Chapter-7

Human Capital
Formation in India
:Chapter Outline
1. Meaning ot Human Capital
2. Difference between Human Capital and
Physical Capital
3. Role of Human Capital Formation in Economic
Development
4. Sources of Human capital Formation
5. Human Capital Formation in India
5.1 Growth of education sector in India
5.2 Growth of Health Facilities in India
6. Problems of Human Capital Formation in India
 ike other resources (such as land or minerals, machines, building etc.). population is also a
resource which is called human resource. It contributes to growth. This is the positive aspect
alarge population. This positive aspect is often overlooked. We consider the problems
population, that is, providing the population with food, education and access to heaith facilities.
Population becomes human capital when investments are made in the form ofeducation and health
When the existing human resource is further developed by spending more on health and education
we callit human capitalformation. Investments in human beings (through education, training, medical
care) yields a return just like investment in physical capital. In the present chapter, we shalldisCuss
the following questions:
(a) What is human capital and how is it different from physical capital?
(b) How people become resource?
(c) What is the role of human capital in economic development?
(d) What are the achievements in the fields of education and health in India since independenCe?

1. Meaning of Human Capital

(Human capital can be defined as the knowledge, ability, skill and physical capacity of the people
which help them to produce more., Andthe process of improvement in human capital is termed as
human capital formation) Population becomes human capitalwhen investment is made in the form of
education and halth. Thus,(human capital is the stock of skills and productive knowledge embodied
in human beings.)
Human capitalmay not be confused with human development. Human capitaltreats human
beings as means to an end, the end being the increase in productivity. It considers education and
health as a means to increase labour productivity. On the other hand, the term human development
treats human beings an end in themselves. It treats human development as human welfare. Human
development (or human welfare) can be increased through investments in education, and health even
when such investments do not result in higher labour productivity. Therefore, basic education and
basic health are important in themselves irrespective of their contribution to higher productivity.
2. Difference between Human Capital and Physical Capital
Both human capital and physical capital are the outcomes of investments. These two forms of
capital are different from each other in the following ways:
(0) Physical capital (machines, building etc.) is tangible and can be easily sold in the market like
any other commodity, whereas human capital is intangible. It is endogenously built in the
body and mind of its owner. It cannot be sold in the market; only the services of human capital
are sold.
(ii) The physical capital is separable from its owner, whereas human capital cannot be separated
from its OWner.
(ü) Physical capital is perfectly mobile between the countries, whereas the mobility of human
capital is restricted by nationality and culture.
(v) Physical capital depreciates overtime either due to its constant use or due to change in
technology. But human capital though depreciates with aging but can be made up through
continuous investments in education and health.
(4 Physical capital creates only private benefit. In other words, the benefit from a capital good
goes to those who pay for the products and services produced by it. But human capital
creates private benefit as well as social benefit (or external benefit). For example, an educated
person is benefited individually when he earns more than what he could earn without it. He
creates social benefits when he contributes to socio-economic progress of the country.
3. Role of Human Capital Formation in Economic Development
Human capital (may be called human resource development) plays animportant role in economic
development. Human capital formation accelerates the process of economic growth in the following
ways

