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chapter 4 Human Capital Formation In India
A significant factor in human progress is the capacity to acquire, store, and share knowledge. While conversation and lectures are traditional methods, training and skill development are crucial for efficiency. Educated individuals possess greater labor skills than the uneducated, leading to higher incomes and increased contributions to economic growth. Beyond earnings, education offers social standing, pride, better life choices, understanding of societal changes, and stimulates innovation. An educated workforce also facilitates the adoption of new technologies, accelerating national development.
Introduction
Human capacity for knowledge and skill development has been crucial for human evolution and economic progress. Education enhances earning capacity and provides numerous other benefits, including social standing and innovation. Economists emphasize the importance of expanding educational opportunities for accelerating development.
What Is Human Capital?
Just as physical resources are transformed into physical capital (e.g., land into factories), human resources (people like nurses, farmers, teachers) can be developed into **human capital** (skilled professionals like engineers, doctors). Societies require sufficient human capital, such as educated professors and professionals, to produce more human capital. This means investing in human capital is necessary to develop human resources into skilled individuals.
Turning Human Resources Into Human Capital
Developing people's skills and knowledge transforms them into valuable human capital.
Investment In Human Capital To Produce More Human Capital
Investment in education and training is essential for developing the human capital needed to educate and train others.
Questions About Human Capital
Understanding human capital involves addressing: its sources, its relationship with economic growth, its link to human development, and the government's role in its formation.
Sources Of Human Capital
Investment in education is a primary source of human capital formation, but several other factors also contribute.
Investment In Education
Similar to a company investing in capital goods for future profits, individuals invest in education to increase their future income. Parents spending on education for their children is an investment with the objective of higher future earnings for the children.
Investment In Health
Health is as crucial for national and individual development as education. A healthy person is more productive than a sick one.
Forms Of Health Expenditures
Expenditure on health includes preventive medicine (vaccination), curative medicine (treatment), social medicine (health awareness), and provision of clean water and sanitation. These directly increase the supply of a healthy labor force, contributing to human capital formation.
On-the-job Training
Firms invest in training their workers, either within the firm or off-site. These expenses are considered human capital formation because the resulting increase in labor productivity outweighs the training cost. Firms often require workers to stay for a certain period after training to recover their investment through enhanced productivity.
Migration
People migrate for higher salaries (e.g., rural-urban migration for jobs, skilled workers migrating abroad). Migration involves costs (transport, living expenses, emotional costs), but the prospect of higher earnings in the new location makes the expenditure a source of human capital formation.
h3 class="yellowheading">Information
Spending on information about labor markets, education, and health (e.g., salaries for different jobs, cost and quality of educational institutions) is also a source of human capital formation. This information is vital for making informed decisions about investing in and effectively utilizing human capital.
Physical And Human Capital (Similarities And Dissimilarities)
Human capital is conceptualized based on physical capital, sharing some similarities but also having key differences (Box 4.1). Physical capital is tangible, separable from its owner, mobile across space, and depreciates through use or technological obsolescence. Human capital is intangible, embodied within the owner, not perfectly mobile (restricted by nationality/culture), and depreciates with age but can be enhanced by continuous investment. Benefits from human capital are both private (to the owner) and social (external benefits to society), while physical capital typically yields only private benefits.
Human Capital And Economic Growth
Human capital contributes significantly to economic growth. Educated and healthy individuals are more productive and earn higher incomes, directly increasing national income.
Contribution Of Educated Person To Economic Growth
Educated individuals have higher income-generating capacity and contribute more to national income.
Health As A Factor For Economic Growth
Good health ensures a consistent labor supply and is crucial for economic growth.
Enhanced Productivity Stimulates Innovations
Increased human productivity not only boosts labor output but also drives innovation and the ability to adopt new technologies. Education provides the knowledge base for inventions and innovations, while an educated workforce facilitates the integration of new technologies.
Empirical Evidence And Measurement Problems
While a causal link between human capital and economic growth is expected, empirical evidence is somewhat inconclusive due to measurement challenges (e.g., quality of education/health is hard to quantify). While developing countries show faster human capital growth (based on indicators), per capita real income growth hasn't always converged as quickly with developed nations.
