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CHAPTER 6 HUMAN CAPITAL FORMATION IN INDIA

Ql Explain difference between Physical capi t al and Human capita l.
Ans.
sASIS . - - - - - : - - - -r---.:.._
P:....:
H...:..:
YSICAL CAP ITA L HUMAN CA PITAL _
Meaning Physica l ca pital impli es th e non -hurn ;in Human ca rlt al re fers to th e ~to ck of skill
assets of th e co mpany, such as plant and and expertise of a nation a t il giv en po in t
m c1chi nery, too ls and equipm en t e tc . th at of time .
help in th e process of production.

Nature Tangible
Intangibl e
Sale It can be so ld in the market. Human capital can not b e sold . Only the
services of human capital can be sold.
Separability It is separabl e from its own er. It is not separable from its own er .

Fin ancial Shown in financial st at eme nt. Not shown in financial sta t emen t.
Statement

Restriction No restriction except under trade Occurs out of nationality and culture.
on mobility barriers.

Nature of Constant use, results in depreciation. Ageing leads to depreciation, but it can
depreciation Also change of technology makes a be minimized through continuou s
machine obsolete. investme nt in education, health, etc

Q2. Explain sou rces of Human capital formation. (V.IMPT.)

Ans. 1. Investment in education
Education not on ly raises the stan dard and quality of livin g but also encourages modern attitude of the people.
Moreover, education in c reases th e productive capacity and productivity of a nation s workforce by increasing their
skills . Spend ing on education by in d ivi duals is similar to spending on capital goods by companies with the objective of increasing
future profits over a period of time. Likewise, individuals invest in education with the obj ective o f in crea sing their future income.
2. Expenditure on health
The wealth of a country can be i ncreased with the efforts of healthy workforce . Investmen t in health sector increases
efficiency, efficacy and productivity of a nations workforce . Health expenditure directly increases the supply of healthy
labour force and is, thus, a source of human capital formation . A sick labourer without access to medical facilities is compelled to
abstain from work and there is loss of productivity. Hence, expenditure on health is an important source of human capital
formation.
Various forms of health expenditure
• Preventive medicine (vaccination),
• Curative medicine (medical intervention during illness)
• Social medicine (spread of health literacy)
• Provision of clean drinking water and good sanitation are the variou s fo rms of health expenditures.
3. Expenditure on training .
Training refers to the act of acquiring skill s, knowledge and competency required to perfo rm a particular job efficiently
and effectively .Expenditure regarding on the job training is a source of hu_m an capital formation as the return of such
expenditure in the form of enhanced labour productivity is more than the cost of 1t.
For training its employees firm spend in two ways: . . .
• The workers may be trained in the firm itself under the superv1s1on of a ski lled worker
• The workers may be sent for off-campus tr~ining . . .
.
In b oth these cases f irms . r some expenses Firms will, thus, 1ns1st that the work ers should work for a sp ecific period of
mcu · .
. . h . b t ai·n ·ing during which it can recover the benefits of the enhanced productivity owing to the
time, after their on t e JO r ,
training.
4. Expenditure on migration . h · h · ·
P I . . h f . b th t fetch them higher salaries than what t ey may get in t e1r native places. M igra tion involves
eop e migrate in searc o JO s a I It b · ·
. f 1· . ·n the migrated places etc. For examp e rura o ur an m1grat1on or migration by eng ineers
cost of transport higher cost o 1vmg 1 · h t ·
I doctors to other ' . f h. her salaries that they may get 111 sue coun ne s. The enh anced earnings In th e new
countries because O ig f h
. . . expenditure on migration Is also a source o uman capital fo r m ation .
PIace 1s more than the costs of m1grat1on, so
 5. Expend iture incurred for acquiring lnform,1tlon m inted to the labour market and other markets
The availability of job s and r1dml ss lo11 s r elat ed lnfor111 c1 llun no l only help s Lh e Slud ents t o o r, t fo r t he best choice
according t o th eir int er est ar eas but ci lso lcci d to th e eff ec tiv e utl lls;itlon of hum an sk ill s a nd kno wl edge . This expen ditu re
• · g information)
(for acquirin • Is ci lso a sou rce of· hum an ca pltci I f orm ati 011 beca use thi s Inform atio n Is .necessa r"' to make de c1s1
· •ons
· · · · rr· 1 t ti ll tl on of th e ac quired human ca pital stock.
regarding investm ent s 111 hum an ca pital as well as fo re 1c en u sa .
People spend to ;icqui rc Information reli1 t lng to th e labour mar et an
. .
k °d . . . ·
th er mark ets like edu ca t ion and health. Fo r exa I
mp e,
f · bs wheth er the educ at ion al 1nst1tut1ons provide th
people want to know th e level of s;i lari es assorn1ted with variou s types o JO , e
ri ght ty pe of employabl e skills and at wh at cost.