118 Indian Economic Development

 Effective Use of Physical Capital : Human capital leads to an efficient utilisation of the physical
capital (e.g., machines, plants, tools, equipments etc.) of a nation. The skilled workers are
capable of handing the productive assets in a better way than others. Investment in humman
capital helps in a acquiring new skills and also knowledge relating to management of resources,
technology and productions.
2) Inventions and Innovations : Human capital formation facilitates innovation and creates ability
to adopt new technologies. An educated person has the potential to develop new skilis and
innovate new technique that can be more efficient.
Higher Rate of Participationand Equality : Human capital increases the rate of participation
(percentage of labour force participating in the process of production). People with higher technical
skills are more productive and efficient. This increases the participation of more people in the
process of production. Higher the rate of participation. greater is the degree of economic and
socialequality in the society.
Modern Outlook : Investment on human capital helps in changing mental outlook of the people.
Modern people have smaller families as compared to other people.
9 More Human CapitalFormation : We also need human capital to produce more human capital
say doctors, engineers, managers etc. This means, we need investment in human beings to
produce more human capital.
(6) Rural Development:Education can contribute significantly to rural development. It enables the
rural people to overcome ignorance and superstitions. Educated farmers can eassily adopt new
agricultural techniques and new methods of farming. It can help rural people in acquiring skills
to set up small and cottage industries so that disguisedly unemployed can be gainfully employed
in the village themselves.
) Supply of Healthy Labour Force:Like education, health is equally considered as an important
imput for the development of a nation as much as it is important for the development of an
individual. If the worker or the government spends on health, sick persons would be fit for work
and hence there will be no loss
sOoner. They willnot be compelled to abstrain from work for long
essential for continuity
of production. The uninterruped suply of healthy labour force is considered
in production.
Box 7.1 Need for Promoting Women's Education
Though the difference in literacy rates between males and females are narrowing down, there
education will further improve
is still a need to promote women's education in India. Women's would make a favOurable impact
the economicindependence and social status of women. Also itpromotion of women's education
on fertility rate and health care of women and children. Finally,
WOuld be a step towards gender equity,

Table 7.2 Role of Education in Economic Development

a t produces sklled and trained workers.
increases of 40 per sent.
D) tincreases labour productivity. Primary education causes an cent in labour productivity.
secondary education 100 per cent and higher education 300 per
among the people which are
C) tdevelops persenality and sense of national consciousness
important for rapid economic growth.
9tenables one to make better choice in life. promotes
e) It provides knowledge tounderstand changes taking place in society, It also
inniovations
Wtmodernizes people's attitudes.
9 Educated peoplecan easily participatein the local developrnent activities
undertaken by
the
Part- B Human Capital Formation in India 119
 India recognized the importance of human capital in economic growth long ago. The Seventh
to he
FIve Year Plan says, "Human resources development (real human capital) has necessarily population
assigned a key role in any development strateav. particularly in a country with a large
Trained and educated on sound lines, alarge population can itself become an asset in accelerating
economic growth and inensuring social change in desired directions".
Box 7.3 Role of Helath Economic Development
Who can work better- a sick persn or a healthy person? Obviously, a health person. Asick
himself from work and hence, there
person without access to healthcare facilities has to abstain health, sick persons may be fit for
IS loss of production. If the worker or the government spends on productive
Work sooner. Therefore, expenditures on health are important in building and maintaining a
medicine (vaccination)
labour force. Health expenditure may take the various forms. preventive
Curative medicine (treatment of illness), social medicine (spread of health, literacy), and provision
expenditures.
of clean drinking water and good sanitation are various forms of health
economic growth in the
Good health improves the quality of life. Imporved health contributes to
followning ways:
(a) It increases the effciency of workers.
(b) It reduces production loss caused by worker's illiness.
(c) It permits the use of national and other resources.
them beter able to learn.
(d) It increases the enrolment of children in schools and makes
illness.
(e) It spares/frees resources that otherwise have to be spent on treating

It is difficult to estabiish a cause and effect relationship between growth of human capital (education
(as measured
and health) and economic growth. But Table7.1 clearly shows that economic growth death rate, infant
rate, crude
by real per-capita income) and human capital (as measured by literacy has
mortality rate and life expectancy) has grown simultaneously. In fact, growth in one sector
reinforced the growth of other.
Table 7.1Select Indicators of Development in Education and Health Sectors
Particulars 1951 1981 1991 2001 Current level
(2011)
Real Per Capital Income (in Rs.) 5,708 8,594 11,535 16,172 38,037
(2011-12)
Crude Death Rate (Per 1,000 Population) 27.4 12.5 9.8 8.1 7.1

Infant Mortality Rate 146 110 80 63 44

Life Expectancy at Birth (in Year) 32.1 50.4 58.7 62.5 66.1
Male 32.5 50.9 59.6 61.6 64.6
Female 31.7 50.0 59.0 63.3 67.6
Literacy Rate (%) 18.3 43.57 52.21 64.8 74.04
RMP per 10,000 3.9 4.7 5.6 7.6