Causality Between Human Capital And Economic Growth
There is likely a bidirectional relationship: higher income facilitates human capital development, and higher human capital promotes income growth.
India Recognized Importance Of Human Capital
India recognized the importance of human capital for economic growth early on, emphasizing human resources development in its planning.
Human Resources Development In Development Strategy
Human resource development (human capital formation) was considered a key element in India's development strategy, seeing a large, trained population as an asset.
Growth Of Sectors Simultaneous
Education, health, and economic growth have grown simultaneously in India (Table 4.1), suggesting they reinforce each other.
Select Indicators of Development in Education and Health Sectors:
| Particulars | 1951 | 1981 | 1991 | 2001 | 2016-17 |
|---|---|---|---|---|---|
| Real Per Capita Income (in Rs) | 7,651 | 12,174 | 15,748 | 23,095 | 77,659 |
| Crude Death Rate (Per 1,000 Population) | 25.1 | 12.5 | 9.8 | 8.1 | 6.3 |
| Infant Mortality Rate (Per 1,000 Live Births) | 146 | 110 | 80 | 63 | 33 |
| Life Expectancy at Birth (in Years) - Male | 37.2 | 54.1 | 59.7 | 63.9 | 67 |
| Life Expectancy at Birth (in Years) - Female | 36.2 | 54.7 | 60.9 | 66.9 | 70 |
| Literacy Rate (%) - Male | 16.67 | 43.57 | 52.21 | 65.20 | 76 |
| Literacy Rate (%) - Female | -- | -- | -- | -- | 66 |
| Literacy Rate (%) - Total (Age 7+) | 16.67 | 43.57 | 52.21 | 65.20 | 74.04 (2011) |
Note: Literacy Rate (%) in 1951 for age 7+ is approximately 18.33%. For 2016-17, female literacy is stated as 66% in the text, while Table 4.2 shows 65.20% for 2001. Using 2011 data for Total Literacy Rate (7+ age) is more appropriate here for comparison. The table provided in the text has inconsistencies in female literacy rate reporting across years.
National Education Policy 2020 (Knowledge Landscape)
The NEP 2020 highlights the rapid changes in the global knowledge landscape driven by scientific and technological advancements. It anticipates increased demand for a skilled workforce, particularly in mathematics, computer science, data science, and multidisciplinary fields, while unskilled jobs may be automated. Climate change and resource depletion will create demand for skills in environmental sciences. The rise of epidemics necessitates collaborative research. As India develops, demand for humanities and arts is also expected to grow. This policy aims to position India as a knowledge-based economy.
Human Capital And Human Development
While sounding similar, human capital and human development are distinct concepts.
Distinction Between Terms
There is a clear difference in perspective between human capital and human development.
Human Capital Perspective
Human capital views education and health primarily as investments to increase labor productivity. Investment is seen as unproductive if it doesn't enhance the output of goods and services. Human beings are treated as a means to the end of increased productivity.
h3 class="yellowheading">Human Development Perspective
Human development considers education and health as essential components of human well-being, crucial for people to make valued choices in life (e.g., ability to read, lead a long and healthy life). In this view, human beings are ends in themselves, and investments in education and health should be pursued for human welfare regardless of their impact on labor productivity. Basic education and healthcare are considered fundamental rights.
Basic Education And Health As Rights
Every individual is considered to have a right to basic literacy and healthcare.
India As A Knowledge Economy
The emphasis on human capital development, particularly through IT, is seen as a pathway for India to become a knowledge-based economy (Box 4.2). The potential for IT-based services, including e-governance, in rural areas and urban centers is significant, aiming to contribute to overall human development.
State Of Human Capital Formation In India
Human capital formation in India is influenced by investments in education, health, training, migration, and information. Education and health are particularly crucial. India, as a federal country, involves the union, state, and local governments in providing education and health services. Analyzing the education sector is key to understanding the state of human capital formation.
Analysis Of Human Capital Formation In India
Examining investments in key areas helps understand the progress in human capital development.
