HUMAN CAPITAL FORMATION IN INDIA

Human Capital
Human capital refers to the stock of skill, ability, expertise, education and
knowledge in a nation at a point of time. It is the sum total of professionals and
skilled people of all types who are engaged in the process of production.
Human Capital Formation
Human Capital formation is the process of adding to the stock of human capital
overtime.
We need investment in human capital to produce more human capital out of
human resources.

Difference between Physical Capital and Human Capital

Physical Capital Human Capital
It produces tangible goods. For It increases efficiency to produce
example, machines help to produce tangible goods. Skilled labor is more
goods. productive than unskilled labor.

It can be sold in the market. It cannot be sold in the market; only

the services of human capital are sold.
It can be separated from its owner. It cannot be separated from its owner.
It is completely mobile between It is not perfectly mobile between
countries except for some trade countries as movement is restricted
restrictions. by nationality or culture.

It creates only private benefits. It creates both private and social

benefits.
It can be built through imports. It can be built through policy
formulations.
It depreciates overtime due to It generally depreciates with ageing,
constant use or due to change in but depreciation can be reduced with
technology. continuous investment in health and
education.
Difference between Human Capital and Human Development

Human Capital Human Development

Human capital considers education Human development considers
and health as a means to increase education and health an integral
labour productivity. part of human well-being.
Human capital treats human being It considers human beings as ends
as a means to achieve an end which in themselves.
is higher productivity.
It considers that investment in It considers that good education
health & education should increase and health is a fundamental right
labour productivity in the country. of every citizen.

Sources of Human Capital Formation

1. Expenditure on Education: Expenditure on education is an important source
of capital formation. Education is an important source of human capital
formation because:
(a) It generates technical skills and creates a manpower which is suited for
improving labour productivity.
(b) Benefits of education (in terms of earnings of the educated person) far
exceed the cost of education.
(c) It results in social benefits since it spreads to others who may not be
skilled. For example, an engineering professor has the skill to produce
more engineers.

2. Training: Technical training adds to the efficiency of the people to produce

more. Firms are given on-the-job-training to enhance the productive skills
of the workers to enable them to absorb new technologies and modern
ideas. It can be given in two forms:
(a) The workers may be trained in the firm itself under the supervision of a
senior and experienced worker.
(b) The workers may be sent for off campus training. The returns of such
expenditure in the form of enhanced labour productivity is higher than
the cost of it.
 3. Expenditure on Health:
(a) Health is another important source of human capital formation.
Preventive medicine (vaccination), curative medicine (medical
intervention during illness), social medicine (spread of health literacy)
and provision of clean drinking water and good sanitation are the
various forms of health expenditures.
(b) A sick labour is less efficient than a healthy labour.
(c) Thus, health expenditure directly increases the supply of a healthy
labour force and is thus a source of human capital formation.

4. Migration:
(a) People sometimes migrate from one place to the other in search of a
better job.
(b) It includes migration of people from rural areas to urban areas in India
and migration of labour from India to other countries of the world.
(c) Migration involves cost of transport, higher cost of living in the migrated
places and psychic costs of living in a strange socio-cultural set-up. The
enhanced earnings in the new place outweigh the costs of migration.
Thus, expenditure on migration is also a source of capital formation.

5. Expenditure on Information:
(a) People spend money to acquire information about the labour market
and educational institutes.
(b) People want to know salaries and other facilities available in different
labour markets so that they can choose the right job.
(c) Similarly, people want to know about educational institutions, their
educational standards and cost of education.
(d) This information is necessary to make decisions regarding investment in
human capital.

Role of Human Capital Formation/ Human Capital Formation and Economic

Growth
1. Creation of a growth conducive environment: People tend to acquire
growth-oriented attitude and aspirations. Material environment becomes
helpful to growth as the society now possesses a higher number of skilled
 and trained workers to implement the plans and programmes of economic
growth.

2. Increased productivity of physical capital: Human capital formation

increases productivity of physical capital (referring to output per unit of
capital). Specialised engineers and skilled workers can certainly handle the
machines and other productive assets in a manner that enhances their
productivity.

