Human Capital

formation: An Indian
Perspective
Rishav Singh
Under the Guidance of: Dr. Anamitra Roy
 WHAT IS HUMAN CAPITAL?
• Human Capital is a measure of the skills, education, capacity and attributes of labour which
influence their productive capacity and earning potential.

• “The knowledge, skills, competencies and other attributes embodied in individuals or groups of
individuals acquired during their life and used to produce goods, services or ideas in market
circumstances”

• Individual human capital – the skills and abilities of individual workers.

• Human capital of the economy – The aggregate human capital of an economy, which will be
determined by national educational standards.
Difference between Physical and
Human Capital
 Human Capital Formation
Human capital formation is the process of adding to stock
of human capital over time. Human capital can be
developed through creation of skilled, trained and
efficient labour force by providing better education,
health care facilities, etc.
 Sources of Human Capital Formation
• Investment in Education
• Investment in Health
• Migration
• Information
• On- the –job- training
 Investment in Education
The most powerful way to improve and expand the fruitful workforce in the state is by
nourishing and building up the education system. It is acknowledged as the root of
human capital formation, that is the reason why the parents and also the government
spend more on education. Few objectives why individual and state investment is more in
education are:
• To develop their future income.
• To build manpower and enhance their technical skills, to improve workers productivity,
hence resulting in economic growth.
• To control the population growth rate by reducing the birth rate and making maximum
resources available per person.
• Knowledge and education can be transferred to others, resulting in social advantages.
 Investment in Health
Investing in the health system not only saves lives, but it is also a crucial
investment in the wider economy. This is because ill-health impairs
productivity, hinders job prospects and adversely affects human capital
development. There has been a strong political and historical commitment to
treating health as a social goal either through legislation or mandating and
prioritizing expenditure on health. For instance, the government of India –
Ayushman Bharat and other schemes by state government.
 Migration
• An individual, to get higher salaries, good jobs, migrate from their native place to another
place. In India, unemployment is the reason for rural-urban migration. Other skilled and
qualified individuals like doctors, engineers, etc. migrate from one country to another in
search of better opportunities.

• In both the situations, migration involves transportation cost, cost of living in the migrated
place, etc.

• The increased incomes in the new place exceed the values of migration. Therefore,
investment in migration is another source of human capital formation.
 Investment in Information
To invest is to allocate money with the expectation of a positive
benefit/return in the future. In other words, to invest means
owning an asset or an item with the goal of generating income
from the investment or the appreciation of your investment which
is an increase in the value of the asset over a period of time.
 On-Job-Training
To increase the labour productivity, many companies provide on-
job-training. This source of income is expensive, and companies
bear huge expenses for providing on-job-training. Examples: in-
house training, straining under a skilled supervisor, and off-
campus training.
 Human Capital & Economic Growth
• When we talk about economic growth, human capital is the main reason for the accelerated
growth and expansion for many countries that provide investment in human capital. This gives
the best advantages to these countries for providing the best situations for work and lifestyles.

• A significant advantage in generating a stable environment for growth is that the nation has the
expanded high-quality human capital in fields like health, science, management, education, and
other fields. Here, the main components of human capital are definitely human beings, but
presently, the principal component is a creative, educated, and enterprising person with a high
level of professionalism.

