HUMAN CAPITAL

FORMATION
IN INDIA

TO
Concept of Human Capital and Human Capital Formation
DO
Determinants/Sources of Human Capital Formation
Role of Human Capital Formation
Or
Human Capital Formation and Economic Growth
Problems Facing Human Capital Formation in India
ducation as an Essential Element of Human Resource Development

I.CONCEPT OF HUMAN CAPITAL AND

HUMAN CAPITAL FORMATION
Fuman capital refers to the stock of 'skill and expertise of a nation at

pount of time. It is the total of skill and expertise of engineers,

sum

OS, professors and workers of all types who are engaged (or have
the capacity and expertise to be engaged) in the process of production.

Core Determinants of Growth

Skill and Expertise-The
 Human capital formation is the process of adding to the stock o
of human
capital over time. If human capital stock' of a nation
tion consists
consists c of 100
skilled workers at the beginning of 2018, and if at the
he
beginning of 2019
increases to 12,000 skilled workers (implying an increase formation
of hun
capital stock by 2,000 workers in a year), there is human capital fors
to the extent of 2,000 skilled workers in a year.
Gerald M. Meier
"Human Capitel Formation is the process of acquiring and increasing the number of persa
who have the skill, education and experience which are essential for the economic and politel
development of a country" -G.M. Meier

Human Capital is Different from Physical Capital and Financial Capital

Physical capital refers to the produced means of production. Stock of physical capital measues
production capacity of a nation.
Financial capital refers to paper olaims against physical capital.
Human capital refers to skill and expertise acquired by man over time. Human capital is the cause
behind physical capital. Indeed, it is the ultimate cause of an exponential pace of
growth and
development in advanced economies ofthe world.

2. DETERMINANTS/SOURCES OF
HUMAN CAPITAL FORMATION
Determinants of human capital refer to the sources of human
capita
formation, or the ways of adding to the stock of human capital.
Following are some
important ways of adding to the existing stock
human capital:
(1) Expenditure on Education: Expenditure on education is the mos
eftective way of raising
It is, therefore, a
a
productive workforce in the counu y
very important determinant of human pital
cap
formation.
Most families decide to incur huge expendhiture
on raise
education, even when they have t0
loans. Reason: Returns on such tures

expena
are substantially large.

Education enables an individual to make

total
a
good living throughout his life. His
"exceed

earnings during his life span would far e

Education: Raises Productive Workforce in the Country his initial
expenditure on education.
 Monetary benefits of education (in terms of earnings of the
arvben
cost of
exceed the education. educated person during his lire
tr
far
difference between benefit and cost is
T h e diference
an
formation.
approximate market value of human capltd

(2) Expendi on Health "A sound mind in a sound body" is an

p) Expenditure on health makes a man more efficient and,
old saying
refore, more productive.
His contribution to the
production
arocess tends to rise. He adds more to GDP of the nation than a
process

sick person.
Lnenditure on health, therefore, is an important determinant of
human capital formation.

() On-the-Job Training: On-the-job

training helps workers to hone/sharpen
their specialised skills. It enables them
to raise the level of their eficiency/
productivity.
Firms are always inclined to undertake
on-the job-training programmes.
Because, returns (on account of enhanced
productivity) far exceed the cost of such
programmes. n-the Job Trainingraises Efficiency
Expenditure on such training programmes, therefore, is yet another
important determinant (and a source) of human capital formation.
4) Study Programmes for Adults: Other than formal education at
the primary, secondary and university levels, the Government
and NGOs organise study programmes for adults to make them
proficient in their work areas. This enhances their productivity,
SErVIng as a source of human capital formation.
B Migration: Migration contributes to human capital formation as it
aCilitates utilisation of (otherwise) inactive skills of the people, orit
acilitates fuller/better utilisation of the
skills.
Migration involves cost:
cost of transportation from one

place to the other, and

(i)cost of living in different social
environment.
Migration helps Fuller Utilisation of Skill

Human Capital Formation in India 161

 of better job opportunities. Because
Yet people migrate in search
Gains of migration (in terms of higher salaries) are greater than the

cost of migration.
leads to human capital formation, throuoh
Implying that migration
fuller/better utilisation of skills.

