Plus One Economics Chapter 5
Plus One Economics Chapter 5

Plus One Economics Chapter 5

Chapter 5 :-

Human Capital Formation in India.

Plus One Economics Chapter 5


There are many poor countries in the world which are rich in natural resources. But they could not achieve fast economic growth and development because of their low human capital. On the contrary, many contries like Japan do not have any major natural resource. But it has one of the best and most productive human resources in the world. Human resources or human capital plays a crucial role in economic growth and development.

What is Human Capital ?

An uneducated, untrained. and unhealthy person is not productive. He cannot contribute to production. On the other hand, an educated/ trained and healthy person is productive. India’s software companies employ many physically challenged persons. They are educated/trained and therefore productive. Human beings, when they are given education/training, become human resources or human capital.

Converting human beings through education and training into human resources like teachers, doctors, engineers, technicians, is human capital formation.

Sources of Human Capital

Human capital is created through investment in:

  • 1. Education
  • 2. Health
  • 3. On-the-job training
  • 4. Migration and
  • 5. Information

1. Education

Government and parents invest a lot of money in education. An educated/trained person with know ledge and skills is more productive than an uneducated and untrained Person. Educated population contributes substantially to a country’s economic growth and development. So education should be given top priority.

Education is desirable and beneficial because it:

  • Raises the quality of life

  • Increases earning Capacity through higher productivity

  • Raises social status

  • Improves the ability to understand the world

  • Stimulates discoveries and innovations

  • Contributes to nation’s growth and development.

2. Health

Only healthy persons can work; Therefore, health is an important source of human capital. Expenditure on health includes:

  • Preventive medicines (vaccination)

  • Curative medicines (treatment during illness)

  • Social medicine (spread of health literacy)

  • Provision for clean drinking water

  • Provision for sanitation. facilities

Preventive Medicine, Curative Medicine and Social Medicine.

In order to ensure the health of people in a country medical treatment at the time of sickness is not sufficient. In preventive medicine vaccination, periodical medical check-up including clinical investigation are provided. In curative medicine disease specific treatment is admimistrated. In social medicine health education, especially on communicable diseases, hygiene, sanitation, nutrition, etc., are provided.

3. On-the-job training

Companies spend money on giving on-the-job training to their employees in two ways:

  • The workers are given training in the factory itself under an experienced supervisor.

  • The workers are sent for off-campus training. Thus the factory gains enhanced productivity. In short, on-the-job training means providing training while on the job.

4. Migration

Migration is a major trend now. Kerala is famous for rural and urban migration and out-migration. Lakhs of Keralites work in the Middle East, the U.S.A., Europe, Australia, etc. People migrate mainly due to two reasons:

  • Unemployment in the home state/country

  • Better job/living prospects abroad

Migration involves costs such as costs of:

  • Travel

  • Learning the specifics of job abroad

  • Higher cost of living abroad

  • Real costs of separation if the worker is separated from the family

  • Psychic costs of living in a strange foreign environment

  • Provision for sanitation. facilities

In spite of these costs, people migrate since the benefits of migration are higher than costs.

5. Information

Information on appropriate health care educational courses, institutions providing such courses, opportunities for jobs in different places and countries, salary levels, in different jobs, etc., are very important. Expenditure on such information is regarded as investment in human capital.

Human Capital and Economic Growth

Education, health, on-the-job training, job market information and migration lead to human capital formation. This increases a person’s earning capacity. Education also Provides knowledge to understand Society and scientific and technological advancements. This facilitates discoveries, inventions and innovations.

Human capital formation leads to economic growth and development. It may be difficult to establish a cause and effect relationship. But the beneficial effects of human capital formation on economic growth and development are very obvious. The following table gives details of socio-economic growth and development.

Human capital formation and per capita income growth move together, Globally, human capital formation has contributed to improvement in standard of living and quality of life of the people.

