Human Capital:– It refers to the stock of skills, abilities, expertise, education and knowledge inherent in the people of a country at a time.
Human capital formation:-
Human capital formation is the process of adding to the stock of human capital over a period of time. It is the process of acquiring and increasing the number of persons having the skills, education and experience which are essential for the economic and political development of a country.
Sources of Human Capital Formation:-
1. Expenditure on Education:- An educated person’s labour skill is higher than that of an uneducated person, which enables him to generate more income than an uneducated person and hence contributes more to economic development. Spending by individuals on education is similar to spending by companies on capital goods, aimed at increasing future profits over time. It enhances productivity and efficiency of labor. Thus, individuals invest in education with the aim of increasing their future income.
Education is demanded not only because it provides high earning potential to the people but also for its other highly valued benefits:-
. It confers a better social prestige and pride.
. It enables a person to make better choices in life.
. It provides knowledge to understand the changes taking place in the society.
. It also encourages new ideas.
. It facilitates adaptation to new technologies.
Thus, the expansion of educational opportunities in a nation accelerates the development process.
2. Expenditure on Health: It is an important source of human capital formation as it directly increases the supply of healthy labor force. Without medical facilities a sick worker is forced to stay away from work and there is loss of productivity.
There are different forms of health expenditure:-
. Preventive medicine (such as vaccination);
. Palliative medicine (medical intervention during illness);
. Social medicine (eg spreading health literacy);
. Provision of clean drinking water and good sanitation facilities.
3. Expenses on Migration:-
People migrate in search of jobs where they get a higher salary than their native places. Unemployment is one of the reasons for rural-urban migration in India. Technically qualified persons, such as doctors, engineers, etc. migrate to other countries because of the high salary that they can get there.
4. Expenditure on Information:-
People spend to gain information related to other markets such as labor market, education and health. For example people want to know the level of pay associated with different types of jobs, whether educational institutions provide the right type of employable skills and at what cost. This information is essential for making decisions regarding investments in human capital as well as efficient use of the acquired human capital stock.
Thus, expenditure incurred for obtaining information related to labor market and other markets is also a source of human capital formation.
Difference between physical capital and human capital:-
| Physical capital | Human capital |
| It refers to the resources which are required for further production like plant, machinery, building etc. | It refers to the stock of skills, abilities, education and knowledge possessed by an individual or society at a time. |
| Physical capital is stable and can be easily sold in the market. | Human capital is intangible; It is directly produced in the mind and body of its owner. Therefore it cannot be sold in the market. Only the services of human capital are sold. |
| Physical capital can be separated from its owner. | Human capital (a person’s life skills) cannot be separated from its owner. |
| It is completely transferable between countries except for some artificial trade restrictions. | It is not fully transferable between countries as restricted by nationality and culture. |
| It depreciates with the passage of time. | It also depreciates with age but depreciation can be reduced to a great extent through continuous investment in education, health etc. |
Physical Capital Formation Vs Human Capital Formation:-
| Physical Capital Formation | Human Capital Formation |
| The ownership of physical capital is the result of the owner’s decision – physical capital formation is primarily an economic and technological process. | Human capital formation is partly a social process and partly a conscious decision of the owner of human capital. |
| Physical capital formation can be done through imports. | Human capital formation has to be done by the state and individuals through correct policy making commensurate with the nature of expenditure by the society and economy. |
Human capital VS Human development:-
| Human capital | Human development |
| It is a narrow concept. It considers education and health as means of increasing labor productivity. | This is a broad concept. It is based on the idea that education and health are integral to human well-being because only when people have the ability to read and write and live a long and healthy life, will they be able to make other choices that they value. Huh. |
| It considers man as a means of increasing productivity. Any investment in education and health is unproductive if it does not increase the production of goods and services. | Human development considers man as an end in himself. Human welfare should be increased through investment in society, on education and health, even if such investment does not lead to higher labor productivity as welfare is its basic objective. |
Note:- According to the human development approach, everyone has the right to basic education and basic health care, regardless of their contribution to labour productivity. It means that every person has the right to be literate and lead a healthy life.
Importance or Role of human capital formation:-
Effective use of physical capital:- The growth and productivity of physical capital largely depends on the formation of human capital. Educated, efficient and healthy people use physical capital effectively and increase the productivity of capital.