(6) Expenditure on Information: Information relating toto ioh

job
markets and educational institutions offering specialised skills is

an important determinant of skill formation. It enables people to

actualise their productive potential. Accordingly, expenditure on

information is another determinant of human capital formation.

Briefly, human capital formation is promoted by investment on

education and health, besides 'on-the-job training programmes.

Investment on migration and information relating to availability of
skills and markets also contributes to human capital
job
specialised
formation.

Human Capital and Human Development

but certainly not identical.
O Human Capital and Human Development are related concepts,
Human capital is a means to an end.
that it consists of 'skills' as used in the process of
Human capital is a means in the sense
of know-how, abilities and expertise used as inputs in the production
production. It consists

activity.
want to
Increase in productivity (referring Output per unit of input) is the end result. Thus, we
to
of human
achieve higher and higher levels of output through extensive and intensive application
capital.
Human development is an end itself It refers to development of the individuals as valuable
ersonalities by acquiring good education and attaining good health. Human development
occurs when more and more individuals in a society are educated, healthy and skil-oriented.

3. ROLE OF HUMAN CAPITAL FORMATION

OR
HUMAN CAPITAL FORMATION AND
ECONOMIC GROWTH
tion
Following observations
highlight how human capital
contributes to the process of
growth and development:
wth:
(1) Change in Emotional and Material Environment of Growtn
and
Human capital formation generates change in emotionar
a "
material environment of growth.
 onotional environment becomes conducive to
growth
aspeople tend to acquire growth-oriented attitude and
aspirations.

Material environment becomes helpful to growth as the

society
now possesses higher
number of skilled and trained
workers
to implement the plans and programmes of
economic growth.
l Higher Productivity of Physical Capital: Human capital formation
increases productivity of physical capital (referring to output per unit
of capital). Specialised engineers and skilled workers can certainly
handle machines better than the others. It enhances productivity
and accelerates the pace of growth.
(3) Innovative Skills: Human capital formation facilitates innovations,
the under-current ofgrowth and development. Larger the number of
skilled and trained personnel, greater the possibilities ofinnovations
in the area of production and related activities. Innovation is the
life-line of growth, we all know.

(4) Higher Rate of Participation and Equality: By enhancing

productive capacities of the labour force, human capital formation
induces greater employment.
This increases the rate of participation (percentage of labour force
participating in the process of production or simply the percentage
of employment of the
existing labour force).
Higher the rate of participation, greater is the degree of economic
and social equality in the society.
Thus, there is a and effect relationship between human capital
cause
and economic growth: human capital formation stimulates the
process
r
economic growth. However, economic
growth also impacts human
capital formation. Growth implies increase in per
capita real income (or
Crease in per capita availability of goods and services). Higher income
acilitates higher investment on education and skills. Implying human
4pltal formation. Thus, human capital formation prompts the process
growth, and growth prompts the process of human capital formation.

Chain Effect of Human

Capital Formation
Human Capital Formation [increase in the stook
of human capital> Better/Efficient utilisation
ofphysical capital Increase in productivity (output per unit of labour/capital) > Increase in
GDP growth along with higher rate of participation/employment> Higher level of income of the
individuals and households> Higher expenditure on education and health Increase
Or in the stock
human capital (implying human capital formation).
 4. PROBLEMS FACING
HUMAN CAPITAL FORMATION IN INDIA
The major problems facing the human capital formation are asas
under.
(1) Rising Population: Rapidly rising population adversely sely affects
the quality of human capital. This is because it reduces
per head
availability of the existing facilities relating to housing, sanita
drainage, water-system, hospitals, education, power supply, ete anitation,
Reduced availability of these facilities leads to a fall in the
ality of
life.
In turn, this leads to a fall in the capacity to acquire specialised skgil
and knowledge.
(2) Brain-Drain: Migration of
persons
(born, educated and trained in India) to
developed countries is a serious threat to
the process of human capital formation in
the country.
Those who decide to migrate are
persons of high calibre such as scientists,
administrators, executives, engineers,
physicians, educationists, etc.

