Chapter-8 Human capital Formation

Just as a country can turn physical resources like land into physical capital like factories, similarly, it
can also turn human resources like students into human capital like engineers and doctors. Societies
need sufficient good human capital out of human resources.

A. Concept:-
 Human capital refers to the stock of skill and expertise if human beings in the country.
 Human capital formation implies the addition to the stock of abilities and skills among the population of
the country.
 It is basically acquiring and increasing the number of people who have skills and expertise which are
important for overall development of the country.
B. Sources of human capital formation:-
i. Expenditure on education:-
 Investment in education is considered as one of the main sources of human capital.
 Expenditure on education increases the efficiency and skill of human capital.
 Education enhances mental horizon of human resources and helps in generating profits in future.
 Individuals invest in education to increase their skills and efficiency resulting in higher earning capacity.
ii. Expenditure on health:-
 Health is considered to be an important input for the development of nation as much as it is important for
the development of an individual.
 It directly increases the physical and mental ability of human beings and produces healthy labour force.
 Healthy person adds more to GDP of the nation than a sick person.
iii. On-the job training:-
 This type of training is required to enhance skills and expertise of human capital in order to increase the
productivity of workers.
 This is the training given to the individual at the time when he performs his job by skilled workers.
 Expenditure done on this training programme will enhance the labour productivity.
 This may take different forms:- the workers may be trained in the firm itself under the supervision of
skilled labour.
[Link] on migration:-
 Migration means movement from one place to another.
 People move from one place to another in search of jobs where they can utilize their skill in an efficient
way.
 Expenditure done on migration is also considered as source of human capital formation as the earnings are
much higher than cost.
 Migration involves cost of transportation, higher cost of living etc.
v. Expenditure on information:-
 People spend to acquire information relating to market and educational institutions.
 The information is necessary to make decisions regarding investment in human capital as well as for
efficient utilization of resources.
C. Role of human capital formation:-
i. Higher productivity of physical capital:-
 Physical capital formation depends upon human capital formation.
 The physical capital can be utilised effectively only by skilled and intelligent work of human capital in the
economy.
 Thus, human capital formation raises productivity of physical capital which is desired for economic
growth.
ii. Innovative skills:-
 The human capital formation not only increases the productivity of human resources but also stimulates
innovation.
  Education provides knowledge to understand changes in society and scientific advancements thus
facilitating inventions & innovation.
 Large the number of skilled and trained personnel, greater the possibilities of innovation.
iii. Higher rate of participation and equality:-
 Higher rate of participation means increase in employment.
 Human capital formation has increased the productivity of individuals which increases employment
opportunities and also provides economic and social equality.
iv. Improvement in quality of life:-
 The quality of life improves due to quality education, health and skill formation acquired by the people.
 Human capital formation enables them to enjoy a higher standard of living, they are able to generate better
remuneration for them and for the nation.
v. Change in emotional and material environment of growth:-
 Change in emotional growth means change in attitude level of individual. Individual will become more
growth oriented.
 Change in material environment means now society as a whole can grow as there are more skilled people
or workers who will implement the plans & policies in an effective way.
D. Problems facing human capital formation:-
i. Rising population:-
 Continuous rise in population will adversely affect the quality of human capital.
 Benefits of economic growth relating to housing, hospitals, education etc. have reduced due to rising
population.
 Rapidly rising population lowers the capacity to possess skill and expertise required for economic growth.
[Link]-drain:-
 Loss of resources in terms of ―Brain-Drain‖ is a serious outcome of migration when educated and skilled
manpower moves to other countries to work.
 The countries like India cannot afford migration of persons of high calibre and possessing high quality
education who choose to render their services abroad.
iii. Deficient manpower planning:-
 In India, there exists imbalance between the demand and supply of human resources required for different
categories of work.
 Because of poor manpower planning there is wastage of scarce resources of the country.
iv. Insufficient training in primary sector:-
 Primary sector is the most important sector but proper training is not provided to them in order to utilize
the resources effectively.
 There are widespread inefficiencies in arranging on-the job training programmes.
v. Low academic standards:-
 Educational facilities in India have not developed as required for economic growth.
 There is mismatch between the requirement of skills and available academic standards.
 The result of this is that skills, training and expertise obtained by human capital is insufficient to meet the
desired standards of economic growth.
E. Reports on the Indian Economy:-
Two independent reports on the Indian Economy, in recent times, have identified that India would grow
faster due to its strength in human capital formation.
 Deutsche Bank, a German bank in its report on ‗Global Growth Centers‘ identified that India will emerge
as one among four major growth centres in the world by the year 2020.
 With reference to India it states, ―Between 2005 and 2020 we expect a 40% rise in the average years of
education in India.
 World Bank, in its recent report, ‗India and the knowledge Economy- Leveraging strengths and
opportunities‘, states that India should make a transition to the knowledge economy and if it uses its
 knowledge as much as Ireland does then the per capita income of India will increase from US$1000 IN
2002 to US$3000 in 2020.
 It further states that the Indian economy has all the key ingredients for making this transition such as, a
critical mass of skilled workers, a well-functioning democracy and diversified science and technology
infrastructure.
F. Government intervention in Education and health sectors:-
 Expenditure on education and health makes substantial long term impact and they cannot be easily
reversed; hence, government intervention is essential.
 The role of government is to ensure that the private providers of these services adhere to the standards
stipulated by the government and charge the correct price.
 In a developing country like India, with a large section of the population living below the poverty line,
many of us cannot afford to access basic education and health care facilities.
 Basic health care and education is a right of the citizens. So it is essential that the government should
provide education and health services free of cost for the deserving citizens and those from the socially
oppressed classes.
G. Growth of education sector in India:-
 During 1952-2014, education expenditure as percentage of total government expenditure increased from
7.92 to 15.7 and as percentage of GDP increased from 0.64 to 4.13.
 In 2009, the Government of India enacted the Right to Education Act to make free education a fundamental
right of all children in the age group of 6-14 years.
 Government of India has also started levying a 2 % ‗Education Cess’ on all Union taxes. The revenues
from education cess have been earmarked for spending on elementary education.
 In addition to this, the government sanctions a large outlay for the promotion of higher education and new
loan schemes for students to pursue higher education.
H. Educational achievements in India:-
S. no Particulars 1990 2000 2015
1. Adult literacy rate (%) of people aged above 15
Male 61.9 68.4 81
Female 37.9 45.4 63
2 Primary education completion rate
Male 78 85 94
Female 61 69 99
3 Youth literacy rate
Male 76.6 79.7 92
Female 54.2 64.8 87