Since, the beginning of planning, the levels of national income and per capita income have risen
significantly. Per capita income at constantprices of 1999-00 has increased from Rs.5708 in 1950
51te 38037 in 2011-12. This has resulted in higher living standard of the people. In order to mainta
their higher standard of living, people have begun to prefer asmalfamily. Woman is no longertheonly
SOurce of recreation for the people. More recreation facilities are such as cinema, music ; dance.
radio, T.V., sports, festivals etc. are available to al sorts of people. Moreover, people in India have now
120 Indian Economic Development
 from just
ge1ng a balanced diet to some extent. As a result, life expectancy has increased
pen number of childrens who die
21yearsin 1951 to 66.1 yearsin 2011. Again, infant mortality rate(The just to
Der
1000live children before completing one year) has also fallen drastically from 146 in 1951
children.
2011. Earier, because of high mortality rate people used to produce alarge number of
46in conscious than they were
Educated women nowtake care of their children's health and are now more
verbefore.

LSources of Human Capital Formation

Foiiowing are the main sources of human capital formation:
capital formation.
sa) Health Expenditure: Expenditure on health is an important source of human
of time. It increases the
it keeps workers ealthy and enables them to work fora longer period
Supply of healthy labour force.
capital formation.
) Education: Investments in education is another major source of human without
Expenditures on education convert human beings into human captal. Human beings
education are only physical labour.
Ic) Expenditure on Giving on the Job-training: Expenditure regarding on the job training is also a
expenditure in the form of increased labour
Source of human capitalformation as the return of such
productivity is more than the cost of it.
(d) Expenditure on Migration: People migrate from one place to another to find jobs that bring them
unemployed people migrate to
higher income/salaries as compared to their native income. Rural migrate to other
urban areas in search of job in our country. Professionals like doctors, engineers cost
cOuntries for higher salaries. Migration in both these cases involves cost of transport, higher
The increased
of living in the migrated places and psychic costs of living at a strange place. on migration is
earnings at the new place outweigh the cost of migration. Therefore, expenditure
also considered a source of human capital formation.
(e) Expenditure on Acquiring Information about the Labour Market: People spend money to
know about the wages and
acquire information about the market. For example, people want to institutions
salaries in different types of jobs. They also want to know about various educational
whether there are imparting right-type of educational skills or not, if yes at what cost? This information
as for efficient
is necessary to make decision regarding investments in human capital as well information
utilization of the acquired human capital stock. Expenditure incurred for acquiring
relating to the labour market is also a source ofhuman capital formation.
Indicators of Human Development-Human Development Index (UNDP) : United Nations
Development Programme (UNDP) which is an agency of United Nations publishes Human Development
indicator
(HDI) as an
Heport every year since 1990. This report, presents the Human Development Index on GDP
ofhuman development. The report ranks various countries on the basis of HDI. "HDI is based
per capita, ife expectancy at birth and education as measured by adult literacy rate and gross enrolment
ratio."
Ihe components of HDIare as follows :
W Longevity : It represents the life expectancy at birth.
) GDP per Capita: ltsignifies per capita real income which can be calculated as:
GDP at constant prices
Total Population
) Educational Atalnment:It is measuredby two variables : Adult Literacy Rate (ALR). It represents
hat number of people out of 100 above the age of 15 years who can read and write the general
statements.
Part- B Human Capital Formation in India 121
 5. Human Capital Formation in India had.
In this section, we will analyse human capital formation in India under the following two
5.1 Growth of education sector in India
In India, education was at a very low level of developmentat the time of independenCe Butithas
made a significant progress after that. This is brought out by the following facts.
(a) Expansion of General Education
There has been a marked growth of general education facilities in the country during the planning
period
Table 7.2Growth of General Education Facilities in India
1950-51 2009-10
2.23 lakh 11.96 lakh
1,Number of Primary &Middle Schools
7.4 thousand 203 thousand
2.Number of Secondary Schools 37204
3.Number of Colleges for General Education 578
27 723
4.Number of Universities
5. Enrolment:
19.15 lakh 1930 lakh
(a) UptoVIlil class
14.8 lakh 441 lakh
(b) High/Hr. Sec.
3.6 lakh 130.4 lakh
(c) University
education.
