Chapter 5 Human Capital Formation In India

5.1 Introduction

The evolution of human society has been profoundly shaped by our ability to store, process, and transmit knowledge. This ability is not innate; it requires significant training and skill development. It is evident that the skill level and productivity of an educated person are substantially higher than those of an uneducated individual. Consequently, an educated person generally earns more and contributes more significantly to the nation's economic growth.

The pursuit of education is driven by more than just the potential for higher earnings. It offers numerous other benefits:

• It enhances social standing and fosters a sense of pride.
• It equips individuals to make better life choices.
• It provides the knowledge necessary to comprehend societal changes.
• It stimulates creativity and innovation.

Furthermore, a well-educated workforce is crucial for a nation as it facilitates the quick adoption of new technologies, thereby accelerating the overall development process. Economists universally emphasize the importance of expanding educational opportunities to fuel national progress.

5.2 What Is Human Capital?

Just as physical resources like land can be converted into physical capital like machinery and factories, human resources (people) can be transformed into human capital. Human capital refers to the stock of skill, knowledge, and expertise embodied in a population. For instance, a society invests in students to turn them into doctors, engineers, and teachers.

This process is self-reinforcing. To create new human capital (like training more doctors), a society first needs a sufficient stock of existing human capital (competent professors and medical professionals). Therefore, continuous investment in human capital is essential to produce even more human capital from the available human resources.

This chapter explores several key questions related to this concept:

1. What are the primary sources of human capital?
2. What is the relationship between human capital and a country's economic growth?
3. How does human capital formation relate to the broader concept of human development?
4. What is the government's role in fostering human capital formation in India?

5.3 Sources Of Human Capital

Human capital is formed through various forms of investment in people. The primary sources of human capital formation are:

1. Investment in Education: This is the most recognized source. Individuals and families spend on education with the objective of increasing future earning potential, much like a company invests in machinery to boost future profits.
2. Investment in Health: Health is a vital input for development. A healthy person can work more productively and for a longer duration than a sick person. Health expenditure includes:
   • Preventive medicine: Such as vaccinations.
   • Curative medicine: Medical treatment during illness.
   • Social medicine: Spreading health awareness and literacy.
   • Provision of clean drinking water and sanitation.
   Investing in health directly increases the supply of a healthy and productive labor force.
3. On-the-Job Training: Firms invest in training their employees to enhance their skills and productivity. This can be done within the firm or at external training centers. Firms undertake this expenditure with the expectation that the increased productivity will generate returns greater than the cost of training.
4. Migration: People often migrate from their native places in search of better job opportunities and higher salaries. This includes both rural-to-urban migration within a country and international migration of skilled professionals. The costs of migration (transport, higher cost of living) are seen as an investment, as the higher earnings in the new location are expected to outweigh these costs.
5. Investment in Information: People spend money and time to acquire information about labor markets, salaries, and educational opportunities. This information is crucial for making sound investment decisions regarding education and for utilizing one's skills efficiently.

Box 5.1: Physical And Human Capital

While human capital is conceptualized based on physical capital, there are crucial distinctions between the two.

5.4 Human Capital And Human Development

Human capital and human development are related but distinct concepts. Their primary difference lies in how they view human beings.

• Human Capital: This perspective treats human beings as a means to an end. The "end" is increased economic productivity. In this view, any investment in education or health is only considered productive if it enhances the output of goods and services.
• Human Development: This perspective views human beings as ends in themselves. It asserts that the primary goal of development is to enhance human well-being. According to this view, investments in education and health are essential because they are integral to a good life, regardless of their impact on labor productivity. Every individual has a fundamental right to be literate and healthy.

In essence, human capital sees education and health as tools to make people better workers, while human development sees them as essential components of a fulfilling life.

Box 5.2: India as a Knowledge Economy

With the impressive growth of its software and IT industry, there is a growing narrative about transforming India into a knowledge-based economy. This vision involves using information technology (IT) to drive progress, with examples like e-governance and villagers using email being cited. However, the effectiveness of IT-based services is heavily dependent on the existing level of economic and human development. It is crucial to question whether simply providing IT services in rural areas can lead to genuine human development without first addressing fundamental issues like literacy, health, and basic infrastructure.

5.5 State Of Human Capital Formation In India

Human capital formation in India is a shared responsibility across different levels of government, as mandated by the Constitution. The Union government, state governments, and local governments (like Municipalities and Panchayats) all have roles in providing and funding education and health services.

