HUMAN CAPITAL FORMATION

Introduction
 Education is sought not only as it confers (advantage) higher earning capacity on people but also for its other highly
valued benefits.
 It 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.
 The availability of educated labour force facilitates adaptation of new technologies.
 Economists have stressed the need for expanding educational opportunities in a nation as it accelerates the
development process.
1. What is Human Capital?
 Just as a country can turn physical resources like land into physical capital like factories, similarly, it can also turn
human resources like nurses, farmers, teachers, students into human capital like engineers and doctors.
 Societies need sufficient human capital in the first place-
 In the form of competent people who have themselves been educated and trained as professors and other
professionals.
 In other words, we need good human capital to produce other human capital (say, nurses, farmers, teachers,
doctors, engineers). This means that we need investment in human capital to produce more human capital out of
human resources.
2. What are the various sources of human capital?
a) Investment on Education: 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.
b) Investments on health: Like education, health is also considered as an important input for the development of a
nation as much as it is important for the development of an individual. A sick labourer without access to medical
facilities is compelled to abstain from work and there is loss of productivity. Hence, expenditure on health is an
important source of human capital formation.
 Forms of health expenditures:
 Preventive medicine (vaccination)
 Curative medicine (medical intervention during illness)
 Social medicine (spread of health literacy)
 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.
c) On- the-job training: Firms spend on giving on-the-job- training to their workers.
This may take different forms:
 Workers may be trained in the firm itself under the supervision of a skilled worker
 The workers may be sent for off-campus training.
 In both these cases firms incur some expenses. Firms will, thus, insist that the 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 due to training.
 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.
d) 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.
 e) Information:
 People spend to acquire information relating to the labour market and other markets like education and health. For
example, people want to know the level of salaries associated with various types of jobs, whether the educational
institutions provide the right type of employable skills and at what cost.
 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.
3. Differentiate between Human Capital and Physical Capital.
 On the basis of creation
Decision regarding investment in physical capital is taken on the basis of one’s knowledge in this regard. The
entrepreneur possesses knowledge to calculate the expected rates of return to a range of investments and then
rationally decides which one of the investments should be made.
 The ownership of physical capital is the outcome of the conscious decision of the owner- the physical capital
formation is mainly an economic and technical process.
 A substantial part of the human capital formation takes place in one’s life when she/he is unable to decide whether
it would maximise her/his earnings. Children are given different types of school education and health care facilities
by their parents and the society. The peers, educators and society influence the decisions regarding human capital
investments even at the tertiary level, that is, at the college level.
 The human capital formation at this stage is dependent upon the already formed human capital at the school level.
 So, Human capital formation is partly a social process and partly a conscious decision of the possessor of the
human capital.
 Separation form owner
You know that the owner of a physical capital, say a bus, need not be present in the place where it is used; whereas, a
bus-driver, who possesses the knowledge and ability to drive the bus, should be present when the bus is used for
transportation of people and materials.
 The physical capital is separable from its owner, whereas, human capital is inseparable from its owner. The two
forms of capital differ in terms of mobility across space.
 Physical form
 Physical capital is tangible and can be easily sold in the market like any other commodity.
 Human capital is intangible; it is endogenously built in the body and mind of its owner.
 Human capital is not sold in the market; only the services of the human capital are sold and, hence, there arises the
necessity of the owner of the human capital to be present in the place of production.
 Mobility
 Physical capital is completely mobile between countries except for some artificial trade restrictions.
 Human capital is not perfectly mobile between countries as movement is restricted by nationality and culture.
 Therefore, physical capital formation can be built even through imports, whereas human capital formation is to be
done through conscious policy formulations in agreement with the nature of the society and economy and
expenditure by the state and the individuals.
 Depreciation
Both forms of capital depreciate with time but the nature of depreciation differs between the two.
 Continuous use of machine leads to depreciation and change of technology makes a machine obsolete.
 In the case of human capital, depreciation takes place with ageing but can be reduced, to a large extent, through
continuous investment in education, health, etc.
 This investment also facilitates the human capital to cope with change in technology which is not the case with
physical capital.
 Benefits
 Nature of benefits flowing from human capital is different from that of physical capital.
 Human capital benefits not only the owner but also the society in general. This is called external benefit.
 An educated person can effectively take part in a democratic process and contribute to the socio economic progress
of a nation.
 A healthy person, by maintaining personal hygiene and sanitation, stops the spread of contagious diseases and
epidemics.
 Human capital creates both private and social benefits, whereas physical capital creates only private benefit. That
is, benefits from a capital good flow to those who pay the price for the product and services produced by it.
4. Explain the role / Importance of Human Capital Formation.
 Higher Productivity & Production:
Economic growth means the increase in real national income of a country; naturally, the contribution of the educated
person to economic growth is more than that of an illiterate person. If a healthy person could provide uninterrupted
labour supply for a longer period of time, then health is also an important factor for economic growth. 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.
 Improvement in Inventions, Innovations & technological improvements:
 The enhanced productivity of human beings or human capital contributes substantially not only towards increasing
labour productivity 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.
 Modernization of attitudes: Creating a will for development.
 Increasing life expectancy & Quality of life
 Effective use of physical capital: Through training.
5. ‘Increase in Human capital always causes economic growth.’ Defend or refute by giving appropriate reasons.
 Measurement problems.
o Education measured in terms of years of schooling, teacher-pupil ratio and enrolment rates may not reflect the
quality of education.
o Health services measured in monetary terms, life expectancy and mortality rates may not reflect the true health
status of the people in a country.
o The human capital growth in developing countries has been faster but the growth of per capita real income has not
been that fast.
o There are reasons to believe that the causality between human capital and economic growth flows in either
directions.
o Higher income causes building of high level of human capital and vice versa, that is, high level of human capital
causes growth of income.
6. ‘India recognised the importance of human capital in economic growth long ago.’ Explain.

