenditure allocated in different states.
 The percentage of government expenditure on education of the total government expenditure shows
the importance of education in government programmes.
 In 2014–15, the per capita education expenditure was Rs 34,651 in Himachal Pradesh and Rs 4,088
in Bihar.
 Allocation of educational expenditure in Himachal Pradesh differences in educational opportunities and
attainments was very high as compared to Bihar. This leads to differences in educational
opportunities and attainments across states.

Need for government intervention

Public and private institutions function in the health and education sectors. Functioning of these
institutions needs to be monitored by the different forms of government intervention because
 Poor people cannot afford to have the health and education facilities provided by the private sector
because of high costs. So, the government needs to provide these services to the poor at lower
costs.
 Health and education facilities provided by private institutions are mainly located in urban areas. It is
the responsibility of different governments to encourage private firms to provide health and
education services in rural areas.
Thus, government intervention is important to improve and maintain the education and health status
of a country.

Indicators of educational achievement in India

 Primary education completion rate

o Primary education completion rate is the percentage of students completing the last year of
primary school.
o Provides an idea regarding student progression and monitors the coverage of the educational
system.
o Enables to measure human capital formation in terms of quality and efficiency of the educational
system.
o Reflects the cautious steps of the people towards educating children in case the primary
education completion rate is higher.
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 Adult literacy rate

o Adult literacy rate is the percentage of literates in the age group 15 years and above.
o Measures the stock of literates within the adult population who are able to write and continue to
learn.
o Reflects the accumulated achievement of education in spreading literacy.
 Youth literacy rate
o Youth literacy rate is the percentage of literates in the age group 15–24 years.
o Indicates the accumulated achievement of literacy programmes in imparting literacy skills to
people.
o Potential for intellectual growth and contributes to socioeconomic development of society.

Education and its challenges

 Over the years, the adult and youth educational level has increased in India. However, the number of
illiterate people is high as the population was at the time of independence.
 The educational system lacks vocationalisation of education as it provides a degree-oriented
certificate to youths.
 A lack of gender parity and equality in education is often a critical factor in under development. A
difference in literacy rates between males and females still prevails in India.
 The rural population has low access to education compared to the urban population.
 Privatisation of education has increased the cost of education to the poor sections of society.
 The government’s actual expenditure on education has been about 4–5% of GDP which is lower than
the committed spending on education (6% of GDP).

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Mind Map

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Important questions with answers

Q1: Explain how investment in human capital plays a vital role in economic growth.
Ans: Investment in human capital plays a vital role in economic growth in the following ways:
 Development of skills: It helps to develop skills and imparts training to increase
production.
 Increase in productivity: Human resource plays the most crucial role, without which it is
not possible to innovate, use and upgrade physical capital for economic development.
 Development in mental ability: It develops the ability to make right choices of the
available resources in the economy.
 Modernisation: The education system focuses on increasing productivity of human
resources with technical progress at all levels of work. It increases the receptivity of
people to modern and scientific ideas.
 Increase in standard of living: Higher expenditure on education increases the efficiency
of labour productivity as people become skilled in their jobs.
 Increase in participation rate and equality: An individual with the capacity to obtain
knowledge and specialised skills enhances the productive efficiency and the rate of
participation of workers in economic, social and political activities.

Q2: Distinguish between physical capital and human capital.

Ans: Physical capital and human capital:
Physical capital Human capital
 It is tangible and can be sold in the  It is intangible, built in the body and
market. mind of its owner.
 It is separable from its owner.  It cannot be sold but only its services
can be sold in the market.
 It is completely mobile between countries,  It is not perfectly mobile and is
barring some artificial trade restrictions. restricted by nationality.
 It can be built through imports and creates  It depends on a person’s conscience
only private benefits. as to whether or not he/she wants to
raise earnings. It creates both
private and social benefits.

Q3: How can we relate human capital formation with economic growth?
Ans: Human capital formation and economic growth are positively related to each other:
 Economic growth refers to an increase in the real national income of a country.
 A trained workforce can be an asset for the growth of an economy.
 Human capital formation plays an essential role in innovation, usage and upgradation
of physical capital for economic growth.
 An improvement in the stock of human capital helps in accelerating economic growth.
 However, higher economic growth helps improve the process of human capital formation.
Thus, human capital formation and economic growth are dependent on each other.

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Q4: ‘Expenditure on information is a source of human capital formation.’– Justify the

given statement.
Ans: Yes, expenditure on information is a source of human capital formation.
 Information related to educational institutions, employment level, wages and availability
of health facilities is essential as it is an integral part of human capital.
 The productivity of labour can be enhanced by information related to educational
institutions.
 It enables people to choose the right institution to educate themselves and improve their
skills according to the requirements of the job market.
 Expenditure on preventive and curative medicine and provision of clean drinking water
and sanitation determine the health status of people.
 However, the actual potential productivity level will be higher than the cost of
acquiring information on hospital facilities provided by the government and other private
institutions.

Q5: What factors contribute to human capital formation?

Ans: Factors contributing to human capital formation:
 Expenditure on education increases the productivity of human resources by connecting
technical progress at each level of work.
 Expenditure on health enables people to perform efficiently and thus be more
productive.
 On-the-job training provides returns in the form of increased labour efficiency and
productivity.
 Migration in search of good returns for work.
 Expenditure on information enables the producer to satisfy the consumer’s demand
and to optimise production.

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