3. More innovations: Human capital formation facilitates the use and growth
of innovative skills. Larger the number of skilled and trained personnel,
greater the possibilities of innovations in production and other economic
activities.

4. Increase in labour participation and equality: By enhancing productive

capacities of the labour force human capital formation induces greater
employment. This increases the rate of participation (percentage of labour
force participating in the process of production or simply the percentage of
employment of the existing labour force). Higher the rate of participation
greater is the degree of economic and social equality in the society. Higher
rate of participation and higher degree of equality are pointers to growth
with social justice called ‘development’.
Thus, there is a cause and effect relationship between human capital and
economic growth: human capital formation stimulates and accelerates the
process of economic growth. However, economic growth also facilitates
human capital formation. Growth implies increase in per capita real income
(or increase in per capita availability of goods and services). Higher income
facilitates greater investment on the acquisition of education and skills.
Thus, human capital formation accelerates the process of growth and
growth accelerates the process of human capital formation.

Human Capital Formation in India

The Seventh Five Year Plan emphasizes the importance of human capital in
economic growth. The Seventh Five Year Plan reads, “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.
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.”
Two independent reports suggest that India would grow faster due to its strength
in human capital formation. These are:

1. Deutsche Bank, a German Bank, in its report on ‘Global Growth Centre’

identified that India will emerge as one among four major growth centres
in the world by the year 2020. It further states, “Our empirical
investigation supports the view that human capital is the most important
factor of production in today’s economies. Increase in human capital is
crucial in achieving an increase in GDP.” Regarding India, it states,
“Between 2005 and 2020 we expect a 40 per cent rise in the average years
of education in India”.

2. World Bank, in its recent report, ‘India and the Knowledge Economy –
Leveraging Strengths and Opportunities’, states that India should make a
transition to the knowledge economy and if it uses its knowledge as much
as Ireland does (it is judged that Ireland uses its knowledge economy very
effectively), then the per capita income of India will increase from a little
over US $ 1000 in 2002 to US $ 3000 in 2020. Three essential things that
India has are:
(a) manpower of skilled workers,
(b) well-functioning democracy, and
(c) diversified science and technology infrastructure.

Government Intervention in Education and Health Sectors

1. 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.
2. Expenditures on education and health make substantial long-term impact
and they cannot be easily reversed; hence, government intervention is
essential.
3. Moreover, 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.
4. The role of the 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.
5. In a developing country like ours, with a large section of the population
living below the poverty line, many of us cannot afford to access basic
education and healthcare facilities.

In India, the ministries of education at the Centre and State level,

departments of education and various organisations such as 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.

2.5 Education Sector in India

Education refers to the process of teaching, training and learning, especially in schools
or colleges, to improve knowledge and develop skills.
Education is a much wider concept than literacy. Literacy refers to the ability to read and
write. Education includes three parameters — primary education, secondary education
and tertiary (or higher) education. While all educated people are literate, all literate
people are not necessarily educated.

Importance/Objectives of Education
1. Education produces good citizens.
2. It develops science and technology.
3. It facilitates efficient use of natural and human resources.
4. It expands mental horizon of the people.
5. It helps economic development through greater participation of the people in the
production process.
6. It promotes rational and scientific thinking of the people.
7. It tends to bring down birth rates, which helps in reducing the population growth
rate.
Growth expenditure on education can be expressed in two ways:
1. As a percentage of total government expenditure: The percentage of
education expenditure to the total government expenditure indicates the
importance of education in the government objectives and policies.
2. As a percentage of Gross Domestic Product (GDP): The percentage of education
expenditure to GDP expresses how much of our income is being committed to
the development of education in the country.

The education expenditure is an important indicator of the importance of education in

any economy.

1. 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
0.62 to 4.13. Throughout this period the increase in education expenditure has not
been uniform and there has been irregular rise and fall.

2. The per capita education expenditure is as high as Rs. 34,651 in Himachal

Pradesh to as low as Rs.4088 in Bihar. This shows differences in educational
opportunities across states.

3. As against the goal of 6 percent of GDP, which was recommended by the

Education Commission, the current level is about 4 per cent which is quite
inadequate.