Table 7.2 shows that an impressive progress has been achieved in the field of general
to 12.26 lakh in
The number of schools (primary and middle) has gone up from 2.23 lakh in 1950-51
2010-11. Likewise,enrolment (upto VHIth class) has increased from 19.15 lakh to 1930 lakh during the
total population
same period. Consequently, the percentage of literates improved from 18.3 per cent of theclass
in 1950-51 to 73.0 per cent in 2011. Elementary education (i.e., from class 1 to VI) to all
children in the age-group of6-14 has been made free and compulsory. Access to primary schools is no
longer a major problem. At primary level-, 94 per cent of rural population has a school within a distance
of one kilometer. At the upper primary level, 85 per cent of rural population has schools within a
distance of three kilometers.
In the field of secondary education, some notable developments took place. These were : (a) 10
+2 pattern of education has been introduced, (b) High priority to vocationalisation of secondary education
(c)Àscheme for the establishment of residential schools called Navodaya Vidyalayas was launched
in 1987-88 to provide modern good quality education to talented children mainly from the rural areas.
Presently 565 such Vidyalayas are operating in the country (d) To provide educational facilities to the
chiidren of transferable central government employees, Kendriya Vidyalayas were established. For
this purpose, Kendriya Vidyalaya Sangathan (KVS) was set up by the central government in 1965.
Now there are 1086 Kendriya Vidyalaya located all over the country, one each in Kathmandu and
Moscow. The number of secondary and higher secondary schools has increased from 7,416 in 1950
51to 1,90,000 in 2009-10. The corresponding increase in totalenrolment has been from 14.8 lakh to
441 lakh during the same period. The National Council of Educational Research and Training
(NCERT) functions as an apex organization to provide academic and technical <support for qualitative
improvement of school J education.
There has been an enormous expansion in higher education since 1950-51. The number ot
universities which was only 27 in 1950-51 has increased 723 by the end of 2012. The number of
colleges has gone up from 578 in 1950-51 to 27204 in2012. Besides, for quantitative expansion of
higher education, special attention has been given to improve its quality. In 1985, Indira Gandhi National
Open University was established to provide educational opportunities for school dropouts, housewives.
unemployed and working people. The University Grants Commission was set up in 1956 for
coordination and determination f standards in higher education.
122 Indlan Economic Development
 Expansion of Technical Education
There has, been a massive growth of technical and» professional education! in India since 1950-51
Idia is nOwin a poston to meet Imost of the economy's requirements for trained personnel. However.
nseveral categories; even these trained personnel do not get suitable jobs. Abrief accOunt of the
progress of technical education is given below:"
Afer independence, the number of institutions imparting technical and professional education
has increased.
(ü) Anumber of institutions providing training in agriculture, animal husbandry, forestry and
tishing etc. have been established. Agricultural universities are the most important among
them. By 2000-01, there were 28 agricultural universities in the country.
Inrecent years, technical education has received special attention and consequently there nas
been signihicant improvement in it. In future, special attention willhave to be given to areas like electronics,
omputer systems satellite communications, nuclear science. environment,engineering, bio-engineering
and non-conventional energy sources development and technology.
(c) Development of Research Facilities
Since 1950-51, there has been significant progress in the development of research facilities.
Research in science and technology is being undertaken by universities, institutes of technology.
orofessional colleges and specialized research laboratories. The Indian Council of Agricultural
Research (ICAR) is the top body that co-ordinates and undertakes agricultural research. It runs a
number of research institutes. Likewise, The lndian of Medical Research (1CMR) is the top body in
the field of medical research.
(d) Total Literacy Campaign
In 1988,National Literacy Mission was set up to achieve fulliteracy. The total literacy Campaign
has been started to achieve this target.
5.2 Growth of Health Facilities in India
Over the years, India has built up a vast health intrastructure and manpower at different levels : (Refer
Table 7.3)
Table 7.3 ::Expansion of Health Facilities in India
1951 2012
1. Number of doctors (Modern System) 61.840 883812
2. Numberof nurses 1,65,500 212466
3.Nurnber of Medical Colleges 28 321
Number of beds in hospitals (Private &Public) 3.2 4.2
5. Number of hospitals &dispensaries 9210 35416
Community Health Centers (CHCs), Primary 725 177248
Helath Centres (PHC) and Sub-centres
B Number of doctorsper 10,000population 1.7 6.0

