CLASS 12

ECONOMICS
CHAPTER-5
HUMAN CAPITAL FORMATION IN INDIA

Human capital refers to the stock of skill, ability, expertise, education and
knowledge in a nation at a point of time which contributes in the production
activity.

Physical capital refers to assets which themselves have been manufactured

and are used for production of other goods and services.

Difference between Physical Capital and Human Capital :-

Physical Capital Human Capital

It is tangible It is intangible.
It is separable from its owners. It cannot be separated from its owners.
It is perfectly mobile between the Its mobility is restricted by nationality and
countries. culture.
It though depreciates with ageing but can be
It depreciates over time due to
made up
constant use
through continuous investment in education
or due to change in technology.
and health.
It creates private benefit as well as social
It creates only private benefit.
benefit.

Human capital formation is the process of adding to the stock of human

capital over a period of time.

Sources of Human Capital Formation:-

(i) Expenditure on education: Education is considered as one of the important
source of human capital formation. People incur expenditure on education so
that they can increase their future income. People even take loan for
education as the benefits of education is far more than its cost.
(ii) Expenditure on health:- Health is also one of the important function as
“sound mind lives in a sound body.” The productivity of a healthy labour is
greater than the sick person. Health expenditure involves expenditure on:
 a) Preventive medicines: Includes expenditure on vaccination.
b) Curative medicines:- Includes expenditure on medical intervention
during illness.
c) Social medicines:- Includes expenditure on health literacy.
(iii) On –the- job training:- It is important to enhance the skills and
abilities of the people who are already engaged in some jobs. These
can be done in two ways:-
a) In the campus – by more skilled worker to less skilled worker.
b) Off campus training:- workers are sent out of organisation for training
programmes.
Expenditure on such programmes are incurred as the labour
productivity is higher than its cost.
(iv) Expenditure on Migration:- people migrate in search of jobs that
fetch them higher salaries than what they may get in their native
places. Migration take place from rural to urban areas and even
technically qualified persons like engineers and doctors migrate to
other countries.
Both these involves:
a) Cost of transportation
b) Higher cost of living in the migrated places and costs of living in a
strange socio-cultural set up.

But the enhanced earnings outweigh the costs of migration.

v) Expenditure on information:- it is important to be informative to gain

the new skills and abilities and for also using the gained knowledge
properly i.e. it is necessary to make decisions regarding investments in
human capital as well as for efficient utilisation of the acquired human
capital stock. People acquire information relating to the labour market
and other markets like education and health.

Human Resource Development:- It refers to the development of the set of

individual that makes up the workforce of an organisation, business sector or
economy.

ROLE OF HUMAN CAPITAL FORMATION IN ECONOMIC GROWTH:-

a) Raises production
b) Improves quality of life.
c) Raises life expectancy.
d) Innovative skills.
 e) Raises social justice and equality.

“EMPIRICAL EVIDENCE TO PROVE THAT INCREASE IN HUMAN CAPITAL

CAUSES ECONOMIC GROWTH IS RATHER NEBULOUS.”

The statement signifies that it will not be clear to say that rate of increase in
human capital will be the same as rate of increase in economic growth which
may be due to measurement problems. For example:- the rate of educational
standards is measured in terms of years of schooling, teacher pupil ratio, gross
enrolment ratio etc. but all these indicators cannot measure the rate of
economic growth which actually define the rate of increase in economic
growth.

So, with the increase in human capital the economic growth will also increase
but it is not important that both increases with the same rate.

PROBLEMS FACING HUMAN CAPITAL FORMATION:-

(i) Rising population
(ii) High regional and gender inequality.
(iii) Brain drain
(iv) Insufficient man power planning.
(v) Insufficient on the job training in agriculture
(vi) High poverty levels
(vii) Low academic standards.

INDIA AND STATE OF HUMAN CAPITAL:-

a) India recognised the importance of human capital in economic growth

long ago. The Seventh Five Year Plan says, “Human resources
development (read human capital) has necessarily to be assigned a key
role in any development strategy, particularly in a country with a large
population. Trained and educated on sound lines, a large population
can itself become an asset in accelerating economic growth and in
ensuring social change in desired directions.”
b) The Draft National Education Policy 2019 states that “India aspires to
take its place beside the United States and China as the third largest
economy by 2030-2032.
c) India is the sixth largest economy now and we will reach five trillion
economy in five-seven years taking us to fourth or fifth position.
 d) By 2030-2032 we will be the third largest economy at over ten trillion.
Our ten trillion economy will not be driven by natural resources, but by
knowledge resources.
e) To do this, we will need a knowledge society based on a robust
education system, with all the requisite attributes and characteristics in
the context of changes in knowledge demands, technologies, and the
way in which society lives and works.
f) This all points to the fact that further human capital formation in India
will move its economy to a higher growth trajectory.

DIFFERENCE BETWEEN HUMAN CAPITAL AND HUMAN DEVELOPMENT:-

a) Human capital considers education and health as a means to increase

labour productivity whereas Human development is based on the idea
that education and health are integral to human well-being.
b) Human capital treats human beings as a means to an end; the end being
the increase in productivity. In this view, any investment in education
and health is unproductive if it does not enhance output of goods and
services. In the human development perspective, human beings are ends
in themselves.

HUMAN CAPITAL FORMATION IN INDIA

(i) The seventh five year plan stressed upon the importance of human capital.
(ii) In India, ministry of education at the Centre and state level, NCERT
(National Council of Educational Research and Training), UGC (University
Grant commission), AICTE (All India Council of Technical Education) regulate
the education sector.
(iii) In India, Ministry of Health at the Union and the State level and ICMR
(Indian Council of Medical Research) regulate the health sector.
(iv) World Bank states that India will become the knowledge economy.
Also if India uses its knowledge as much as Ireland does, than the per capita
income will rise by $ 3000 by the year 2020.

INTERRELATIONSHIP BETWEEN HUMAN CAPITAL FORMATION AND

ECONOMIC GROWTH:-
Human capital formation raises the process of Economic Growth and economic
growth raises the process of human capital formation.
(i) Rise in human capital raise economic growth
Rise in Human Capital
↓
Modern attitude and outlook, better quality of life, Higher life expectancy
↓
More Efficiency
↓
More Production
↓
More economic growth

(ii) Rise in economic growth raises human capital formation

Rise in Economic Growth
↓
Rise in per capita income
↓
More investment in education and health
↓
Rise in human capital