HUMAN CAPITAL FORMATION

In order to understand Human capital formation, we need to understand the following concepts:

Human: Human refers to human beings

Capital: Capital refers to that part of wealth which is used in creation of further wealth. All such
goods which contribute in the process of wealth creation are called capital goods. Machines, tools
and equipments are all considered capital goods.

Capital formation: Capital formation is the process of adding to the stock of capital.

Human capital Formation: Summing up, Human Capital Formation refers to the process of
improvement in the knowledge, skill, ability and physical capacity of the people. Thus Human capital
formation in some sense is the expenditure incurred on education and health. HCF adds to the
wealth generating abilities of human beings.

If human capital stock of a nation is 10,000 skilled workers at the beginnings of 2016.This stock is
12,000 at the beginning of 2017. It is clear that there is an increase in stock of human capital by 2000
workers. Thus 2000 skilled workers is human capital formation.

Difference between Human Capital , Financial Capital and Physical Capital.

Human Capital Financial Capital Physical Capital

Human capital refers to the
skill and expertise acquired by
human overtime.
Ex: Expenditure incurred on
education and health
Stocks/shares of the company
are also capital. This is because
they too add to the stock of
wealth. FC simply means the
title of ownership of physical
capital.
Ex: Money Value of Shares and
Stock of companies
It is the stock of Physical goods
which are used in the
Production process.
Ex: Stock of machines, tools
etc.

What Capital of the three human, financial or Physical is of greater significance or economic value
from the view point of production capacity of nation?

Ans: It is clear that FC refers to the titles of ownership of physical capital. Shares are but claims
against the assets of companies.

Physical capital are physical goods that directly contribute in production. From this angle, PC are of
greater relevance.

Human capital includes skill and intelligence. HC also includes physical strength of body which is
involved in the production process. Now without human beings and their intelligence, skill and
physical power it is impossible to create physical capital. Machines can’t be made without men. Also
without Physical capital it is not possible for financial capital to exist. For ownership of titles of
physical assets , it is important to have Physical assets in the first place.

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Thus it is clear that Financial capital is an outcome of Physical capital which is an outcome of Human
Capital. So HC is all the more most important. It is the basis of the existence of the other two kinds of
Capital. It is thus very important to invest in education, professional training and health etc.

Determinants of Human Capital Formation:

Determinants of HCF refers to the factors affecting HCF. Some of the important factors are as
follows:

1. Expenditure on Education: EOE is one of the most important factors affecting capital
formation. An educated person can contribute more to the production or national income
than the one who is not educated. More expenditure on education will result in
a. Addition to the number of educated population
b. Addition to the level of education
Most families invest huge expenditure on education of their children. This is because
they know that returns on such investments are substantially large and so much more
when compared to the cost of education.
More expenditure on education thus add to the total human capital formation and less
expenditure on the same results in a low level of human capital formation.
2. Expenditure on Health: “ Health is the real wealth”. A healthy man is more efficient than
one who is not healthy. Thus it is clear that a healthy person contributes more to the
production. In order to improve health , it is important that more expenditure is incurred on
health infrastructure like hospitals , dispensaries, medical colleges etc. More expenditure on
health thus leads to more human capital formation and reverse.
3. On the job training: OJT is another important determinant of human capital formation. OJT
given to workers improve their skills. This further causes workers to contribute more to the
production. Thus extra expenditure incurred on OJT will lead to an increase in human capital
formation and otherwise.
4. Study programs for adults: Apart from formal education, SPFA conducted by government
and NGOs for adults have been observed to make them more proficient in their work areas.
This Increase in their productivity further increase production. Thus human capital formation
tends to increase with more being spent on these programs than otherwise.
5. Migration: Migration involves –(a) cost of transportation from one place to the other (b)
cost of living in a different social environment. People generally migrate for better job
opportunities. It is been observed that gains of migration have been greater than the cost of
migration. Thus migration leads to human capital formation since people add more to
production when they migrate than otherwise.
6. Expenditure on information: Information is power today. People when enough informed
about job markets and educational institutions, step up for opportunities. This later makes
them realize their true potential since they end up somewhere better and add more to
production. All this happens because they are well informed about the chances they have
around. Thus expenditure incurred on information adds to the human capital formation and
reverse.

