HUMAN CAPITAL FORMATION PUNEET GROVER

HUMAN CAPITAL FORMATION

There are two types of capital used in production:

Physical Capital
It includes all those resource which are required for further production, like plant
and machinery, factory buildings, equipment’s etc.

Human Capital
It refers to the stock of skill, ability, expertise, education and knowledge in a
nation at a given point of time.

The stock of physical capital is essential in the process of economic growth of a

country. If there is low investment in human capital, utilization of physical
capital will be at low pace leading to level of economic growth. An
improvement in the mental capability, skill and expertise of the people, supports
an increase in the human capital as it enable the human factor to produce more.

Physical Capital Human Capital

1. It is used to produce goods and It increases the efficiency to produce
services goods and services.
2. Physical capital is sold in the It is not the sold, only the services of
market. human capital are sold.
3. It depreciates over time to due There is no depreciation of human
to continuous use or due to capital but invest-ments in human
change in the pattern of demand capital are required to maintain its
efficiency.
4. Formation of physical capital is Formation of human capital is partly a
an economic and technical social process and partly a conscious
process. effort of the possessor of the human
capital.

Human Capital Formation

Human capital formation implies the additions to stock of abilities and skills
among the population of the country.

Human capital formation is the process of acquiring and increasing the number
of person who have the skills and expertise, which are important for the
economic, social and political development of the country.
The formation of human capital involves investment in human capital to make
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them more efficient so that economic growth takes place.

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According to Prof. G.M. Meier,

“Human capital formation is the process of acquiring and increasing the number of
persons, who have skills, education and experience, which are critical for economic
and political development of a country.”

Sources of Human Capital Formation

There are many sources of human capital formation. The different ways in which
efficiency of human resources can be increased, are:
1. Expenditure on education
 Investment in education is considered as one of the main sources of human
capital. Expenditure on education is very important source of human capital
formation because it increases efficiency and skill of human capital.
 Spending on education by individuals is similar to spending on capital goods
by companies with the objective of increasing future profits over a period of
time as education enhances mental horizon of human resources.
 Likewise individuals invest in education to increase their skills and efficiency
resulting in higher earning capacity.

2. Expenditure on health
 Health is considered to be an important input for the development of a nation
as much as it is important for the development of an individual.
 Expenditure on health is important in having a productive labour force.
Health expenditure directly increases the physical and mental ability of
human beings and produces healthy labour force and is, thus an important
source of human capital formation.
 Expenditure on health is needed in the following areas:
 Preventive medicine (vaccination)
 Curative medicine (medical intervention during illness)
 Social Medicine (spread of health literacy)
 Provision of clean drinking water
 Good sanitation facilities

3. On the – job training

 On the – job training is required to enhance the skills and expertise of human
capital in order to increase productivity of worker.
 Many firms spend on giving on – the – job training to their workers. This
may take different forms:

 Worker may be trained in the firm itself by a skilled worker.

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 Worker may be sent for off campus training.

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 Expenditure regarding on – the – job training is a source of human capital

formation as the return of such expenditure, in the form of enhanced labour
productivity, is more than the cost of it.

4. Expenditure on migration
 People migrate in search of jobs that fetch them higher salaries than what
they may get in the native places.
 Unemployed people from rural areas migrate to urban areas in search of jobs.
 Technically qualified persons like engineers, doctors, etc. migrate to other
countries because of higher salaries that they may get in those countries.
 Migration of people involves cost of transportation and higher cost of living
in the migrated places.
 Expenditure on migration is also considered as a source of human capital
formation as the increased earnings outweigh the cost of migration.

5. Expenditure on information
 People spend to acquire information relating to the labour market and other
markets like education and health.
 People want to know, the levels of salaries associated with various types of
jobs, whether the educational institutions provide the 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 utilization of the acquired human
capital stock.
 Expenditure incurred for acquiring information relating to the labour market
and other markets is also a source of human capital formation.

Importance of Human Capital Formation

The important vital role of human capital formation in the growth of an economy
will be clear from the following points:

1. Enhancement of productivity of human capital

 Human capital formation raises the productivity and production as skilled and
efficient workers make better use of the given resources.
 Technical skill can be acquired only by means of education, training and
sound health of the people.
 Investment in human capital produces such skills and expertise which
increase their productivity which is essential for economic growth.
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2. Efficient use of physical capital

 Physical capital formation depends extensively on the human capital
formation.
 The physical capital can be utilized effectively only by skilled and intelligent
work of human capital in the economy.
 Thus human capital formation raises productivity of physical capital which is
desired for economic growth.