Table 5.1
Particulars 1951 1981 1991 2001 2012
Real Per capita income (in ₹) 5708 8594 11535 16172 38037
Crude death rate (Per 1000 Population) 25.1 12.5 9.8 8.1 7
Infant mortality rate 146 110 80 63 42
Life Expectancy (in years) Male 37.2 54.1 59.7 63.9 64
Female 36.2 54.7 60.9 66.9 67.7
Literacy rate (%) 16.67 43.57 52.21 65.20 74

Physical Capital and Human Capital

Both physical capital and human capital are important for growth and development. There are some striking similarities and dissimilarities between the two.

Table 5.2 Physical Capital and Human Capital
Similarities Dissimilarities
Both forms of capital formation are the result of conscious investment decisions. Physical capital formation is an economic and technological process. Human capital formation is partly the result of conscious decision and partly a social process.
Both forms of capital are mobile between countries with some restrictions. Physical capital is tangible and can be sold in the market. Human capital is intangible. Only its services can be sold in the market.
Both forms of capital depreciate with time. Physical capital is separable from its owner. Human capital is not separable from its owner.
Both forms contribute to economic growth and development. Physical capital is more mobile than human capital.
Physical capital depreciates with use. Human capital depreciates with ageing.

India: Emerging Economic Super Power and Knowledge Economy

India is now the second fastest growing major economy in the world. The 21“ century would be an Asian century in which China and India would play major roles.

Several recent economic reports predict the emergence of India as an economic super power of the 21st century. BRIC Report by Goldman Sachs – Investment Bank predicts India would emerge as the third largest economy after U.S.A. and China by 2032. According to this report 2000 to 2050 would be dominated by the BRIC countries (Brazil, Russia, India, China). Now South Africa has been added to BRIC making it BRICS.

India’s greatest asset is its human capital. She has the second largest pool (number one is America) of trained technical, scientific managerial human resource in the world. India’s strength in the English language is an added advantage.

India is emerging as a ‘knowledge economy.’ The growth of India’s IT/ITES industry since 1991 is the result of India’s human capital. In services where knowledge is the key input (knowledge intensive production).

The World Bank says that India should make a transition to knowledge economy. India’s vast qualified human resources, science and technology, infrastructure and democratic political system are her strong points. This will facilitate India’s emergence as a knowledge economy.

India as a Knowledge Economy

Indian economy is a fast growing economy. The growth of the economy is the net outcome of various factors. Scholar’s predicts that India is emerging as a super economic power and will soon be a dominant player in the global economic affair. The strength of Indian economy lies in Services. India’s greatest asset is its human capital. India has the second largest pool of trained technical, scientific and managerial human resource in the world. India is now transforming itself into a knowledge- based economy. Computer literacy is fast increasing. India’s software industry has shown impressive performance. India’s better performance is due to her human capital advantage and India is emerging as a ‘Knowledge Economy’.

Human Capital and Human Development ;

  • Investment in education and health leads to human development.

  • Investment in education and health leads to higher productivity.

  • Improvement in education and health is desirable in themselves.

  • It improves human welfare.

  • Hence modern economies give a lot of importance to education and health.

Human Capital Formation in India: Great Prospects

Human capital formation is the result of investment in education, health, on-the-job training, migration and information. Both public and private institutions exist in education and health. But, major part of the investment in education and health comes from the central, state and local governments. Primary education and health care are areas in which market mechanism does not function effectively, Therefore, the government plays the important role. In the private sector area the government ensures that the private sector adheres to the standards stipulated by the government.

Regulatory Bodies in Education

In India we have the ministries of education at the central and state level to regulate the educational sector. There are other regulatory bodies such as:

NCERT (National Council for Educational Research and Training)

UGC (University Grants Commission)

AICTE (All India Council for Technical Education)

Regulatory Bodies in Health Education

ICMR (Indian Council for Medical Research), Nursing Council, Pharmacy Council

Education – Fundamental Right

In December 2009, the Government of India enacted the Right of Education Act to make free education a fundamental right of all children in the age group 6-14.