Need for Government Intervention:

Government intervention in education and health is essential for several reasons:

1. Long-Term Impact: Investments in education and health have long-lasting and often irreversible effects. A wrong choice of school or hospital can cause significant harm before it can be corrected.
2. Information Asymmetry: Individual consumers often lack complete information about the quality and cost of these services. This allows private providers to acquire monopoly power and potentially exploit consumers.
3. Social Benefits: As discussed earlier, education and health generate significant social benefits (externalities) that private markets do not account for, leading to underinvestment if left to the private sector alone.
- Equity and Access: In a country like India with widespread poverty, a large section of the population cannot afford basic education and healthcare. The government must provide these services free of cost or at subsidized rates to ensure they are accessible to all, especially the poor and socially marginalized.

Regulatory Bodies:

In India, both sectors are facilitated and regulated by various ministries and organizations, such as:

• Education: NCERT (National Council of Educational Research and Training), UGC (University Grants Commission), and AICTE (All India Council of Technical Education).
• Health: National Medical Commission and ICMR (Indian Council for Medical Research).

5.6 Education Sector In India

Growth in Government Expenditure on Education:

Government spending on education is measured in two ways:

1. As a percentage of total government expenditure.
2. As a percentage of Gross Domestic Product (GDP).

Between 1952 and 2014, education expenditure rose from 7.92% to 15.7% of total government expenditure, and from 0.64% to 4.13% of GDP. While this shows an increase, the growth has been irregular and inconsistent.

Sectoral Distribution of Expenditure:

• Elementary education receives the largest share of the total education budget.
• Higher/tertiary education (colleges, universities) receives the smallest share.
• However, the expenditure per student is significantly higher in tertiary education than in elementary education. This creates a need to increase expenditure at all levels of education, as expanding schools requires more teachers trained in higher education institutions.

Inadequacy of Expenditure:

The current spending level of just over 4% of GDP is considered inadequate. The Education Commission (1964–66) had recommended that at least 6% of GDP should be spent on education for meaningful progress. This 6% target has been accepted as a national goal.

To finance education, the government enacted the Right of Children to Free and Compulsory Education Act in 2009 for children aged 6-14 and also levies a 2% 'education cess' on all Union taxes to fund elementary education.

Educational Achievements in India:

Progress in educational attainment is typically measured by literacy rates and school completion rates.

5.7 Future Prospects

Despite progress, India faces significant challenges in the education sector.

Education for All — Still a Distant Dream:

Although literacy rates have improved, the absolute number of illiterates in India today is roughly equal to the country's entire population at the time of independence. The constitutional goal of providing free and compulsory education to all children up to age 14 within ten years of 1950 has not been met. Achieving 100% adult literacy remains a distant goal.

Gender Equity — Better than Before:

The gap between male and female literacy rates is narrowing, which is a positive sign of improving gender equity. However, promoting women's education remains a critical priority. Educating women is essential for their economic independence and social status, and it has a positive impact on fertility rates and the health of the entire family.

Higher Education — A Few Takers:

India's education system resembles a steep pyramid, with a very small number of people reaching the higher education level. A major concern is the high rate of unemployment among the educated youth. According to NSSO data (2011-12), unemployment was highest among graduates, particularly rural female graduates, of whom nearly 30% were unemployed. This indicates a mismatch between the skills imparted by higher education institutions and the skills demanded by the job market. Therefore, there is an urgent need to increase investment in and improve the quality and relevance of higher education.

5.8 Conclusion

The economic and social benefits of forming human capital are well-established. Both Union and state governments in India have allocated significant financial resources to education and health. It is crucial that the benefits of these services are spread equitably across all sections of society to achieve the twin goals of economic growth and social justice.

India possesses one of the world's largest stocks of scientific and technical manpower. The immediate challenge is to enhance the quality of this human capital and create an environment where these valuable skills can be effectively utilized for the nation's development.

Recap

This section summarizes the key concepts of the chapter. It reiterates that human capital is created through investments in education, health, on-the-job training, migration, and information, leading to enhanced labor productivity. It highlights the crucial differences between physical and human capital and distinguishes between the concepts of human capital (a means to an end) and human development (an end in itself). The recap also touches upon government expenditure on education and the need for equitable access to these services to foster both economic growth and social equity.

Exercises

This section contains questions for self-assessment, designed to test the learner's understanding of the concepts discussed in the chapter, such as the sources of human capital, the distinction between human capital and human development, the role of government in education and health, and the relationship between human capital and economic growth.

Suggested Additional Activities

This section provides ideas for projects and discussions to deepen the understanding of the chapter's themes, such as calculating the Human Development Index, debating India's future as a knowledge economy, and analyzing government reports on education and health.

References

This section lists academic books, government reports, and websites that serve as sources for the chapter and provide avenues for further reading on human capital, human development, and India's education policy.