This is described as the problem of brain-

Brain-Drain: Loss of Human Capital drain. This slows down the process of
human capital formation in the domestic

economy.
Not
(3) Deficient Manpower Planning:
maintain
enough efforts have been made to
the demand-supply balance of the ever

rising labour force in the country.

an
As result, India is
a facing
explosive problem relating to graduae
unemployment. ot
It is a sad reflection on the wastag
Graduate Unemployment:An EmergingChallenge human power and human skill.
mar)
(4) Insufficient On-the-Job Training in Primary Sector: Pr
sector (agriculture in particular) is the backbone ofIndian eco
Unfortunately, it has not received due attention in the a
professional skills. Two notable points are that:
 The traditional wisdom predominates the primary sector, and that

On-the-job training programmes' are highly scant, if not listless.

Accordingly,
cco
there is a serious deficiency of human capital formation

in primary sector of the economy.

Low Academic Standards: In our enthusiasm to spread higher

(5) education, we have been opening many universities, unmindful of
their academic standards. Consequently, we have a large army of
half-baked graduates and post-graduates whose deficient skills only
lowers the level of efficiency/productivity.

This also impairs our competitiveness in the international market

of human capital.
Measurement Problem
a In case of physical capital formation, the change can be measured in terms of units. But, it is
difficult in case of human capital formation.
This is because, a large number of factors that impact productivity of human beings are non-
quantifiable.
a Further, it is difficult to iderntify a suitable scale of measuring human capital formation.

5. EDUCATION AS AN ESSENTIAL ELEMENT

OF HUMAN RESOURCE DEVELOPMENT
Education is an essential element of human resource development.
Education implies the process of teaching, training and learning.
(especially in schools or colleges). It improves knowledge and develops
skills
Education is the under-current of economic
and social change.
However, compared to other countries of the
World, spread of education in India has not
been so encouraging.
Even literacy rate in the country continues to
be very loW.

AcCording to the Census 2011, barely 74.04

Per cent of the population is literate as against
0 to 95 per cent literacy in developed countries Education: An Essential Element of
of the world. Human Resource Development
Education and Literacy are not ldentical Terms
Education is a much wider concept than literacy
O write
Literacy just refers to the ability to read and
VIZ., primary education s
the other hand, encompasses three parameters,
Education, on

education and tertiary or higher

education.
condary
not necessaily educated
While all educated people are literate,
all literate people are

of Education
Importance and Objectives
and objectives of educat:.
points highlight the importance
Following tion:
citizens.
) Education produces responsible
(ii) It develops science and technology.
resources of all regions
(iii) It facilitates use of natural and human fthe
oft.

country.
horizon of people.
the
(iv) It expands mental
through greater participation of the
(v) It helps economic development
and development.
people in the process growth
of

(vi) It promotes cultural standard

of the citizens.
(vii) It develops human personality.
in Education and Health
Need for Government Intervention
education and health arises primarily
Need for government intervention in
o n account of the following
facts:
investment with a very high
fixed
(i) These sectors need huge
expenditure.
and
investors to invest in health
(ii) It is difficult to expect private cOsts
r e c o v e r their huge
education unless they are allowed to

through high price of these services.

tor
cannot afford high price
(ii) People in a poor country like ours
education and health.
of mod
Accordingly, these services would remain beyond the reach
people unless these are subsidised or directly provided by the governimc