Community Health Centres cater to about one lakh of the population and operate at the district level.
They provide specialised services in some areas. These centres have about 30 beds.
Primary Health Centres operates at the block level and cater to about 20,000-30,000 people. They
provide only general medical care and maternity facilities, besides family planning advice.
Sub-Centres are basically forsfamily planning services and child care services. They serve about
5,000 persons, Modern hospitals with advanced level of equipments and medicines are located only
in big cities.

Part - B Human Capltal Formation in tridia 123

 Since independence, there has been a significant expansion in the physical provision of health
services. During 1951-2012, the number of hospitals and dispensaries increased from 9,210 to 35416
and hospital beds from 1.2 to 9.1 lakh. During the period, nursing personnel increased from 1.6 lakh to
21.24 lakh and allopathic doctors from 0.62 to 8.84 lakh. Expansion of health infrastructure has resuted
in the eradication of smallpox, guinea worms and the near eradication of polio and leprosy,
As a result of development of health services, there has been a significant improvement in the
state of health in India. This has been indicated by the following.
() Decline in Death Rate: Death rate has come down from as high as 27.4 per thousand in
1951to 7.0 per thousand in 2012.
(ii) Reduction in Infant Mortality : Infant mortality rate (referring to death of the infant upto 1
year of age) has significantly reduced from 146 per thousand in 1951 to 42 per thousand 4n
2012. (ii) Rise in Expectancy of Life:Expectancy of lifehas risen from 50 years in 1951 to
66.1 years in 2011.
(iv) Control over Deadly Diseases : Deadly diseases like malaria, tuberculosis (TB), cholera
and smalpox have been brought under control.
(v) Reduction in Child Mortality Rate: Child mortality rate (referring to death of thechildren up
to 4years of age) has reduced significantly from 57 per thousand in 1951to 11 per thousand
in 2012.

6. Problems of Human Capital Formation in India

The following are the main problems of human capital formation inIndia :
(1) Inadequate resources : The volume of resources allocated in the formation of human capital
have been very much inadequate as compared to its requirements.
(2) Inefficiencies : Human capital secenario in India are subject to inefficiencies. There are lot of
wastage of society's resources as a result of underemployment, brain drain, illiteracy, poor health
facilities tc.
(3) Imbalances : Human capital formation in India is subjected to several imbalances like allocation
of greater proportion of resources for higher education meant for few people as compared to
primary and secondary educations.
(4) High Growth of Population : Rising population adversely affects the attempts of improving
quality of life because it reduces per capita availability of existing facilities.
(5) LackofManpower Planning:Due to lack of proper manpower planning, there arises imbalance
between demand for and supply of human resources of different categories. This has created
unemployment.
(6) Brain Drain : When technically trained people like doctors, engineers, scientists etc. do not get
proper employment in the country, they go to other countries where there are ample opportunities
for employment. This is called 'brain drain'. The country incurs loss due to this 'brain drain'
because huge amount of money spent on technically trained people but their services do not
become available to the country.
(7) Privatisation : Privatisation of education has alsO created problems. As a result of it high quality
schools and institutions become available to children of the rich while children of the poor can
only afiord low quality government and semi-government schools and institutions and they are
deprived of good quality education.