, Tips .
Shortcut - Health - ITEM where Health =Health expenditure, I =Information expenditure, T =train mg expenditure,
=
E education expenditure, M =Migration expenditure .

Q3 Explain relationship between Human Capital Formation and Economic Growth. ( V. IMPT)
An s. Economic growth means the increase in real national income of a country;
Investment in human capital contributes to economic growth because
• The contribution of the educated person to economic growth is more than that of an illiterate person.
• Healthy person ca n provide uninterrupted labour su pply for a longer period of t ime, so hea lth is also an
important factor for economic growth.
• Similarly on-the-job training, job market information and migration, increase an individual's income generating
capacity.
This enhanced product ivity of human beings or human capital contributes substantially not only t oward s increasing labour
productivity but also stimulates inn ovations and creates ability to absorb new technologies. Edu catio n provides knowledge to
understand changes in society and scientific advancements, thus, facilitate inventions and innovations. Similarly, the availabil ity
of educated labour force facilitates adaptation to new technologies.
Higher income causes bu il ding of high level of human capital and high level of human capital causes growth of incom e.

Two independent reports ( one by Deutshe bank and other by World Bank) on the Indian economy, in recent times, have identified
that India would grow faster due to its strength in human capital formation .

Notel - It is difficult to establish a relation of cause and effect from the growth of human capital (education and health) to
economic growth but we can see in Table given below that these sectors have grown simultaneously. Growth in each sector
probably has reinforced the growth of every other sector.
Particulars 1951 1981 1991 2001 2015-16
Real Per Capita Income (in Rs) 7,651 12,174 15,748 23,095 77,803
Crude Death 25.1 12.5 9.8 8.1 6.4
Rate (Per 1,000 Population)
Infant Mortality Rate 146 110 80 63 34
Life Expectancy
at Birth (in Years)
Male 37.2 54.1 59.7 63.9 67
Female 36.2 54.7 60.9 66.9 70
Literacy Rate {%) 16.67 43.57 52 .21 65 .2 76

Note 2 - Empirical evidence to prove that increase in human capital causes economic growth is nebulous (not clear) because of
measurement problems. For example, education measured in terms of years of schooling, teacher-pup il ratio and enrolment rates
may not reflect the quality of education . Similarly, health services measured in monetary terms, life expectancy and mortality
rates may no t reflect the true health status of the people in a country.
Using the indicators mentioned above, an analysis of improvement in education and health sectors and growth in real per capita
income in both developing and developed countries shows that the human cap Ital growth in developing countries has been faster
but the growth of per capita real income has not been that fast.
Note 3- 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."
Q4 Explain role/importance of Human capltal formation. (V . IMPT.)
Ans. 1.lncrease In production - An enu ca ted and trained person can c1pp ly his knowledge c1nd ski ll at his work area and Increase
production. Similarly hea lthy person c;:in provid e uninterrupted labour suprly for a lonr,er period of t im e. So healthy person ca n
contribute more to the production t han an unhe<1lthy man.
2. Increase in Income- Human capit.il formation through on -th e-job trnlnlng, j ob m;irket Information, migration etc increases
skills an d experience of an 1ndlvldur1I. Increased skills and experience wlll Increase an Individual's income generating capacity.
3.lnnovatlve skills- Education provides knowledge to under str1nd changes In socie ty and scientific advancemen ts, thus, facilita t e
inventions and in_novatl~ns. Slmil a_rly, the availability o f ed ucated labour force facilitates adaptation to new tec hnologies
4.lmproves quality of life - Quality of life Is indicat ed by income and health, Income and health depends upon the level of
educil tion, hea lth and skill formation acquired by the perso n. Human capi tal formation transforms th e lives of th e people and now
they have more satisfying life.
s. Increases life expectancy: Formation of human capital raises life expect ancy of th e people. More income, bett er health facilities
enable people to live a healthy and long life .
6.Change in attitude- Economic development of a country depends on th e minds of the people and their changing attitudes
towards creating a 'will' for development. Investment In human ca pit al helps in changing mental outlook and promotes
development of the economy.