Higher Productivity and Production:- The labor skill of an educated person is higher than that of an uneducated person, which enables him to generate more income than an uneducated person and hence contributes more to economic development. Similarly, a healthy person can provide an uninterrupted labor supply for a long period of time. This implies that human capital formation leads to an increase in productivity and output.
Invention, Innovation and Technological Improvement :- Human capital formation encourages new ideas and creates capacity to absorb new technologies.
Increases life expectancy :– The creation of human capital increases the life expectancy of people. Health facilities and availability of nutritious food enable people to live a healthy and long life. This, in turn, enhances the quality of life.
Improving quality of life :- Educated and healthy people lead a good quality of life.
Control of Population Growth: It has been observed that educated persons have smaller families as compared to illiterate families. Therefore, the spread of education is necessary to control the rate of population growth.
Relationship between human capital and economic development:-
Economic growth refers to the increase in per capita real income (or increase in per capita availability of goods and services) of a country. The contribution of an educated person to economic development is more than that of an illiterate person. Similarly, a healthy individual also contributes to economic development by providing a non-stop labor supply for a long period of time. Thus, both education and health as well as many other factors such as on-the-job training, job market information, and migration increase an individual’s income-generating ability.
Human capital formation not only increases the productivity of human resources but also encourages new ideas and creates capacity to absorb new technologies. Education imparts knowledge to understand the changes and scientific progress in the society, thus, facilitating inventions and innovations.
Similarly, availability of educated labor force facilitates adaptation to new technologies.
Cause and effect relationship between human capital and economic development
Human capital formation stimulates the process of economic development. However, economic growth also affects human capital formation. Growth refers to an increase in per capita real income (or increase in per capita availability of goods and services). Higher income facilitates higher investment on education and skills affecting human capital formation. Conversely, increase in human capital leads to efficient/better use of fixed capital, better quality of life, higher life expectancy, increased productivity/efficiency leading to increase in GDP growth.
However, due to measurement problems, it is difficult to prove a cause, effect and relationship between human capital and economic growth. For example, years of schooling may not reflect the quality of education measured by teacher-student ratios and enrollment rates; Similarly, health services, life expectancy and death rates measured in monetary terms may not reflect the actual health status of people in a country.
It is therefore difficult to establish a cause-and-effect relationship from the growth of human capital (education and health) to economic development. However, it is recognized that the causality between human capital and economic development flows in both directions i.e. higher incomes lead to the creation of higher levels of human capital and higher levels of human capital lead to an increase in income.
Note:– An analysis of improvements in education and health and growth in real per capita income in both developing and developed countries shows that there is a relationship between measures of human capital, but there is no indication of convergence of real income per capita. An analysis of indicators (death rate, infant mortality rate, life expectancy and literacy rate) shows that human capital growth in developing countries (reforms in education and health sectors) has been fast but real income per capita has not increased.
Indicators of Educational Achievement in India:–
(a) Adult Literacy Rate (percentage of people in the 15+ age group)
(b) Primary Completion Rate (percentage of relevant 7 + age group)
(c) Youth Literacy Rate (percentage of people in the age group of 15+ to 24)
Note :- The literacy rate is defined by the percentage of the population of a given age group that can read and write. The adult literacy rate corresponds to ages 15 and above, the youth literacy rate to ages 15 to 24, and the elderly to ages 65 and above
Status of Human Capital Formation in India :-
India recognized the importance of human capital in the Seventh Five Year Plan. Well trained and educated, a large population can itself become an asset in accelerating economic development and ensuring social change in desired directions. India is a federal country with a union government, state governments and local governments (municipal corporations, municipalities and village panchayats). The Constitution of India specifies the functions to be performed by each level of government. Accordingly, expenditure on both education and health has to be done simultaneously by all the levels of the country.
The National Education Policy 2019 states that “India aspires to take its place as the third largest economy after the United States and China by 2030-2032… we will be at the third position.”
Largest economy of over ten trillion. Our ten trillion economy will not be powered by natural resources, but on knowledge resources. Thus, we need a knowledge society based on a strong education system,
Thus, we need a knowledge society based on a strong education system, which has all the necessary qualities and characteristics in terms of demand for knowledge, technologies and changes in the way the society lives and works. This policy approach describes how man-making in India will steer its economy towards a higher growth trajectory.