I. Growth of Education sector in India:-

1. Expansion of General education:- During the plans, the number of educational institutions providing
elementary education has increased roughly by five times and number of students increased ten-fold. In
1951, hardly 18.33 % of the total population was literate. In 2011, the percentage of literates has increased
to 74.4%.
2. Elementary education:- Elementary education covers students from class 1 to class 8 in the age-group of
6-14 years. The number of primary and middle school has considerably increased. But low percentage of
admission of children in primary class points to educational backwardness in the country.
3. Secondary and senior secondary education:- Navodaya Vidyalayas were established to impart modern
education of good standard to talented students of rural areas. These schools provide boarding facilities to
the students. Central government has established Kendriya Vidayalaya for the benefit of the children of
transferable employees.
4. Higher education:- After independence, higher education has shown a convincing growth overtime. The
total number of colleges for general education in the country is 39071. Higher education includes general
education as well as technical, managerial, medical and other forms of professional education.
5. Vocationalisation of secondary education:- In February 1988, the Central government launched a plan to
introduce vocational subjects in the education system of the country. Vocational courses have been
introduced in the areas of agriculture, trade and commerce, engineering, technology, health and medicines.
6. Technical, Medical and Agricultural education:- The number of institutions giving technical and
professional education has been increased after independence. Many research centres have also been set up
in the country, eg:- IIT, Agriculture Research Institutes, Indian Statistical Institutes, National Physical
Laboratory, etc.
7. Rural education:- National Rural Higher Education council has been set up for the purpose of increasing
rural education. Under this scheme children of scheduled castes and scheduled tribes get free education in
all the states.
8. Adult and female education:- In order to eradicate illiteracy among the adults, special arrangements have
been made for adult education. National literacy mission was set up in 1998.
9. Total literacy campaign:- National literacy mission was launched to render everybody literate in the
country. This programme has now been recast as ‗Saakshar Bharat‘ with a central focus on female
education.
10. Right to Education:- in the year 2009, the Government of India has brought about an Act , called RTE. It
promises free and compulsory education to all. It makes education a matter of right to all children in the
age of 6-14 years.

s. no Committee Year Objectives

1 Education commission 1964 It had recommended that
at least 6% of GDP be
spent on education so as
to make a noticeable rate
of growth in educational
achievements.
2 The Tapas Majumdar 1998 It estimated an
Committee expenditure of 1.37 lakh
crore over 10 years
(1998-99 to 2006-07) to
bring all Indian children
in the age group of 6-14
years under the purview
of school education.
3 Right to Education Act 2009 It was enacted by the
Government of India to
make free education a
fundamental right of all
children in the age group
of 6-14 years.