Chapter 5. Human Capital Formation in India

Human Capital
• The development of human resources means an increase in quality of human beings, which helps in process of growth and development of economy.
• A country can turn physical resources like land into physical capital like factories. Similarly, it can turn human resources like nurses, farmers, teachers, & students into human capital like engineers and doctors.
• Physical capital includes all those input which are required for further production like plant and machinery, factory, building, raw materials, etc.
• We need good human capital to produce other human capital (say, nurses, farmers, teachers, doctors, engineers…). This means that we need investment in human capital to produce more human capital out of human resources.
• Human capital refers to stock of skill, ability, expertise, education & knowledge embodied in people.
• Investment in education is considered as one of main sources of human capital.
• Investments in health, on-the-job training, migration & information are other sources of human capital formation.
• Spending on education by individuals is similar to spending on capital goods by companies with objective of increasing future profits over a period of time. Likewise, individuals invest in education with objective of increasing their future income.
• Like education, health is considered an important input for development of a nation as much as it is important for development of an individual.
• The amount of money spent on preventive medicine (vaccination), curative medicine (medical intervention during illness), social medicine (spread of health literacy), and provision of clean drinking water and good sanitation are various forms of health expenditures.
• Health expenditure directly increases supply of a healthy labour force and is, thus, a source of human capital formation.
• Expenditure regarding on-the-job training is a source of human capital formation as return of such expenditure in form of enhanced labour productivity is more than cost of it.
• People migrate in search of jobs that fetch them higher salaries than what they may get in their native places. The enhanced earnings in new place outweigh costs of migration; hence, expenditure on migration is a source of human capital formation.
• People spend to acquire information relating to labour market and other markets like education and health. For example, people want to know level of salaries associated with various types of jobs, whether educational institutions provide right type of employable skills and at what cost.
• This information is necessary to make decisions regarding investments in human capital as well as for efficient utilisation of acquired human capital stock.
• People become resources by using their skill, knowledge, productivity and abilities. When human resources is further developed by becoming more educated and healthy, we call it Human Capital Formation.
• Expenditure incurred for acquiring information relating to labour market and other markets is a source of human capital formation.

Human Capital and Economic Growth
• Economic growth means increase in real national income of a country; naturally, contribution of educated person to economic growth is more than that of an illiterate person.
• If a healthy person could provide an uninterrupted labour supply for a longer period of time, then health is an important factor for economic growth.
• Thus, both education and health, along with many other factors like on-the-job training, job market information and migration, increase an individual’s income-generating capacity.
• The human capital growth in developing countries has been faster but growth of per capita real income has not been that fast.
• There are reasons to believe that causality between human capital and economic growth flows in either direction. That is, higher-income causes building of a high level of human capital and vice versa, that is, a high level of human capital causes growth of income.
• India recognised 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.’
• The National Education Policy 2020 states that world is undergoing rapid changes in knowledge landscape. With various dramatic scientific and technological advances, such as rise of big data, machine learning, and artificial intelligence, many unskilled jobs worldwide may be taken over by machines, while need for a skilled workforce, particularly involving mathematics, computer science, and data science, in conjunction with multidisciplinary abilities across sciences and social sciences, and humanities, will be increasingly in greater demand.
• With climate change, increasing pollution, and depleting natural resources, there will be a sizeable shift in how we meet world’s energy, water, food, & sanitation needs, again resulting in need for new skilled labour, particularly in biology, chemistry, physics, agriculture, climate science, and social science.
• There will be a growing demand for humanities and art, as India moves towards becoming a developed country as well as among three largest economies in world.
• This policy vision suggests how human capital formation in India will move its economy to a higher growth trajectory based on knowledge landscape.

Human Capital and Human Development
• The two terms sound similar but there is a clear distinction between them.
• Human capital considers education and health as a means to increase labour productivity.
• Human development is based on idea that education and health are integral to human wellbeing because only when people have ability to read and write and ability to lead a long and healthy life, they will be able to make other choices that they value.
• Human capital treats human beings as a means to an end; end being 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 human development perspective, human beings are ends in themselves.
• Human welfare should be increased through investments in education and health even if such investments do not result in higher labour productivity.
• India is a federal country with a union government, state governments and local governments (Municipal Corporations, Municipalities and Village Panchayats).
• The Constitution of India mentions functions to be carried out by each level of government. Accordingly, expenditures on both education and health are to be carried out simultaneously by all three tiers of government.
• Education and health care services create both private and social benefits and this is reason for existence of both private and public institutions in education and health service markets.
• Expenditures on education and health make a substantial long-term impact and they cannot be easily reversed; hence, government intervention is essential.
• In India, ministries of education at union and state levels, departments of education and various organisations like National Council of Educational Research and Training (NCERT), University Grants Commission (UGC) and All India Council of Technical Education (AICTE) facilitate institutions which come under education sector.
• Similarly, ministries of health at union and state level, departments of health and various organisations like National Medical Commission and Indian Council for Medical Research (ICMR) facilitate institutions which come under health sector.
• Both, union & state governments, have been stepping up expenditures in education sector over years in order to fulfil objective of attaining cent per cent literacy and considerably increase average educational attainment of Indians.
• The government spending on education is expressed in two ways: (i) as a percentage of ‘total government expenditure’ and (ii) as a percentage of Gross Domestic Product (GDP).
• The percentage of ‘education expenditure of total government expenditure’ indicates importance of education in scheme of things before government.
• The percentage of ‘education expenditure of GDP’ expresses how much of people’s income is being committed to development of education in country.
• Elementary education takes a major share of total education expenditure and share of higher/ tertiary education (institutions of higher learning like colleges, polytechnics and universities) is least.
• Though, on average, government spends less on tertiary education, ‘expenditure per student’ in tertiary education is higher than that of elementary.
• In 2014-15, per capita education expenditure differs considerably across states from as high as 34651 in Himachal Pradesh to as low as 4088 in Bihar. This leads to differences in education opportunities and attainments across states.
• The Education Commission (1964–66) had recommended that at least 6 per cent of GDP be spent on education so as to make a noticeable rate of growth in educational achievements.
• The Tapas Majumdar Committee, appointed by Government of India in 1999, estimated an expenditure of around ` 1.37 lakh crore over 10 years (1998-99 to 2006-07) to bring all Indian children in age group of 6-14 years under purview of school education.
• Compared to this desired level of education expenditure of around 6 percent of GDP, current level of a little over 4 per cent has been quite inadequate.
• In 2009, Government of India enacted Right of Children to Free and Compulsory Education Act to make free education a fundamental right of all children in age group of 6-14 years.
• The Government of India has started levying a 2 percent ‘education cess’ on all Union taxes. The revenues from education cess have been earmarked for spending on elementary education.
• Educational achievements in a country are indicated in terms of adult literacy level, primary education completion rate and youth literacy rate.
• In 1950, when Constitution of India was passed by Constituent Assembly, it was noted in Directive Principles of Constitution that government should provide free and compulsory education for all children up to age of 14 years within 10 years of commencement of Constitution.

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