India as a Knowledge Economy – The Indian software industry is showing an impressive record over the past two decades. Entrepreneurs, bureaucrats and politicians are now pushing ideas about how India can use information technology (IT) to transform itself into a knowledge-based economy. There have been some instances of villagers using e-mail which have been cited as examples of such change.
Need for various types of government interventions in education and health sectors:-
Expenditure on education and health is of great importance in the formation of human capital.
Government intervention in the field of education and health is important for the following reasons:-
A) Education and health care services create both private and social benefits and this is the reason for the existence of both private and public institutions in the education and healthcare markets. Expenses on education and health have long-term implications and cannot be easily reversed. Therefore government intervention is necessary.
B) Individual consumers of these services are not fully aware of the quality of the services and their cost. In this situation, providers of education and health services acquire monopoly power (knowledge givers) and indulge in exploitation. The role of the government in this situation is to ensure that the private providers of these services adhere to the standards set by the government and charge the right price.
C) Regulatory Authority in India :-
The Ministry of Education, Department of Education and various organizations at the Union and State level such as National Council of Educational Research and Training (NCERT), University Grants Commission (UGC) and All India Council for Technical Education (AICTE) facilitate institutions falling under the education sector.
Similarly, at the Union and State level, the Ministry of Health, the Department of Health and various organizations such as the National Medical Commission and The Indian Council of Medical Research (ICMR) facilitate institutions under the health sector.
D) In India, a large section of the population is living below the poverty line and cannot access basic education and health care facilities. Moreover, a large section of the people cannot afford to access super specialty healthcare and higher education. Furthermore, when basic education and health care is considered a right of citizens, it is necessary that the government provides free education and health services to deserving citizens and socially oppressed sections.
Problems in Human Capital Formation:-
A) Inadequate resources :– The resources allocated for the formation of human capital have been far less than the resources required. For this reason, the facilities for the formation of human capital remain inadequate.
B) High growth of population :– Continuous increase in population has affected the quality of human capital as it reduces the per capita availability of facilities.
C) Brain drain :- People migrate from one place to another in search of better job opportunities and better salary. This leads to the loss of a class of skilled workers like doctors, engineers etc., who have high potential and are rare in the developing country. The cost of such loss of quality human capital is very high.
D) Lack of proper manpower planning :- There is an imbalance between the demand and supply of different categories of human resources, especially in case of highly skilled personnel. The absence of such a balance has resulted in wastage of resources.
E) Low Educational Standards :-The quality of education provided by many of our educational institutions is well below international standards. With respect to education, particularly in the development of science and technology and modern technology sector, the performance is unsatisfactory.
Future Prospects:-
Education for all still a distant dream :-
Although there has been an increase in the literacy rate for both adults and youth, the absolute number of illiterates in India is the same as the population of India at the time of independence.
In 1950, when the Constituent Assembly of India was passed, the Directive Principles of the Constitution stipulated that the government should provide free and compulsory education within 10 years for all children up to the age of 14 years. In 2009, the Government of India enacted the Right to Education Act to make free education a fundamental right for all children in the age group of 6-14 years.
Still we are not able to achieve the target of 100% literacy in India.
Note :- Government of India has started levying 2% ‘Education Cess’ on all union taxes. The revenue from education cess has been earmarked for spending on elementary education. In addition, the government approves a large outlay for new loan schemes to promote higher education and for students to pursue higher education.
Gender equality Better than before :-
The gap in literacy rates between men and women is narrowing, reflecting positive developments in gender equality; However, there is still a need to promote women’s education in India because –
It improves the economic independence and social status of women. Women’s education has a favorable effect on the fertility rate and health care of women and children. If women are educated, there is a higher chance that the children in the family will be educated and hence it can help in achieving better literacy rate.
Problems in Higher Education / Tertiary Education :-
The current level of Indian education, which indicates the number of people reaching the higher education level, is becoming less and less. In addition, the level of unemployment is highest among educated youth as per NSSO data. Therefore, the government should increase the allocation for higher education and also improve the standard of higher education institutions, so that employable skills can be provided to the students in such institutions.
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