Growth of Education Sector in India

in

Following observations indicate the growth of education secto

India: of
(1) Expansion of General Education: Table 1 shows the expans
general education during the period of Five Year Plans:
 Table 1. Expansion of General Education Important
Considering the
Item
1950-51 2015-16 importance of education in
human capital formation,
L.Institutions the Government of India
tries to regulate education
Middle Schools
) Primary and 2.23 lakh 12.70lakh sector through various
organisations. Important
(i) Secondary and Senior (Higher) 7.4 2.52 lakh
among these are:
Secondary Schools thousand
(i) NCERT (National
(ii) Colleges (General) 578 39,071 Education Research
and Training): It is
v)Universities (including Deemed 27 799 basically engaged in
Universities) designing text material
upto the senior
IL. Number of Students secondary level.
(i) UGC (University
) Primary and Middle 19.15 lakh 17 crore Grants Commission): It
() High and Higher Secondary Schools is primarily the funding
15.0 lakh 3.2 crore
authority for university
Gii) Higher
Education 3.6 lakh 346 lakh education. It also
enforces the rules and
Source: Statistical Outine of India 2012-13, Economic Survey 2017-18 and www.ncert.nicin) regulations regarding
(Note: Primary and middle school education together is called elementary higher education in the
country.
education.)
(ii) AICTE (All India
Table 1 suggests that substantial progress has been made in the field Council of Technical
Education): It enforces
of education. rules and regulations
regarding technical/
During the plans, the number of educational institutions providing engineering education
elementary education has increased roughly by five times and the in the country.
number of students has increased ten-fold. iv) ICMR (ndian Council
for Medical Research):
In 1951, hardly 18.33 per cent of the total population was literate. In It enforces rules and
regulations relating
2011, the percentage ofliterates increased to 74.04 per cent. to education and
research in the health
students
(2) Elementary Education: Elementary education covers sector.
of
from class 1 to class 8 (primary and middle) in the age-group
6 to 14 years.
middle
The number of primary and
schools has considerably increased.

In 1950-51, their number was 2.23 lakh.

In 2015-16, it increased to 12.70 lakh.
admission
However, low percentage of
to
ofchildren in primary classes points
educational backwardness in the country.
economic poverty is
Social and
of educational Elementary Education: Essential but lacking in India
the principal cause

backwardness.
 (3) Secondary and Senior Secondary Education: In 1950-51 there
were 7.4 thousand secondary and senior secondary level schonl.
10ols
with 15.0 lakh students.

An Alarming Fact In 2015-16, the number of secondary and senior secondar

In india. spread of schools rose to 2.52 lakh and the number of students went up to
to
education has not
been inked with
3.2 crore.
VOcationalisation. In 1987-88, Navodaya Vidyalaya were established to impart modern
Accordingly, there
education of good standard to talented students of rural areas. Thes
iS an acute problem
of educated schools provide boarding facilities to the students.
unempioyment.
Presently, 565 Navodaya schools are functioning.
Central government has established Kendriya Vidyalaya (Central
Schools) for the benefit of the children of transferable employees.

Currently, the number of central schools in the country is estimated

to be 1,128 as against 931 in 2007 and the number of students in
these schools is about 12.6 lakh.
Three Kendriya Vidyalayas, one at Kathmandu, one at Moscow and
another at Tehran are also functioning.
 Higher Education: After
her Edu
independence, higher education has
(4) shown a convincing growth over time.

AsI 1any 2s 799 universities are providing higher education in the

country.
of these, there are 44 central universities. Besides, there are 40 deemed
to be universities.

The total number of colleges tor general education in the country is

39,071.
The number of students in all universities is 346 lakh in 2015-16.
University Grants Commission regulates and guides higher
education in India.

Areas of Concern in Higher Education

Higher education includes general education as well as technical, managerial, medical and other
forms of professional education. It has substantially expanded over time. But the areas of concern
are:
() That the expansion is largely confined to general education. Of the total enrolment for higher
education nearly 80O per cent is for the general education, and only 20 per cent for the
professional education. It deprives the educated youth of the possibility of self-employment.
and their
(i) There is a growing gulf between the supply of job seekers with higher education
demand. Accordingly, the problem of unemployment is assuming alarming proportions.
Reservation policy of the government for the various categories of people largely points
to
to their
the failure of the government to provide employment opportunities proportionate
demand.

In February 1988,
(5) Vocationalisation of Secondary Education:
the central government launched a plan to vocationalise secondary
education.
those schools who
Under the plan, financial assistance is given to
level.
start vocational higher secondary (+2)
course at