 The Seventh Five Year Plan says, ‘Human resources development has necessarily to be assigned a key role in any
development strategy, particularly in a country with a large population.’
 Trained and educated population can itself become an asset in accelerating economic growth and in ensuring social
change in desired directions.
 Growth in Education & Health sector probably has reinforced the growth of every other sector.
 The National Education Policy 2020 states that the world is undergoing rapid changes in the knowledge landscape.
 With various dramatic scientific and technological advances, such as the rise of big data, machine learning, and
artificial intelligence, many unskilled jobs worldwide may be taken over by machines, while the need for a skilled
workforce, particularly involving mathematics, computer science, and data science, in conjunction with
multidisciplinary abilities across the sciences and social sciences, and humanities, will be increasingly in greater
demand.
  With climate change, increasing pollution, and depleting natural resources, there will be a sizeable shift in how we
meet the world’s energy, water, food, and sanitation needs, again resulting in the need for new skilled labour,
particularly in biology, chemistry, physics, agriculture, climate science, and social science.
 The growing emergence of epidemics and pandemics will also call for collaborative research in infectious disease
management and development of vaccines and the resultant social issues heightens the need for multidisciplinary
learning.
 There will be a growing demand for humanities and art, as India moves towards becoming a developed country as
well as among the three largest economies in the world.
 This policy vision suggests how human capital formation in India will move its economy to a higher growth trajectory
based on knowledge landscape.

7. ‘Both Human capital and human development are same concepts.’ Defend or refute.
 The two terms sound similar but there is a clear distinction between them.
 Human Capital considers education and health as a means to increase labour productivity.
 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, they will be able to make
other choices which they value.
 Human Capital treats human beings as a means to an end; the end being the increase in productivity.
 In this view, any investment in education and health is unproductive if it does not enhance output of goods and
services.
 In the Human Development perspective, human beings are ends in themselves.
 Human welfare should be increased through investments in education and health even if such investments do not
result in higher labour productivity. Therefore, basic education and basic health are important in themselves,
irrespective of their contribution to labour productivity.
 In such a view, every individual has a right to get basic education and basic health care, that is, every individual has a
right to be literate and lead a healthy life.