Outcomes Of Investments
Human capital formation results from strategic investments.
Federal Country And Government Functions
In India, the Constitution outlines the roles of different government tiers in providing education and health services.
Government Intervention In Education And Health Sectors
Government intervention is essential in education and health sectors due to their long-term impact, the non-reversibility of negative outcomes (e.g., inadequate services), and information asymmetry where providers have more knowledge than consumers, potentially leading to exploitation. The government's role is to ensure standards and fair pricing by private providers.
Private And Social Benefits
Education and health services generate benefits for individuals and society.
Long-term Impact And Non-reversibility
The effects of investments in these sectors are significant and difficult to undo.
Lack Of Complete Information And Exploitation
Consumers' limited knowledge can lead to providers exercising monopoly power.
h3 class="yellowheading">Role Of Government To Ensure Standards And Price
Government regulation is needed to ensure quality and affordability.
Facilitating Organizations In Education Sector
Organizations like NCERT, UGC, and AICTE facilitate institutions in the education sector.
Facilitating Organizations In Health Sector
Bodies like the National Medical Commission and ICMR facilitate institutions in the health sector.
Population Below Poverty Line
In a developing country like India, a large segment of the population lives below the poverty line.
Inability To Afford Basic Education And Healthcare
Many people cannot afford basic or specialized education and healthcare.
Super Specialty Health Care And Higher Education
Access to advanced healthcare and higher education is limited for a large portion of the population.
Basic Education And Healthcare As A Right
Considering basic education and healthcare as citizen rights necessitates government provision, including free services for the deserving and socially oppressed classes.
Government Expenditure On Education Sector
Both union and state governments have increased expenditure on education to achieve universal literacy and raise average educational attainment.
Objective Of Attaining Cent Per Cent Literacy
A key goal is to achieve complete literacy across the population.
Education Sector In India
Examining government expenditure on education provides insight into the sector's growth in India.
Growth In Government Expenditure On Education
Government spending on education has increased over the years.
Expenditure Expressed In Two Ways
This expenditure is measured as a percentage of total government expenditure and as a percentage of GDP.
Percentage Of Total Government Expenditure
This indicates the priority placed on education by the government.
Percentage Of Gross Domestic Product (GDP)
This reflects the portion of national income allocated to education.
Increase In Education Expenditure (1952-2014)
Between 1952 and 2014, education expenditure as a percentage of total government expenditure rose from 7.92% to 15.7%, and as a percentage of GDP from 0.64% to 4.13%. This increase has been irregular over time.
Private Expenditure
Including private spending by individuals and philanthropic institutions would result in a much higher total education expenditure figure.
Share Of Elementary And Higher Education
Elementary education receives the largest share of total education expenditure, while higher/tertiary education receives the least. However, expenditure per student is higher in tertiary education.
Expenditure Per Student In Tertiary Education
The cost per student is higher at the tertiary level.
h3 class="yellowheading">Need To Increase Expenditure On All Levels
Expanding school education necessitates more trained teachers, highlighting the need to increase expenditure across all educational levels.
Per Capita Public Expenditure Across States
Per capita public expenditure on elementary education varies significantly between states (e.g., ₹34,651 in Himachal Pradesh vs. ₹4088 in Bihar in 2014-15), leading to disparities in educational opportunities and attainment.
Inadequacy Of Expenditure
The current level of education expenditure (a little over 4% of GDP) is considered inadequate compared to recommendations by commissions like the Education Commission (6% of GDP) and the Tapas Majumdar Committee (estimated required expenditure to bring children aged 6-14 into school). Reaching the 6% target is deemed essential.
Recommendations By Commissions (Education Commission, Tapas Majumdar Committee)
Expert bodies have recommended significantly higher levels of public spending on education.
Current Level Of Expenditure
Actual spending falls short of recommended targets.
Right Of Children To Free And Compulsory Education Act (2009)
In 2009, the government enacted the Right of Children to Free and Compulsory Education Act, making free education a fundamental right for children aged 6-14. This aligns with the Directive Principles of the Constitution.