Q 5 Explain the Deutshe Bank and World Bank report on the Indian economy which says that India would grow faster due to its
strength in human capital formation.
Ans. (i) Deutsche Bank, a German bank, in its report on 'Global Growth Centres' (published on 1.7.05) identified that India will
emerge as one among four major growth centres in the world by the year 2020.
It further states, " Our empirica l investigation supports th e view that human capital is the most important factor of production in
today's economies. Increases in human capital are crucial to achieving increases in GDP."
With reference to India it states, " Between 2005 and 2020 we expect a 40 per cent rise in the average years of education in India,
to just above 7 yea rs ..."

(ii)World Bank, in it s recent report, 'India and the Knowledge Economy - Leveraging Strengths and Opportunities', states
that India should m ake a transit ion to th e knowledge economy and if it uses its knowl edge as much as Ireland does (it is judged
that Ireland uses its knowledge economy very effectively), then the per capita in come of India will increase from a little over US
$1000 in 2002 to US$ 3000 in 2020. It further states that the Indian economy has all th e key ingredients for making th is transition,
such as, a critical mass of skilled workers, a well-functioning democracy and a diversified science and technology infrastructure.

Thus the two reports point out the fact th at further human capital formation in India will move its economy to a higher growth
level.

Q 6 Explain difference between human capital and human development .

Ans.
Human Capital Human development
Human capital refers to the stock of a Human development is the overall process of widening
nation s human ski ll s and expertise at a humans' skills and giving them to opportun ity to grow,
particular point of time . Human capital
treat s humans as just another resource, like
machine, technology etc.

Human capital considers education and Human development is ba sed on the idea th at education
health as a means to increase labour and health are integral to human well-being beca use only

I
productivity. when people have the ability to read and write and the
ability to lead a long an d healthy life, they will be able to
make other choices which they value.

Human capital treats human beings as a
means to increase produ ctivity. In this
view, any investment in education and
health is unproductive if it does not
enh ance output of goods and services.
In th e human development perspective, human beings
are ends in themselves. Human welfare should be
increased through investments in educ~tio~ and health \
even if such investment s do not result in higher labour
productivity. Therefore, basic education and basic health
are important in th emselves, irrespect ive of their
contribution to labour productivity. In such a view
every individual has a right to get basic educa tion and \
basic hea lth care .
 Q7 How people become re source ?
Ans. Peopl e become b
t·o country ,s working
· resource Y using their skills, knowledge, productivity and abilities. People as Resource Is a way of ref .
pe 1 1 . erring
op e n terms of their existing productive skills and abilities. looking at the population from this prod .
c1spect e mphasizes Its blllt . . . . uct1ve
. a Y to contribute to increasing GDP of country. Just like other resource like mach ines, technolog
population also Is a resource-a human resource. Y etc,

Q 8 Explain need for government intervention in education and health sector .

Ans. Human capital formation Is the outcome of investments In education, hea lth, on-the-job t raining, migration and informatl
Of t_hese education and hea lth are very important sources of human capital formation. We know that India is a federal counotn.
having: ry

► Union government,
► Stat e governments
► loca l governments (Municipal Corporations, Municipalities and Village Panchayat s).

The Constitution of India ment ions the fun ctions to be ca rried out by each level of gove rnment. Accordingly, expenditures on both
education and healt h are to be ca rried out simultaneously by all the three tiers of the government in India.

Need for government intervention in education and healt h sector

Education and health care services create both private and social benefits and this is the rea son for t he existence of both private
and public institutions in the education and health service markets.
• Expenditures on education and health make substantial long-term impact and they cannot be easily re versed;
hence, government intervention is essential.
For inst ance, once a child is admitted to a school or health care centre where the required services are not provided
before t he decision is taken to shift t he child to anot her institution, substantial amount of damage would have bee~
done. Mor eover, individual co nsumers of t hese services do not have complete information about the quality of services
and th eir cost s. In th is situat ion, th e ·providers of education and hea lth services acquire monopoly power and are involved
in exploitation.
The role of govern ment in th is sit uation is t o ensure t hat t he private providers of these services adhere to the standards
stipulated by the government and charge th e correct price.
• In a developing country like ours, with a large section of the population living below t he poverty line, many
of us cannot afford to access basic education and health care facilities. Moreover, a substantial section of our people
cannot afford to reach super specialty health care and higher educatio n.

Basic educatio n and health ca re is considered as a right of the citizens. So it is essential t hat the government should
provide educatio n and health services free of cost for the deserving citizens and those from the socially oppressed classes

Q 9 Explain Growth in Government Expenditure on Education in India.

Ans. Government expenditure by the government is expressed in two ways
:,.. As a percentage of 'total government expenditure'
► As a percentage of Gross Domestic Product (GDP).