4. In December 2002, the Government of India, through the 86th Amendment of the
Constitution of India, made ‘free and compulsory education’ a fundamental right of
all children in the age group of 6-14 years. The Tapas Majumdar Committee,
appointed by the Government of India in 1998, estimated an expenditure of around
Rs. 1.37 lakh crore over 10 years (1998-99 to 2006-07) to bring all Indian children in
the age group of 6-14 years under the purview of school education.
5. Elementary education takes a major share of total education expenditure and
the share of the higher (tertiary) education is the least. It is also a fact that Per
capita (student) expenditure in tertiary education is higher than that of
elementary education. This does not mean that financial resources should be
diverted from tertiary education to elementary education. As school education is
 expanded, more teachers are required. Hence, expenditure in all levels of
education needs to be increased.

6. In the Union Budget 2004-05, the government of India levied a 2 percent

education cess on all union taxes.

7. The government sanctioned a large amount for the promotion of higher

education. Loan schemes have also been initiated for students desiring higher
education.

Educational Achievement in India

Generally, educational achievements in a country are indicated in terms of:
in India
1. adult literacy level,
2. primary education completion rate, and
3. youth literacy rate.

(a) Primary education covers students from class 1 to 8 in the age group of 6 to
14 years. As many as 89 per cent children in the age-group of 6-14 years
have been receiving education in schools. Universalisation of primary
education is still a distant dream.

(b) Literacy rate has shot up from 19.2% in 1951 to 64.8% in 2001.

(c) Female literacy rate (53.7%) is less than the male literacy rate (75.3%).

(d) Literacy rate in the rural areas (60%) is less than the literacy rate in urban
areas (80%).

(e) In 1988, National Literacy Mission (NLM) was set up. There are 11 crore
illiterates in the country between the age group of 15-35 years. The objective
of this is to reduce illiteracy in the country.

(f) Since 1976, formal education programme has been launched. It aims at
providing meaningful education to the youth in the age-group of 15-25 years.
 (g) The rate of dropouts from school is one of the major problems in achieving
the objective of 100 percent literacy levels. The rate is higher at higher levels
of education and among females. A large section of the population lives
below poverty line and do not have access to basic educational facilities. A
substantial section cannot afford to get higher education.

Education – The Challenging Proposition

The Constitution has the provision for free and compulsory education for the children
between the age group of 6-14 years, even then 20 per cent are still not going to the
school. This points towards the challenges posed by the education policy. The
challenges are:
1. Gender Bias: There is still a significant ‘gender-bias’ in offering the
opportunities of education to male and female children. The enrolment ratio is
relatively low for the female candidates and their drop-out ratio is considerably
high.
The need to promote education for women in India is imminent for various
reasons:

(a) It improves economic independence and social status of women.

(b) Women education makes a favourable impact on fertility rate and health care
of women and children.

1. Low Access Level in Rural Areas: There is a high degree of disparity in access to
education. Rural areas are deprived of good quality education in India.

2. Privatisation: There is a growing trend towards privatisation of education. It

makes education expensive. So, good quality education gets restricted to rich
population of the country.

3. Less Government Expenditure on Education: The government is able to spend

only 3-4% of GDP on education as compared to 6% which is required to provide
education for all.

5. 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.
Therefore, the government should increase allocation for higher education and
import employable skills in such institutions.

Problems of Human Capital Formation in India

Main problems of human capital formation in India are:
1. Rising Population: A large population requires huge investment in education
and health. This diverts the limited resources to production of human capital at
the cost of physical capital.
2. Long term process: The process of human development is a long-term policy
because skill formation takes time. The process which produces skilled manpower
is thus slow.
3. High regional and Gender inequality: Regional and gender inequality lowers
the human development levels.
4. Brian drain: Highly skilled labour migrates to other countries i.e., brain drain
which adversely affects the economic development.
5. Insufficient on-the-job-training in agriculture: Agriculture sector is neglected
where the workers are not given on-the-job-training to absorb emerging new
technologies.

6. High poverty levels: A large proportion of the population lives below poverty
line and do not have access to basic health and educational facilities. A large
section of society cannot afford to get higher education or expensive medical
treatment for major diseases.