Also, efforts are underway to draw employment

plans for those who
courses.
Successfully complete vocational
schools in the
was granted to nearly 11,000
Dy2012-13, permission
vocational courses.
cOuntry to start
in these
vocational education
About 10 lakh students are getting
schools.
introduced in the a r e a s ofagriculture,
vOcational courses have been health and
technology,
engineering,
trade and commerce,

medicines.
Development of Literacy (6) Technical, Medical and Agricultural ducation:
and its Problem Area
independence, the number of institutions imparting technicalSince
Overall literacy rate has
shot up from 18.33 per professional education has increased significantly. nical and
cent in 1951 to 74.04 per
cent in 2011. In 1951, there were 43 level polytechnical
diploma ineti
Total number of Their number has significantly risen to 1,914. itutions.
illiterates which was
increasing till 1991 (from There are 3,400 recognised engineering colleges running den-
22.8 crore in 1951 to 32
crore in 1991) has started
level courses in different disciplines. degree
decreasing thereafter. The admission capacity of these courses is
In the census of 2001, 15,00,000 studentsts per
the total number of year.
illiterates was recorded
to be 30.3 crore. This is a Presently,
there are 289 medical colleges in the
country with anan
new development in the admission capacity of 32,815 students.
census of 2001.
Female literacy rate Number of dental colleges is 282 with an admission capacity of
(65.46 per cent) is still far 22,680 students.
behind the male literacy
rate (82.14 per cent). Many research centres have also been
set-up in the
Literary rate in the rural Indian Institute of country, eg.
areas (68.9 per cent) is Technology, Agriculture Research Institute,
less than the literacy Indian Statistical Institute, National
Chemical Laboratory, Institute of Physical Laboratory, National
rate
in urban areas
(nearly 85 per cent). Economic Growth, etc.
Rural female literary Many agricultural universities have also been
rate is just 58.8 per cent set-up in the country
which is With a view to
miserably low
compared to urban spreading technical education in rural areas,
female literary rate of Community Polytechnics have been set-up.
79.7 per cent.
Presently, as many as 617
Hence, focus is needed to
promote female literacy established. Community Polytechnics
had been
rate particularly in the rural
areas. Presently, the admission capacity of
institutions is 6.53 lakh and 3.54 degree and diploma leve
lakh
(7)
respectively.
Rural Education: Rural
areas have aso
witnessed wide expansion of education.
National Rural
Higher Education
Council has been set-up for this
Under this
purpost
Council, 14 rural educational
institutions have been functioning
Children of scheduled nd
Expanding Rural Education scheduled tribes get free castes inall
the states.
education in
(8) Adult and
Female Education: In order to
among the adults, special eradicate 1illiteracy
education. arrangements have been maae
1988. Since Importantly, National Literacy
adulk
set-up ini
1976, formal Mission was sc
170 education
indian Economic Development programme h a s been launched.
has been
la
 It aims at providing meaningful education to the youth of the age RTEIn(Right to Education)
the year 2009. the
15-25 years.
group of Government of India has
brought about an Act,
In order to provide technical education to the women, many
called RTE.
women polytechnics have also been established. 'Women Education
It promises free and
Council' is a significant step to promote education among compulsory education
to all.
women.
It makes education aa
(9) Total Literacy Campaign: National Literacy Mission was launched matter of right to all
children in the age
to render everybody literate in the country. This programme has group of 6-14 years.
now been recast as Saakshar Bharae with a central focus on female This programme is yet too
yield its results.
education. The programme covers all those in the age group of
However, it is hoped
15 and above. that RTE will transform
dreams into reality by
It may be noted that there are 1l crore illiterates in the country offering basic education
etween the age group of 15-25 years. to all, free of cost.

In short, as a result of persistent efforts during the post-independence

period, the number of literates has increased four-fold. The number
of schools and the number of students has increased many times. Rate
of literacy in the country has shot up from 18.33 per cent to 74.04 per
cent. In the state of Kerala, it is 94 per cent. In December 1993, in the
conference of nine most populous countries of the world held in Delhi,
a plan to give concrete shape to the objective of Education for All has
been formulated.

EDUCATIONAL FINANCE: WHO SPENDS ON EDUCATION AND HOW MUCH?

() The State Governments: A state government is spending between 10-30 per cent of its total
annual budget. State government budgets amount to approximately 74 per cent of the total
education budget for India.
(i) The Central Government: R45,000 crore annually (nearly 3 per cent of its total annual budget).
(01) Total Percentage Expenditure by the Governments (states as well as the centre): 80-90 per cent.

(iv) The Parents (by way of fees) for their children: 4-5 per cent.

(v)The Private Trusts: 7 per cent.

(vi) Endowments: 3 per cent.
A broad conclusion thus emerges that in India, despite a significant trend towards privatisation
of education, the bulk of spending is done by the central and the state governments.