The percentage of 'education expenditure of t ot al government expenditure' indicat es the im portance of education in the scheme
of th ings before the government. The per centage of 'education expenditure of GDP' expresses how much of our income is being
committed to t he d evelopm ent of education in the country.
• During 1952-20 14, educatio n expend iture as percent age o f tota l government expenditure increased from 7.92
t o 15. 7 and as per centage of GDP increased from 0.64 to 4.13.
• In 2009, the Government of India enact ed t he Right of Ed ucation Act t o make free ed ucat ion a fu ndamental right
of all children in the age group of 6-14 years.
• Government of India has also st arted levying a 2 per cent 'education cesses on all Union t axes. The revenues
from education cess have been ea rmarked for spending on elementary educatio n.
• In addition t o this, the governm ent sanct ions a large outlay for the promot ion of higher education and new loan
schemes for students t o pursue higher educat ion.

Q 10 Explain growth of education sector in India. (V.IMPT)

Or Explain educational achievements in Ind ia.
Ans. There has been a significant growth of education sector In India. All t he m easures o f educationa l achievement s have
increased in p ast 30 yea rs. Generally, educational achievem ents in a country are indicated in terms of
 ► Adult literacy level- This rnte Indicates the percentage of lh e literate adult population who are aged 15 years and
above . If w e compare this ratio of year 1990 with year 2015 lhen we can see that this ratio has increased and reached
81% for males and 63 % for females.
► Primary ed~cati~n completion rate - This rate Indicates the percentage of students completing classes 1 t~ 8 . If we
compare this ratio of year 1990 with yea r 2015 then we ca n see that this ratio has increased and reached 94¼ for males
and 88 % for females.
► Youth literacy rate- This rate indicates the percentage of literate people between the age of 15-24 who can read and
write. If we compare thi s ratio of year 1990 with yea r 2015 then we can see that this ratio has increased and reached
92% for males and 87 % for femal es
Particulars 1990 2000 2015
Adult Literacy Rate (per cent of people aged 15+)
1.1 Male 61 .9 68.4 81
1.2 Female 37.9 45.4 63
Primary completion rate (per cent of relevant age
group)

2.1 Male 78 85 94
2.2 Female 61 69 99
Youth literacy rate (per cent of people aged 15+
to 24}

3.1 Male 76.6 79.7 92

3.2 Female 54.2 64.8 87

Following steps taken by government have lead to growth of education sector in India.
a. During 1952-2014, education expenditure as percentage of total government expenditure increased from 7.92
to 15.7 and as percentage of GDP increased from 0.64 to 4.13. Both, the union and state governments, have
been stepping up expenditures in the education sector over the years in order to fulfi l the objective of attaining
cent per cent literacy and considerably increase the average educational attainment of Indians.
b. In 2009, the Government of India enacted the Right of Education Act to make free education a fu ndamental right
of all ch ildren in the age group of 6-14 years.
c. Government of India has also started levying a 2 per cent 'education cesses on all Union taxes. The revenues
from education cess have been earmarked for spending on elementary education .
d. Institutions which come under the education sector are facilitated by
► The ministries of education at the union and state level,
► Departments of education
► Organisations like National Council Of Educational Research And Training (NCERT), University Grants Commission (UGC)
and All India Council ofTechnical Education (AICTE)

Institutions which come under the health sector are facilitated by

► The ministries of health at the union and state level,
► Departments of health
► Organisations like Indian Council For Medical Research (ICMR)

Q 11 Write a note on Future prospective of Education •

Ans.
1. Ed~cation for All - Still a Distant Dream: . .
. f b th adults as well as youth - have increased, still the absolute number of illiterates in India is
Though literacy rates or o - . . . .
. , t· was at the time of independence. In 1950, when the Const1tut1on of India was passed by the
as much as India s popu 1a 10n . . . .
. bl . noted in the Directive Principles of the Const1tut1on that the government should provide free
Constituent Assem y, 1t was . .
. f all children up to the age of 14 years within 10 years from the commencement of the
and compulsory education or . b
. . h' d th'is we would have cent per cent literacy y now.
Const1tut1on . Had we ac 1eve ,