Difference between Human capital and Human development

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 Human Capital
Human capital is a means to an end
It consists of skills, knowledge, ability and
expertise which help in production. Thus
production is the end result and human
capital is a means to achieve this.
Human development
Human development is the end itself
It consists of values that one adds to his
personality through good education and
good health. Thus human development is
the end itself since it seeks nothing but
itself.

Role / Importance / Merits/ Benefits/ Significance of human capital formation.

1. Change in emotional and material environment of growth: Human capital brings about the
following changes:
Emotional environment: EE changes as people acquire growth-oriented attitude and
aspirations. Such environment with such attitude of people is definitely more conducive for
growth, development and overall prosperity.
Material environment: ME changes as the society now possess more number of skilled and
trained workers. This definitely adds to the material growth prospects. Skilled and trained
workers, as we already know add more to the GDP.
2. Higher productivity of Physical capital: Without human beings and their intelligence, skill
and physical power it is impossible to create physical capital. Machines can’t be made
without men. Also skilled and trained work-force make more efficient use of Physical capital.
It is thus clear that human capital adds to the higher productivity of physical capital.
3. Innovative skills: Human capital formation leads to larger number of trained and skilled
personnel. This further leads to greater possibilities of innovations in the area of production.
Innovation is the life line of growth.
4. Higher rate of participation and equality: HRP refers to higher percentage of labor force
participating in the process of production. Human capital formation leads to addition to the
levels of skill and training. This leads to HRP. High HRP further ensures that wealth is spread
and doesn’t get concentrated in few hands. Thus there emerges growth with equality and
social justice. Growth with justice is the prime requisite of development. Thus there is a
cause and effect relationship between human capital and economic growth since the
former causes the latter.

Problems related to HCF in India.

1. Rising population: population is the root cause of all economic problems. HCF is no
exception. More population create a situation of lesser availability of infrastructure required
for HCF. There are thus lesser hospitals, educational institutes, power sources, sanitation
and drainage facilities etc. HCF is thus low due to the paucity of adequate infrastructure.
2. Brain drain: BD refers to migration of the educated, talented and trained in a country to
developed countries. BD is a serious threat to the process of HCF in India today. All persons
of high caliber such as scientists, engineers, physicians, educationist etc want to migrate for
better opportunities. This slows down the rate of HCF.

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 3. Deficient of man power planning: India is facing one of the most explosive problems. There
is a situation of graduated unemployment. This has added to the discontent and frustration
of the affected class. All this is an outcome of India’s utter failure in maintaining demand-
supply balance of the ever rising labour force in the country. Needless to mention HCF is
thus low.
4. Insufficient On the Job training in Primary sector: PS is the backbone of Indian economy.
This sector hasn’t but received the required attention in the area of professional skills. There
are very less OTJT programmes conducted by the government and NGOs to improve the
skills of farmers. This has adversely affected the rate of HCF.

Education: an essential element of HRD:

Education: Education is the process of teaching, impart training and learning so as to improve
knowledge and develop skills among the masses.

Literacy rate in India is very low (64% in 2001) when compared to developed nations.

Difference between Literacy and Education

Literacy Education
It is a narrow concept It is a wider term
It just refers to the ability to read and write. It comprises of three main parameters; primary
education, secondary education and higher
education.
Not all literate people are educated All educated people are literate

Importance / objectives of Education

1. It produces responsible citizens

2. It develops science and technology
3. It ensures use of natural resources and human resources everywhere.
4. It expands mental horizons of the people.
5. It helps in ED through greater participation of people in the process of growth and
development.
6. It develops human personality.

Do government need to intervene in Education and Health?

Well the answer to this question is “yes”. This is due numerous reasons:

1. Private investors will never invest here unless they are allowed to make substantial profits.
This if they do will increase the cost of education and health services. Government can’t let
this happen. This is because government is a welfare agency.
2. People in India are poor. They cannot afford high prices for education and health services.
No one can provide these services at reasonable price except for government.

Growth of education sector in India

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 Following are the observation in this regard:

1. Expansion of general education: There has been a five times increase in the number of
educational institutions providing elementary education and ten fold increase in the number
of students during 5 year plans. The literacy rate has improved from 16% in 1951 to 74% in
2011.
2. Elementary education: EE covers students from class 1-8. In the age group of 6-14 years.
Universalisation of EE is still a far cry in India. Admissions in PE ( gross enrollment ratio) are
very low. This hints at the educational backwardness in our country. UP, Bihar, Rajasthan
and Arunachal Pradesh are most educationally backward states in India.

