CHAPTER 5: HUMAN CAPITAL FORMATION IN INDIA MLP

CBSE 2019-20 question:

Q. ‘‘Human Capital Formation gives birth to innovation, invention and technological improvements.’’ Do
you agree with the given statement ? Support your answer with valid arguments. (3)

Human Capital refers to the stock of skill, knowledge and expertise possessed by a nation at a
given point of time.

Human Capital Formation refers to the process of acquiring and increasing the number of
people who possess skill, knowledge and expertise over a period of time.

PHYSICAL CAPITAL HUMAN CAPITAL

Man made means of production Skill, ability, education and knowledge
possessed by people
Tangible and can be sold in the market Intangible, cannot be sold. Only services can
be provided
It is more mobile between countries It is less mobile between countries
Can be separated from the owner It is built in the body and mind of owner.
Cannot be separated
It depreciates with the passage of time Depreciation can be reduced by investing in
education, health and training.

NCERT QUESTIONS based on Sources of Human Capital

Q1. What are the two major sources of human capital in a country?

Q6.What factors contribute to human capital formation?

Q8. Education is considered an important input for the development of a nation. How?

Q9. Discuss the following as a sources of human capital formation

– Health infrastructure

– Expenditure on migration.

Q10. Establish the need for acquiring information relating to health and education expenditure
for the effective utilisation of human resources.
Q13. Examine the role of education in the economic development of a

nation. Q14. Explain how investment in education stimulates economic

growth.

Q15. Bring out the need for on-the-job-training for a person.

Sources of Human Capital

(Answers to all the above questions are covered in this text/topic)

1) Education: Investment in education is considered as one of the main sources 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. Likewise, individuals invest in education with the objective of
increasing their future income. Education plays an important role as it helps:
• earn higher income
• enjoys better social standing and pride
• contributes more to production his efficiency and productivity are high.
• development of Science and Technology.
• easily adopt modern technology.
• makes better choices in life

2) Health: Expenditure on health is an important source of human capital formation.

A sick labourer without access to medical facilities is compelled to abstain from work and there
is loss of productivity. Preventive medicine (vaccination), curative medicine (medical
intervention during illness), social medi-cine (spread of health literacy) and provision of clean
drinking water and good sanitation are the various forms of health expenditures. Health
expenditure directly increases the supply of healthy labour force and is, thus, a source of human
capital formation.

3) On-The-Job Training:
Types of Training Expenditure
a) training in the firm itself under the supervision of a skilled worker;
b) the workers may be sent for off-campus training
Since, return from expenditure in the form of enhanced labour productivity > cost of
training
so, to recover the benefits firms insist that the workers should work for a specific
period of time after their on-the-job training.

4) MIGRATION: People migrate in search of jobs that fetch them higher salaries
than what they may get in their native places. Unemployment is the reason for the
rural-urban migration in India. Technically qualified persons, like engineers and
doctors, migrate to other countries because of higher salaries that they may get in
such countries. 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 costs of migration; hence,
expenditure on migration is also a source of human capital formation.

5) Information: Information about labour market and educational institutions is

necessary to take decisions regarding investment in human capital and also for the better
utilisation of available human capital.

People spend to acquire information:

a) the level of salaries associated with various types of jobs,
b) educational institutions provide the right type of employable skills
c) and at what cost.
Expenditure incurred for acquiring information relating to the labour market and other markets is
also a source of human capital formation.
NCERT QUESTIONS based on human capital vs human development:

Q4. Bring out the differences between human capital and human development.
Q5. How is human development a broader term as compared to human capital?

Human capital Human development

It considers education and health as It considers education and health as
means to increase labour productivity factors needed for the well being of
human beings
It treats human beings as means to an Human beings are end in themselves
end, end being increase in production . i.e every individual has right to
education and health irrespective of
increase in production.

NCERT QUESTIONS based on human capital and economic growth:

Q11. How does investment in human capital contribute to growth?
Q16. Trace the relationship between human capital and economic growth.
Q12. ‘There is a downward trend in inequality world-wide with a rise in the average
education levels’. Comment.

Human capital and Economic growth:

Causality between human capital and economic growth flows in either directions ie
they both reinforce each other.

A) Human capital promotes Economic growth: Economic growth means the increase in
real national income of a country.

1) Higher production and productivity- The contribution of the educated and healthy
 person to economic growth is more than that of an illiterate and sick person. 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.

2) Stimulates invention, innovation and scientific advancement: This enhanced

productivity of human capital 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.

B) Economic growth promotes Human capital

High GDP results in more expenditure on education ,health and

training programmes which in turn results into better human capital
Conclusion:
Empirical evidence to prove that increase in human capital causes economic
growth is rather nebulous due to measurement problems. They do not tell us
about the quality of education and health services.
But we can see (From table 5.1 , ) that these sectors have grown
simultaneously. Growth in each sector probably has reinforced the growth of
every other sector.
NCERT QUESTIONS based on HUMAN CAPITAL FORMATION IN
INDIA:
Q7. How govt organisations facilitate the functioning of schools and
hospitals in India?
Q18. Argue in favour of the need for different forms of
government intervention in education and health sectors.
Q20. In your view, is it essential for the government to regulate the fee
structure in education and health care institutions? If so, why?
Ans 7: Regulation of Education and Health Sector in India by
Government
THREE TIER STRUCTURE (Federal country)
1. Union Government
2. State Governments
3. Local Governments
(Municipal Corporations, Municipalities and Village Panchayats)
 The Constitution of India mentions the functions to be carried out by each
level of government and accordingly, expenditure is carried out
simultaneously by all the three tiers of the government.
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) regulate the education sector.

Similarly, the ministries of health at the union and state level, departments of health
and various organisations like Indian Council for Medical Research (ICMR) regulate the
health

sector.

Ans 18 and 20: NEED OF GOVERNMENT INTERVENTION IN

EDUCATION AND HEALTH CARE

1) PRIVATE AND SOCIAL BENEFITS: Since, 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.

2) LONG TERM AND IRREVERSIBLE IMPACT Expenditures on education and

health make substantial long-term impact and they cannot be easily reversed;
hence, government intervention is essential. For instance, once a child is admitted
to a school or health care centre where the required services are not provided,
before the decision is taken to shift the child to another institution, substantial
amount of damage would have been done.

3) CHECK ON MONOPOLY AND EXPLOITATION: 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 acquire
monopoly power 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.
4) FUNDAMENTAL RIGHT OF THE CITIZENS: Basic education and health care
is considered as a right of the citizens, then it is essential that in a developing
country like ours, with a large section of the population living below the poverty
line, the government should provide education and health services free of cost for
the deserving citizens and those from the socially oppressed classes.