2 Gender Equity - Better than Before . . . .

.' . ates between males and females are narrowing signifying a pos1t1ve development in gender equity
The differences in literacy r I India is imminent for various reasons such as
S ·11 h d te education for women n
ti t e nee to pr~mo d pendence and social status of women to save them from exploitation.
• Improving econom 1c 1n e
. k a favourable Impact on fertility rate and health care of women and children. Therefore
w en education ma es . ,
• om b t the upward movement in the literacy rates and we have miles to go in achieving cent
we cannot be complacent a ou
per cent adult literacy.
 3. Higher Education - a Few Takers
The India n educat ion µyrnmld Is steep, Indicatin g lesser and lesser number of people rer1ching the higher education l~v~I.
Moreover, th e level of unemployment among educated youth Is th e highest. As per NSSO data, In the year 20] 1-12 the
, rate
of unemployment among youth males who stud ied grad uation and above In ru ral areas was 19 per cent. Their urb~n
counterparts had relatively less level of unemploym ent at 16 per cent. The most severely affected ones were young rura l
female graduat es as nearly 30 per cent of t hem are unemployed. In contrast to this, only abo ut_ 3-6 per cent of primary level
educated youth in rural and urban areas w ere unemployed. Therefore, the government should increase allocation for higher
education and also improve t he standard of higher educa t ion institut ions, so th at students are im parted emp loyable sl<'ills in
such inst itutions.

Q 12 Wh at are t he main problems of human capital fo rmation in India?

Ans. India is faced with many problems of human capita l formation . These are as foll ows:
i. Rising Popu lation : The ri sing po pulat ion exerts pressure on the ava ilable li m ited resou rces . In other words, i t reduces
the per hea d ava ilability of fa ciliti es lik e ho using, sanitation, educat ion, po wer su pply, etc. So, the pressure on t hese
facili t ies retards the qual ity of lif e and lowers the capa city to acqu ire spe cialised skills an d know ledge.
ii. Brain Dr ain: Peop le m igrate from one place t o anoth er in search of better job oppo rtu nit ies and handsome salaries .
This puts a seriou s threat t o the process of huma n capital formation. It lea ds t o t he loss of qual it y people li ke doctors,
engineers, etc. who have high caliber and are ra re in a develop ing co untry. The cos t of such loss of qua li ty human
capita l is very high.
iii. Improper Man Power Pla nning: India lacks in prope r man po wer p lanni ng. No maj or efforts have been ta ken to
maintain the d emand-supply balance of the ri sing labo ur force . So, it leads to the wa stag e and m isallocat ion of human
skills.
iv. Low Academic Standards: In o rder to sprea d educatio n, var iou s educational inst it ution s are opening up regardle ss
of deficiency in their sta nd ards. Thes e in stitution s im part infe rior quality of ed ucat io n and ski lls and that in turn causes
deficiency in the pro du ct ivity and effic iency. Th is is o ne of the im po rt ant hindrances fo r the deve lop ment of quality
hum an capita l forma t ion .

Q 13 Explain how investment in education sector stimulates economic growth 7

An s . Expenditure on educat ion enables one to make better choices in life and provid es knowledge to un derstand the changes
taking place in soci ety t o stimulat e innovation. Investment in education stimu lates economic growth in t he foll owing ways:
a. Development in mental ability: Decision -making ability and menta l abilit ies of an indivi dual are developed t hrough continuous
investment in educa tion . It develops th e ability to make right choices of th e availa ble resources in t he economy. This leads to
efficient use of resource s resulting in higher productivity. Thus, education prepares individuals as human resources for a nation
b. Upgrade of physical capital :Physical capital such as bu ildings, equipment and machin ery is important for increasing the quality
and quantity of production. However, using these resou rces effectively is more important for the rise in pro duct ivity an d capita l
valu e. Human resource plays the most crucia l role and w ithout whi ch it is not possible to in novate, use and upgrade physica l
capital for economic development. Educational investm ent provides higher quality of human resources to increase the level of
produ ction .
c.. Development of skills: Educat ion plays an important role in improving ski lls w hich are requi re d to enhance the productivity
level. It helps develop skills and impart training to increase production. It faci litat es th e use of innovative ideas and abilit y to adapt
to ch anges in science and t echnology.
d.Modernisation: The educat ion system focuses on increasing productivity of hu man resources with technical progress at all levels
of work. Since independence, th e number of technical and professional educational institutions increased to a great extent. Thus,
th e use of advanced technology in the production process becomes easier w ith su itable educational system.
e.lncrease in the standard of living: Higher expenditu re on educati on increases t he efficiency of the labour productivity as they
become skilled in t heir jobs which increase t heir earning capacity. The higher income and greater access to modern techniques
with rise in th e education level raises the standard of living and quality of life in th e nation.
f.lncrease in participation rate and equality: An individual w ith t he ca pacity t o obtain know ledge and specialised skills provides
higher employment opportunities. This enhances th e productive efficiency and t he rate of participation of workers in economic,
social and political act iviti es. This high ra te of part icipation leads to high degree of economic growth.