124 Indian Economic Development

 Box1.31 Why is Government Intervention Necessary in Education and Health Sectors?
Despite being the fastest growing economy in the world after China, India has shown no
progressinisranking among countries on the Human Development Index (HDI) Accorong
to UNDP Human Development FReport 2013. India has been ranked at 134 " place
amorng 18/ countries. However India has made steady progress as HDl value increased
trom 0.427 n1980 to .547 in 2011. Remember. the maximum HDl value is 1and minimum
value is zero.
Thus, Government intervention in education and health is necessary. The folowing reasons
can be given in this regard.
(a) We have a large section of population living below the poverty line who cannot afford even
basic education and health care facilities. So the government should provide them free of
Cost.
(b) Education and health care services create both private as well as social benefits. So, both
private and public institutions are needed to provide these services.
(c) Expenditures on education and health are very crucial for the growth of a nation.
() The private providers of education and health services need to be controlled/regulated by
the government; otherwise they willnot follow the standards/norms fixed by the latter.

SUMMARY

1. Human Capital: Human capital refers to the stock of skills, ability and knowledge embodied in
human beings.
2. HowPeople Become Resource? People will become resource only when investments in the
form of education and health are made inthem. They willthen become asset for the economy. The
process of improvements in human capital is called human capital formation. Educated and healthy
people facilitate development better than iliterates and unhealthy ones.
3. Different Sources of Human Capital Formation
(a) Investments in education and health.
(b) Expenditure on the job training.
(c) Expenditure on acquiring information about the labour market.
(d) Expenditure on migration.
4. Role of Human Capital in Economic Growth:
(0 The labour skill of an educated
latter.
person is more than of an uneducated person; former generates
more inCome than the
(i) Ahealthy person provides an uninterrupted labour supply for a longer period of time.
(ú) Education provides knowledge to understand changes in the society. t also faciltates adoption
of new technologies.
5. Indicators of Human Development:
(a) Literacy rate.
(b) Life expectancy at birth.
(c) Crude death rate.
(d) Infant mortality rate.
Part-B Human Capltal Formatlon In India 125
6. Human Capital Formation in India: Education and health are two very important sources of
human capital formation. About 74.04 per cent people in India are literates. India is emergingas a
knowledge economy in the world.
7. Educational Achievements in India:
(a) The number of primary and middle schools has increased from 2.23 lakh in 1950-51to 11.90
lakh in 2009-10. However, universalisation of primary education is stilla distant dream.
(b) The literacy rate has improved from 18.3 per cent in 1951 to 74.04 per cent in 2011. The
difference in literacy rates between male and female has narrowed down.
(c) The number of technical institutions has increased considerably.
8. Problems of Capital Formation in India :(0) less expenditure as education (i) poor quaity of
education (im) mismatch between demand and supply of labour according to economy's
requirement (iv) less attention to agricultural education (v) poor health of people (i) low levels
of education and health for rural population compared to urban population. (vi) Education is
gender based (vii) problem of malnutrition (ix) Dependence on imported technology
9. Who Regulates the Education Sector in India? In India, the Ministries of Education- Centre
and State, Departments of Education and the various organizations e.g. National Council for
Education Research and Training (NCERT), University Grants Commission (UGC) and All lndia
Council for TechnicalEducation (AICTE), regulate the education sector.

Questions with their Answers :

1 Mark Questions:
1. What is human capital?
Ans. Human capital is the stockof skills, ability and productive knowledge embodied in human beings.
2. What is physical capital?
Ans. Physical capitalrefers to allthoseinputs (like plant &machinery, factories, buildings, technology,
etc.) which are needed to further production.
3. What in meant by human capital formation?
Ans. The term human capital formation implies the development of abilities and skills among the
population of the country.
4. Why do we need to invest in human capital?
Ans. We need to invest in human capital for making proper and effective use of physical capital and
also for increasing productive capacity of people.
5. Howdoes expenditure on health act as a source of human capital formation?
Ans. Health expenditure is a source of human capital formation as it directly increases the supply of
healthy latbour force.
6 Which are the various forms of health expenditures?
Ans. Preventive medicine, curative medcine, social medicine, provision of clean drinking water and
good sanitation are the various forms of health expenditures.
7 What percentage of GDP iscurrently spent on education in India?
Ans. 4.0% of GDP.
8. What is the desired level of public expendture on education?
Ans. 6 percent of DGP.

126 Indian Economic Development