Growth in Government Expenditure on Education

The government spends a lot of money on education. This expenditure is expressed in two ways:

  • as a percentage of total government expenditure. (This indicates the importance the government gives to education)

  • as a percentage of GDP (This indicates how much-of our income is spent on education)

Government expenditure on education both as percentage of government expenditure and percentage of GDP has been rising.

Table 5.3 Government Expenditure on Education

Year G.D.P % % of Total Expenditure
1952 0.64 7.92
2002 4.02 13.7
2012 3.31 11.7

During 1952-2012, government expenditure on education as a percentage of total government expenditure rose from 7.92 to 11.7 per cent. Similarly, the government expenditure on education as a percentage of GDP rose from 0.64 per cent to 3.3 per cent. If we add the private expenditure too, then this figure would be much higher.

Major part of government expenditure on education is on elementary education since the number of pupils are much higher. The share of government expenditure on higher/tertiary education (colleges, polytechnics and universities) is the least.

There is a huge disparity in case of per capita education expenditure across the states in India. Himachal Pradesh has the highest per capita education expenditure with ₹ 12,500 in 2009-10 and the lowest is ₹ 2,200 in Punjab.

The inadequacy of the expenditure on education can be seen if we compare it with the recommendations of various commissions. In 1964-66 period, the Education Commission had suggested that at least 6 per cent of GDP should be spent on education.

The Tapas Majumdar Committee in 1998, estimated an expenditure of around ₹ 1.37 lakh crore over 10 years (1998-99 to 2006-2007) to bring up children in the age group of 6-14 years.

Even though the government expenditure on education as a percentage of GDP has increased to 3.31 per cent, it is still lower than the desired level. The desired level is regarded as 6 per cent.

Education Cess

The central budget 2004-05 levied an ‘education cess’ of 2 per cent on all union taxes. The revenue proceeds (above ₹ 6,000 crore in 2006-07) from this cess is used exclusively for elementary education. Apart from this, many scholarships and liberal bank credit are available for higher education.

Educational Achievements in India

India has the second largest pool of trained technical, scientific, managerial human resource in the world. This is a great achievement. But, actual educational achievement is measured using other indicators like literacy rate, primary education completion rate, etc. Let us look at India’s educational achievement from this angle.

It is clear from the following table that we have made good progress in educational attainments. But, we have a long way to go.

Table 5.4 Educational Achievements in India

Particulars 1990 2000 2012
Adult literacy rate (% of people aged 15+) Male 61.9 68.4 76.7
Female 37.9 45.4 54.9
Primary completion rate (% of relevant age group) Male 78 85 96
Female 61 69 95
Youth literacy rate (% of people aged 15 – 24) Male 76.6 79.7 88
Female 54.2 64.8 74

Challenges for the Future

Even though we have made progress in educational attainments there are major deficiencies here. These deficiencies are also our future challenges. Some of these challenges are:

  • Education for All – Still a Distant Dream: India still has a large number of illiterates. Literacy level of 68 per cent means illiteracy level of 32 per cent.

  • Gender Equity – Better than Before: Gender disparities are glaring. While male literacy is 68.4, female literacy is only 45.4. This is one of the lowest in the world, Similar gender disparities can be seen in primary education completion rate and youth literacy rate. The differences in literacy rates between, males and females are now narrowing showing a positive development towards gender equity.

  • Higher Education — A Few Takers: In India only a small per cent of students who complete schooling go for higher education. This has to be improved.

Table 5.5 Literacy in India

Year Male Female Difference
1951 27.16 8.86 18.30
1961 40.40 15.35 25.05
1971 45.96 21.97 23.99
1981 56.38 29.76 26.62
1991 64.13 39.29 24.84
2001 75.85 54.25 21.70
2011 82.14 65.46 16.68


Human capital formation plays a crucial role in economic growth and human development. Expenditure on education and health is very important in human capital formation. India has made progress in educational attainments. But still, there are glaring deficiencies: Illiteracy, gender disparities and very low participation in higher education are the major challenges to be addressed.

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