Human Capital Formation In India
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:
For these reasons, economists emphasize that expanding educational opportunities is crucial for a nation's development process.
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.
Investing in people is how human capital is formed. The primary sources of this investment are:
While the idea of human capital is based on the concept of physical capital, there are important similarities and differences between them.
| 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). |
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:
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:
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.
Though they sound similar, human capital and human development are distinct concepts.
In India, a federal country, the responsibility for spending on education and health is shared by the union, state, and local governments.
Government intervention in education and health is essential for several reasons:
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:
Government spending on education is measured in two ways:
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:
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.
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.
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.
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.
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.
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.
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