• Human capital in the economy manages the central portion of the national wealth. Hence, all
researchers consider that human capital is the most important resource of the community, which
is more powerful than nature or wealth. In most countries, human capital determines the rate of
development, economic, technological, and scientific progress.
 Role of Human Capital Formation
(i) Inventions, innovations, and technological improvement.
Human capital leads to more innovations in the areas of production and other related
activities.
Innovation leads to more growth.
Human capital also creates the ability to absorb new technologies.
(ii) Higher productivity of physical capital
• Human capital increases labour productivity.
• Trained workers will use the physical capital (like machines) more efficiently.
• iii. Raises production
The formation of human capital raises production levels and leads to economic
growth by adding to the GDP.
Knowledgeable and skilled workers can make better use of resources at their
disposal.
• (iv) High rate of participation and equality
By improving the productive measures of the labour force, the formation of
human capital increases excellent employment.
This leads to a high rate of participation in the labour force.
It reduces the gap between the poor and the rich
Problems of Human Capital Formation
• Growth in population: The rapid rise of the population can influence the grade of
human capital formation, mostly in developing countries. It degrades the per capita
availability of the present facility. A large population involves extra investments.
• Long process: The method applied for human development is a long term process
because skill enhancement requires extra time. Therefore, the process becomes very
normally slow.
• Gender inequality and high regional disparity: These two factors affect the human
development skill.
• Insufficient on-job training: In the agriculture sector, on-job training to handle
advanced equipment is not provided to the worker.
• High poverty level: In India, a large portion of the population is below the poverty
line. Therefore, they do not have easy access to primary health and education
Difference between Human Capital &
Human Development
 State of Human Capital Formation in
India
• India recognised the importance of human capital in economic growth, long ago. 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’.
• The following points show clearly the interdependence among the two:
-Higher Productivity of Physical Capital: Human capital increases productivity of physical capital as
specialised and skilled workers can handle machines or techniques better than the unskilled works. This
increased productivity and hence production lead to economic growth.
-Innovative Skills: Human capital facilitates innovation of new methods of production and this increases
the rate of economic growth in the form of increase in GDP.
-Higher Rate of Participation and Equality in Human capital formation leads to a higher employment rate.
With increase in employment, the productivity rises. Also, increase in employment opportunities also
increases the level of income and this helps in reducing inequalities of wealth.
• Both, increase in employment rate and decrease in income inequalities are pointers of economic
development.
Information Technology Sector in India
• India as a Knowledge Economy.
• The Indian software industry has been showing an impressive record over the past
decade. Entrepreneurs, bureaucrats and politicians are now advancing views about
how India can transform itself into a knowledge-based economy by using
Information Technology (IT).
• There have been some instances of villagers using e-mail which are cited as
examples of such transformation. Likewise, e-governance is being projected as the
way of the future.
• The value of IT depends greatly on the existing level of economic development.
 Education Sector in India
• Education implies the process of teaching, training and learning
especially in schools or colleges, to improve knowledge and
develop skills.
• Following points explain the important or objective of education:
-It produces good citizens.
-It develops science and technology.
-It facilitates use of natural and human resources of all regions of the
country.
-It expands mental horizon of the people
 Growth in Government Expenditure on
Education
Government expenditure on education can be expressed in two ways
• As a percentage of total government expenditure.
• As a percentage of Gross Domestic Product (GDP).
The percentage of ‘education expenditure of total government expenditure’ indicates
the importance of education in the scheme of expenses before the government.
Expenditure on education out of our GDP shows how much we are committed
towards the development of education in our country.
During 1952-2010, education expenditure as percentage of total government
expenditure increased from. 7.92% to 11.1% and as percentage of GDP increased
from 0.64% to 3.25%. During this period expenditure on education was not
constant. There was irregular rise and fell.
 Free & Compulsory Education
• The Education Commission (1964-66) had recommended that atleast 6% of GDP to
be spent on education so as to make a noticeable rate of growth in education.
• 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. Government of India in year 1998 appointed.
The Tapas Majumdar Committee, which estimated an expenditure of around 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. Desired level of expenditure on
education is 6% of GDP but the current level is little over 4% which is not inadequate.
It is necessary to reach the level of 6% which is considered as must for coming years.
• Recently, Government of India has started levying a 2% ‘education cess’ on all union
taxes. The revenues from education cess has been remarked for spending on
elementary education.
• Educational Achievements in India: Generally, educational achievements in a country
are indicated in terms of primary, youth and adult literacy .
 Expenditure on Elementary Education
• Elementary education takes a major share of total education expenditure and
the share of the higher/tertiary education is the least. But expenditure per
student on tertiary education is higher than that of elementary.
• 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. The per capita education expenditure is as
high as Rs. 2005 in Himachal Pradesh to as low as Rs. 515 in Bihar.
• This leads to differences in educational opportunities across parts of India.
 Future Prospect in India
• India government considers education a key sector where considerable growth and.development is required. Thus, it has set some future prospects for framing
its policies.
• These prospects are discussed below
• Education for All : Still a Distant Dream
• Although the education level in India has risen for both adults as well as for youth. Still the number of illiterates in India are as much as the 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.
• The following factors makes education still a distant dream

• Large number of illiterates

• Inadequate vocationalisation
• Gender bias
• Low rural access level
• Privatisation
• Lower government expenditure
• Gender Equity : Better than Before
• 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.
• Social status of women.
• Healthcare of women and children.
 Conclusion
• Therefore, we cannot show satisfaction about the upward movement in literacy
rates as we have miles to go in achieving satisfactory adult literacy percentages.
• In India, Mizoram, Kerala, Goa and Delhi are the states having high literacy rate,
while Bihar, Uttar Pradesh, Rajasthan and Arunachal Pradesh are the
educationally backward states. The educational backwardness is due to social and
economic poverty of the people.
• Higher Education : A Few Takers.
• The Indian education pyramid is steep, indicating lesser and lesser number of
people reaching the higher education level.
• As per NSSG (National Sample Survey Organisation) data, in the year 2007-08,
the rate of unemployment for youth with education up to secondary level and
above was 18.1% whereas, the rate of unemployment for youth with education up
to primary level was only 11.6%.
• Therefore, the government should increase allocation for higher education and
also improve the standard of higher education institutes, so that students are
imparted employable skills in such institutions.
Thank you