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Human Capital Formation In India Notes - Class 11 - Commerce Indian Economic Development

Introduction

The evolution of humankind is deeply connected to our ability to store and pass on knowledge. To perform tasks efficiently, people need training and skills. An educated person is generally more skilled than an uneducated one, which allows them to earn a higher income and contribute more to the country's economic growth.

Education offers more than just higher earning potential. It provides significant benefits such as:

Improved social standing and pride.
The ability to make better life choices.
Knowledge to understand societal changes.
Stimulation of innovation.
Easier adaptation to new technologies.

For these reasons, economists emphasize that expanding educational opportunities is crucial for a nation's development process.

What is Human Capital?

Just as a country transforms physical resources like land into physical capital like factories, it can also transform human resources (like students, farmers, and teachers) into human capital (like engineers and doctors).

Human Capital refers to the stock of skills, abilities, and knowledge embodied in a nation's people. To create more human capital, a society first needs a base of competent, educated people like professors and professionals who can train others. This means that investment in human capital is necessary to produce more human capital.

Note

Think of it this way: to have skilled doctors and engineers, you first need skilled teachers and well-equipped universities. Investing in those teachers and universities is an investment in human capital.

Sources of Human Capital

Investing in people is how human capital is formed. The primary sources of this investment are:

Investment in Education: This is considered one of the main sources. Individuals and families spend on education with the goal of increasing future income, much like a company invests in machinery to increase future profits.
Investment in Health: A healthy person can work more productively and for longer periods than a sick person. Expenditures on health—such as preventive medicine (vaccinations), curative medicine (treatment during illness), and social medicine (health literacy)—directly increase the supply of a healthy labour force. Access to clean drinking water and sanitation are also part of health expenditures.
On-the-Job Training: Firms often invest in training their workers to enhance their skills and productivity. This can happen within the firm under a skilled supervisor or through off-campus training programs. The cost of this training is an investment, as the returns from increased productivity are expected to be greater than the expense.
Migration: People often move from their native places in search of better jobs and higher salaries. This includes rural-to-urban migration within India and migration of skilled professionals like doctors and engineers to other countries. The costs involved (transport, higher cost of living) are considered an investment because the increased earnings in the new location outweigh these costs.
Investment in Information: People spend money to acquire information about the labour market, educational institutions, and health services. This information helps them make better decisions about where to invest their time and money, ensuring they get the right skills for available jobs.

Physical and Human Capital

While the idea of human capital is based on the concept of physical capital, there are important similarities and differences between them.

Similarities

Both are the result of conscious investment decisions.
Both depreciate over time.

Differences

Feature	Physical Capital (e.g., a factory)	Human Capital (e.g., a doctor's skill)
Nature	Tangible and can be physically touched.	Intangible; it exists in the mind and body of its owner.
Separability	Separable from its owner. A factory owner doesn't need to be present for it to operate.	Inseparable from its owner. A doctor must be present to provide medical services.
Marketability	Can be easily sold in the market like any other commodity.	Cannot be sold; only the services of the human capital are sold.
Mobility	Completely mobile between countries, aside from trade restrictions.	Not perfectly mobile due to nationality and cultural barriers.
Formation	Can be built through imports. It is mainly an economic and technical process.	Must be formed through conscious policy. It is partly a social process and partly a conscious decision.
Depreciation	Depreciates with use and can become obsolete with new technology.	Depreciates with aging but can be reduced and updated with continuous investment in health and education.
Benefits	Creates only private benefits for those who pay for its products or services.	Creates both private benefits (higher income) and social benefits (external benefits).

Example

An educated person contributes to society by participating effectively in democracy. A healthy person helps prevent the spread of disease by maintaining good hygiene. These are social benefits that go beyond the individual.

Human Capital and Economic Growth

A country's economic growth is measured by the increase in its real national income. The skills of an educated person are greater than those of an uneducated person, leading to higher income generation and a larger contribution to national income. Similarly, a healthy person can provide an uninterrupted labour supply for a longer time, which also boosts economic growth.

Investment in human capital enhances productivity in two key ways:

Increases Labour Productivity: A skilled and healthy workforce is more efficient.
Stimulates Innovation: Education provides knowledge that facilitates inventions and helps people adapt to new technologies.

While it is difficult to prove a direct cause-and-effect link, data shows that human capital and economic growth are related. The causality can flow in both directions:

High levels of human capital can cause income growth.
Higher income allows for greater investment in education and health, leading to higher human capital.