8. Write a note on State of human capital formation in India and the need for Govt. intervention.
 Human capital formation
It is the outcome of investments in education, health, on-the-job training, migration and information.
 Of these education and health are very important sources of human capital formation.
 We know that 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, expenditures on both education and health are to be carried out simultaneously by all the three tiers
of the government.
 We do understand that 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.
 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.
 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.
 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.
Government Organisations
 National Council of Educational Research and Training (NCERT)
 University Grants Commission (UGC)
 All India Council of Technical Education (AICTE)
 National Medical Commission and Indian Council for Medical Research (ICMR)
  In a developing country like India, with a large section of the population living below the poverty line, many
people cannot afford to access basic education and health care facilities.
 Moreover, a substantial section of India’s population cannot afford to reach super specialty health care 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 those from
the socially oppressed classes.
 Both, the union and state governments, have been stepping up expenditures in the education sector over the years in
order to fulfill the objective of attaining cent per cent literacy and considerably increase the average educational
attainment of Indians.
9. What are the two ways to measure Govt. expenditure on Education?
 As a percentage of ‘Total Government Expenditure’
 As a percentage of GDP
 The percentage of ‘education expenditure of total government expenditure’ indicates the importance of education
in the scheme of things before the government.
 The percentage of ‘education expenditure of GDP’ expresses how much of people’s income is being committed
to the development of education in the country.
10. Write a short note on Govt. Expenditure on Education Sector in India.
 During 1952-2014, education expenditure as:
 Percentage of total government expenditure increased from 7.92 to 15.7
 As percentage of GDP increased from 0.64 to 4.13
 Throughout this period the increase in education expenditure has not been uniform and there has been irregular
rise and fall.
 To this if we include the private expenditure incurred by individuals and by philanthropic institutions, the total
education expenditure should be much higher.
 Elementary 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.
 Though, on an average, the government spends less on tertiary education, ‘expenditure per student’ in tertiary
education is higher than that of elementary.
 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 ₹34,651 in Himachal Pradesh to as low as ₹4,088 in Bihar.
 This leads to differences in educational opportunities and attainments across states.
 One can understand the inadequacy of the expenditure on education if we compare it with the desired level of
education expenditure as recommended by the various commissions.
 The Education Commission (1964–66) had recommended that at least 6 % of GDP be spent on education so as
to make a noticeable rate of growth in educational achievements.
 The Tapas Majumdar Committee, appointed by the Government of India in 1999, estimated an expenditure of
around ₹ 1.37 lakh crores 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.
 Compared to this desired level of education expenditure of around 6 % of GDP, the current level of little over
4 % has been quite inadequate.
 In principle, a goal of 6 % 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 of India has also started levying a 2 % ‘education cess’ on all Union taxes.
 The revenues from education cess has been earmarked for spending on elementary education.
 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.
 EDUCATIONAL ACHIEVEMENTS IN INDIA
Generally, educational achievements in a country are indicated in terms of adult literacy level, primary education
completion rate and youth literacy rate. These statistics for the last two decades are given above in

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.
 Had we achieved this, we would have cent per cent literacy by now.
Gender Equity
 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 per cent adult literacy.

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 2011-12, the rate of unemployment among youth males who studied graduation and
above in rural areas was 19 %.
 Their urban counterparts had relatively less level of unemployment at 16 %.
 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.
 When compared to less educated, a large proportion of educated persons are unemployed.

CONCLUSION
 The economic and social benefits of human capital formation and human development are well known.
 The union and state governments in India have been earmarking substantial financial outlays for development of
education and health sectors.
 The spread of education and health services across different sectors of society should be ensured so as to
simultaneously attain economic growth and equity.
 India has a rich stock of scientific and technical manpower in the world.
 The need of the hour is to better it qualitatively and provide such conditions so that they are utilised in India.