Education still a Challenging Proposition

time. It is
Ocus on education has tremendously increased over
cent children are now
the
Cucouraging to note that nearly 96.5 per
a bitter truth:
SChool goers. But in the backdrop of this statistics there is

uespite the constitutional provision for free and compulsory education

 for the children between the age group of
years, quality of education and infrastructh
continues to be disappointing. Administras
ucture
callousness compounds theproblem furthe
er
A survey by the "Child Rights and You"
CHILDRIGHTSANDYOU finds that children continue to be
(CRY)
schools because of the
refused
admission to
lack of
www.cry.org transfer documentation, birth
registratio
and proof of residence. In some cases,
&nsuring lasting change of school-going children are
parents
compelled to
for children pay fees. Such instances point to a serious

Child Rights and You(CRY bottleneck in the education system of the

country. This along with the following facts and figures makes education
still a challenging proposition in India:
(1) Large Number of Illiterates: India harbours the largest number of
illiterates in the world. Presently, nearly 36 crore people are estimated
to be illiterate. The number exceeds even the total population of
most countries in the world.
(2) Inadequate Vocationalisation: Education continues to be largely
degree-oriented throwing millions of educated youths down to the
corridors of employment exchanges. Vocationalisation of education
is still a far cry.
(3) Gender Bias: There is still a significant gender-bias' in offering
opportunities of education to male and female children. The
enrolment ratio is relatively low for the female candidates and
their drop-out ratio is considerably high. Education system in
India thus needs a substantial change in the attitudes of the
people.
4) Low Rural Access Level: There is a high degree of disparity m
access to education. The 'access level is considerably low for the
rural population compared to the urbans.
(5) Privatisation: There is a growing trend towards privatisation ol
education. Being very expensive, private education has tendcu
widen the gulf between access level for the rich and the poor. Therc
is almost a
drought of educational opportunities for poorer sectio
of the society.
 Covernment Expenditure
(6) Low Gov on Education: The government
Las failed
failed to fulfil its commitment of spending nearly 6 per cent of
to fulf
has
enP on education: actual expenditure has been around 4-5 per cent
only. This points to the gap between what is intended or desired and
onl
achieved.
what is actually
Chen these facts, there follows an obvious inference that education
India has failed to reach the masses, and has also failed to break
he vicious circle of illiteracy-illiteracy breeding poverty and poverty
breading illiteracy.

Power Points &Revision Window-

Human Capital: It refers to the stock of 'skill and expertise' of a nation at a point of time.
Human Capital refers to the process of adding to the stock of human capital over time.
Formation: It

Determinants/Sources of Human Capital Formation: (i) Expenditure on education, (ii) Expenditure

On-the-job training, (iv) Study programmes for adults, (v) Migration, (vi) Expenditure
on
on health, (ii)
information.
environment of growth, (i) Higher
Role of Human Capital Formation: (i) Change in emotional and material
rate of participation and equality.
productivity of physical capital, (ii) Innovative skills, (iv) Higher
Problems Facing Human Capital Formation: (i) Rising population, (ii)
Brain-drain, (ii) Deficient
in primary sector, (v) Low academic standards.
manpower planning, (iv) Insufficient on-the-job training
Education produces good citizens, (ii) It develops science
Importance and Objectives of Education: (i)
in the country, (iv) expands mental horizon
Education
technology, (iii) It facilitates use of
resources
and
greater participation of the people in the
of the people, (v) It helps in economic development through
lt promotes cultural standard of the citizens, (vii) Education
process of growth and development, (vi)
develops human personality.
Sector in India: It
includes: (i) Expansion of general education, (ii) Elementary
Growth of Education
senior secondary education, (iv) Higher education, (v) Vocationalisation
education, (ii) Secondary and Rural education, (vii) Adult
medical and agricultural education, (vii)
of secondary education, (vi) Technical,
campaign.
and female education, (ix) Total literacy
of Education in India: (0) Large number of illiterates, (ii) Inadequate
Problems Relating to Development
Gender bias, (iv) Low rural access level, (v) Privatisation, (vi) Low government
vocationalisation, (i)
expenditure on education.