What is Gross enrolment?

Gross Enrollment ratio is the ratio between number of students enrolled in a particular category
of education and the total number of individuals in the relevant age group. Thus in case of EE :

GER= No of students enrolled for EE/Total individuals in the age group of 6-14 years.

Paradoxical truth about EE in India

In the year 1951, GER was found to be 43%. Presently it is more than 100%. If we are
wondering as to how is this possible, here is an answer:
In our country , there are a lot of students even beyond the age group of 6-14 years, who
enroll themselves for elementary education. Great is our nation.

3. Secondary education: SE covers students in the age group of 14-18 years for secondary
classes (IX-X) and senior secondary classes (XI-XII).
Achievements: (1) In 1987, Navodaya Vidyalaya were established to impart modern
education of good standard to talented students of rural areas. These schools also provide
boarding facilities. There are 565 NVs functioning .
(2) Central government has established Kendriya Vidyalaya (central schools) for the benefit
of children of transferable employees. There are 1086 such schools today with more than 10
lakh students benefitting.
Failures: (1) Enrollment ration in SE is far from satisfactory. It is just 52% in secondary and
28% in senior secondary classes.
(2) Vocationalisation of SE remains a far cry. Against the target of diverting 25% of Senior
secondary students to the vocational streams, actual achievement is just to 5%

4. Higher education: HE includes general as well as technical education, managerial, medical

and other forms of professional education.
Achievements : (1) There are over 400 universities providing HE today.
(2) There are over 13,300 colleges for general education and over 600 colleges for
proffesional education.
(3) There are a total of about 130 lakh students benefiting.

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 Failures: (1) Expansion of HE is only confined to general education. This deprives students of
the possibility of self employment.
(2) There is a growing gulf between supply of job seekers with HE and their demand. This
problem of unemployment is very alarming.

5. Voacationalisation of SE: Government launched a plan to vacationalise SE in the year 1988.

Government also extends financial students to such schools starting vocational courses. By
2009-10, permission was granted to nearly 10,000 schools in the country to run vocational
courses. Nearly 10 lakh students are benefitting. Some popular vocational courses are
introduced in the areas of agriculture, trade and commerce, engineering, technology, health
and medicines.
6. Technical , Medical and Agricultural Education: Since independence institutes providing
such education has increased significantly. There are :
3400 engineering colleges with admission capacity of 15,00,000 students
290 medical colleges with admission capacity of around 33,000 students
280 dental colleges with admission capacity of around 22,500 students.
Many Research centers : IIT, Agriculture research Institute, Indian Statistical Institute etc.
7. Rural education: Government has set up National Rural Higher Education Council to expand
education in rural areas. There are 14 rural educational institute which are functioning to
provide free education to children of SC and ST in all states.
8. Adult and female education:1n 1988, National literacy mission has been set up in this
regard. Formal education programme has also been launched. The aim is to provide
meaningful education to the youth of the age group 15-25 years. Female education is the
central focus here.
9. Total literacy Campaign: Same as above

Conclusion : In short , here are some general observation in regard to education;

1. The number of literates has increased 5 fold.

2. The number of schools has increased 4 folds.
3. The number of students has increased 10 folds.
4. Rate of literacy has shot up from 17% to 70%. Kerala is 100% literate.

Why is education still a challenging proposition in India?/ Problems in Education In India.

This is due to following reasons:

1. Large no of illiterates: India is still a home to largest number of illiterates in the world. There
are to an estimate of 36 crore illiterate in India and we are still counting. Not something to
feel proud about.
2. Inadequate Vocationalisation: Already Explained
3. Gender Bias: The enrolment ratio is relatively low foe female. Female drop-out is very high.
There thus is a clear gender-bias.
4. Privatisation: There is a growing trend of privatization of education. Private education is
very expensive. It is further widening the gulf between access level for rich and poor.

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 RTE: Right to Education
In the year 2009, the govt. of India has brought about this act. It promises free and
compulsory education to all. Education as per this act is a matter of right to all children from
6-14 years .

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