Education Cess
A 2% education cess on Union taxes has been levied, with revenues earmarked for elementary education. Significant outlays and loan schemes support higher education.
Outlay For Higher Education And Loan Schemes
Government provides financial support for tertiary education.
Educational Achievements In India
Educational progress is measured by indicators like adult literacy, primary completion rate, and youth literacy rate.
Indicators Of Educational Achievements
Adult literacy, primary completion, and youth literacy rates show improvements over the last two decades (Table 4.2).
Educational Attainment in India (Table 4.2):
| Sl.No. | Particulars | 1990 | 2000 | 2011 | 2017-18 |
|---|---|---|---|---|---|
| 1. | Adult Literacy Rate (per cent of people aged 15+) | -- | -- | 74.04 | 77.7 |
| 1.1 | Male | 61.9 | 68.4 | 79 | 82 |
| 1.2 | Female | 37.9 | 45.4 | 59 | 66 |
| 2. | Primary completion rate (per cent of relevant age group) | -- | -- | -- | -- |
| 2.1 | Male | 78 | 85 | 92 | 93 |
| 2.2 | Female | 61 | 69 | 94 | 96 |
| 3. | Youth literacy rate (per cent of people aged 15+ to 24) | -- | -- | -- | -- |
| 3.1 | Male | 76.6 | 79.7 | 90 | 93 |
| 3.2 | Female | 54.2 | 64.8 | 82 | 90 |
Note: The table data is transcribed as provided in the text, even with some inconsistencies in year grouping and data points like Total Adult Literacy for 1990/2000/2011 and 2017-18. For Adult Literacy (15+), 2011 data is shown as 74.04% in external sources. Youth Literacy (15-24) data is provided for specific years only.
Future Prospects
While literacy rates are rising, challenges remain in India's education sector.
Education For All — Still A Distant Dream
Despite increasing literacy rates, the absolute number of illiterates remains high, equivalent to India's population at Independence. Achieving 100% literacy, a goal set for 10 years after the Constitution's commencement (for children up to 14), is still a distant dream.
Absolute Number Of Illiterates
The sheer number of illiterate individuals is substantial.
Directive Principles Of The Constitution
The Constitution aimed for free and compulsory education for children up to 14 within a decade of its adoption.
Gender Equity — Better Than Before
Differences in male and female literacy rates are decreasing, indicating progress in gender equity. However, promoting women's education remains crucial for their economic independence, social status, and positive impact on health and fertility.
Narrowing Differences In Literacy Rates
The gap in literacy between genders is closing.
Need To Promote Education For Women
Continued focus on educating women is essential for various societal benefits.
Higher Education — A Few Takers
The structure of India's education system is like a steep pyramid, with fewer and fewer people reaching higher education levels.
Steep Indian Education Pyramid
Access to higher education is limited compared to basic education.
Level Of Unemployment Among Educated Youth
Ironically, unemployment rates are highest among educated youth, particularly rural female graduates (nearly 30% unemployed among those with graduation and above in 2011-12), compared to much lower rates among primary-level educated youth.
Reasons For Unemployment
This situation suggests a mismatch between skills gained and employable skills needed in the job market. The government needs to increase investment in higher education and improve standards to ensure graduates acquire relevant skills.
Conclusion
The economic and social benefits of human capital formation and human development are widely acknowledged. Both the union and state governments in India allocate significant financial resources to develop education and health sectors. Ensuring the widespread availability of these services is crucial for achieving both economic growth and equity simultaneously. India has a considerable pool of scientific and technical talent globally. The key challenge is to enhance the quality of this workforce and create conditions within India that facilitate their utilization for national development.
Economic And Social Benefits
Investing in people brings widespread advantages.
Government Financial Outlays
The government makes substantial investments in education and health.
Spread Of Education And Health Services
Ensuring these services reach all sections of society is vital for inclusive growth and equity.
India's Stock Of Scientific And Technical Manpower
India possesses a significant number of skilled professionals.
Need To Improve Qualitatively And Utilise
The focus should be on improving the quality of human capital and creating opportunities for them to contribute within India.