India recognized this link long ago. The Seventh Five Year Plan stated that developing human resources is key to any development strategy, especially for a country with a large population. As seen in Table 4.1, indicators of health, education, and real per capita income in India have grown simultaneously over the decades, suggesting that growth in one sector reinforces growth in others.

The National Education Policy 2020 highlights the growing need for a skilled workforce in fields like data science, AI, biology, and climate science, emphasizing that human capital formation will be crucial for moving India's economy onto a higher growth path.

Human Capital and Human Development

Though they sound similar, human capital and human development are distinct concepts.

Human Capital views education and health as a means to an end. The "end" is to increase labour productivity. From this perspective, any investment in education or health is unproductive if it doesn't increase the output of goods and services.
Human Development is a broader idea where education and health are integral to human well-being. It sees humans as ends in themselves. The core idea is that people should have the ability to read, write, and lead long, healthy lives because these capabilities allow them to make other choices they value.

Note

The main difference is the perspective. Human capital treats people as a tool for economic growth. Human development believes that every individual has a right to basic education and healthcare for their own welfare, regardless of its impact on productivity.

State of Human Capital Formation in India

In India, a federal country, the responsibility for spending on education and health is shared by the union, state, and local governments.

The Need for Government Intervention

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

Long-term Impact: Decisions about education and health have long-lasting effects and cannot be easily reversed.
Information Asymmetry: Consumers often lack complete information about the quality and cost of services, which can lead to exploitation by private providers with monopoly power.
Social Benefits: These sectors create social benefits that go beyond the individual, which private markets may not account for.
Affordability: A large portion of India's population lives below the poverty line and cannot afford basic education and healthcare.

The government's role is to regulate private providers, ensure they adhere to standards, and charge fair prices. It must also provide these services free of cost to deserving citizens, especially those from socially oppressed classes.

Key government organizations facilitating the education and health sectors include:

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

Education Sector in India

Growth in Government Expenditure on Education

Government spending on education is measured in two ways:

As a percentage of total government expenditure: This shows the importance of education in the government's priorities.
As a percentage of Gross Domestic Product (GDP): This shows how much of the nation's total income is being committed to education.

Between 1952 and 2020, education expenditure as a percentage of total government expenditure rose from 7.92% to 16.54%, and as a percentage of GDP, it grew from 0.64% to 4.47%.

However, this spending is considered inadequate. The Education Commission (1964-66) recommended that at least 6 per cent of GDP be spent on education. The current level of just over 4 per cent falls short of this goal.

To boost funding, the Government of India:

Enacted the Right of Children to Free and Compulsory Education Act in 2009, making education a fundamental right for children aged 6-14.
Started levying a 2 per cent 'education cess' on all Union taxes, with the revenue earmarked for elementary education.

Educational Achievements in India

Key indicators of educational achievement include adult literacy, primary completion rate, and youth literacy. Data shows steady improvement in these areas for both males and females.

Future Prospects

Education for All - Still a Distant Dream

Despite rising literacy rates, the absolute number of illiterate people in India remains very high. The constitutional goal set in 1950 to provide free and compulsory education to all children up to age 14 within ten years has not been achieved.

Gender Equity - Better than Before

The gap in literacy rates between males and females is narrowing, which is a positive sign for gender equity. However, promoting women's education remains critical for improving their economic independence, social status, and for the positive impact it has on family health and fertility rates.

Higher Education - a Few Takers

The Indian education system is often described as a steep pyramid, with very few people reaching the higher education level. A major concern is the high rate of unemployment among educated youth.

NSSO data from 2011-12 showed unemployment among male graduates in rural areas was 19%, while for rural female graduates, it was nearly 30%.
In contrast, unemployment among primary-level educated youth was much lower, at 3-6%.

This indicates a mismatch between the skills imparted in higher education institutions and the skills demanded by the job market. The government needs to increase funding for higher education and improve its quality to provide students with employable skills.

Conclusion

The economic and social benefits of human capital are well-known. Governments in India have been allocating significant funds for education and health. To achieve both economic growth and equity, it's crucial to ensure that these services are accessible across all sections of society. India possesses a large pool of scientific and technical manpower, and the challenge now is to improve its quality and create conditions for this talent to be utilized within the country.

Chapter Notes