3. Innovations and technological improvement

 Technological upgradation is important for structural changes. The human
capital formation not only increases the productivity of human resources but
also stimulates innovations and creates ability to absorb new technologies.
 Education provides knowledge to understand changes in society and
scientific advancement thus facilitate inventions and innovations.
 The availability of educated labour force facilities adaption to new
technologies. Human capital formation promotes innovations and discoveries
to develop the economy.

4. Improvement in quality of life

 The quality of life improves due to quality education, health and skill
information acquired by the people.
 Human capital formation enables them to enjoy a higher standard of living as
they are able to generate better remuneration for them and for the nation.

5. Positive change in attitude

 Investment in human capital makes people more knowledgeable, skilled and
modern in their thought and actions.
 In increase their outlook and attitude towards various aspects such as
traditions, job markets, mobility etc. which are helpful in development of the
country.
 They are able to make rational choice in respect of job opportunities. It leads
to emergence of modern society desired for economic development.

Problems Facing Human Capital Formation

Though serious efforts have been made to develop human capital, still there are
certain problems facing human capital formation in India. These are as follows:

1. High growth rate of population

 Continuous raise in population has adversely affected the quality of human
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capital. It has reduced per capita availability of benefit of economic growth.

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Benefits of economic growth relating to housing, hospital, education etc.

have reduced due to rising population.
 Rapidly rising population lowers the capacity to possess skill and expertise
required for economic growth.

2. Migration
 Loss of resources in terms of “Brain Drain” is a serious outcome of migration
when educated and skilled manpower moves to the other countries to work.
 The country like ours cannot afford migration of persons of high caliber and
possessing high quality education who choose to render their services aboard.

3. Lack of proper manpower planning

 In India there exists imbalance between the demands and supply of human
resources require for different categories of work.
 In India there is poor manpower planning which corresponds to wastage of
scare resources of the nation.
 We require a proper system of manpower of planning so that there may be
equilibrium determined between demand and supply of human resources.

4. Law level academic standard

 A greater proportion of resources have been diverted towards higher
education, which is meant for few people as compared to the primary and
secondary education. Due to this reason, the general productivity of the
economy has remained low.

5. Inefficient system
There are widespread inefficiencies in:
 Arranging on – the job and off – the – job training programmes for human
capital.
 Utilizing scare resources efficiently because of lack of human resource
development.
 Providing proper health care facilities.
 Eradicating widespread poverty, illiteracy and unemployment.

6. Poverty
 There is widespread poverty in India creating lack of finances and awareness
a major problem facing human capital formation.
 A large proportion of population does not have access to basic health and
educational facilities. Due to their inability to get higher education and
maintaining a reasonable standard of health, they are not able to develop
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themselves as sound human capital.

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Education Sector in India

Education refers to the process of teaching, training and learning especially in

schools and colleges to improve knowledge and to develop skills.

Importance of Education

Education is very important for the development of human capital. Its

importance may be clear from the following points:
 It helps in developing necessary skills essential for the smooth functioning of
the economy. It produces good citizens of the country by enhancing their
abilities and skills.
 It develops mental horizon of the masses and helps in promoting rational
thanking of the people.
 It enables greater participation of the people in the growth process of the
economy. By developing human resource development, the country is able to
use its scarce resources efficiently.
 By promoting education, social evils can be eradicated and advancement in
thoughts and actions can be achieved.

Growth of Education Sector in India

1. Growth of general education

 During the period planning, there has been tremendous expansion of general
education.
 There are 14 lakh 50 thousand schools as per economic survey 2011 – 12. It
includes about 67822 primary schools also.
 Number of students enrolled in schools has increased from to 2160 lakh in
2009 – 10.
 Govt. allocation of expenditure (as a percentage of GDP) on education has
increased from 1.5% in 1950 – 51 to 4.2% in 2009 - 10.
 Number of universities has increased from 27 in 1950 – 51 to 436 in 2009 –
10.

2. Elementary/Primary and Middle education

 Elementary education refers to primary and middle school education.
 It refers to eight years of schooling i.e. class 1 to 8 in the age group of 6 to 14
years.
 It is the foundation of growth of human resources. In 2008 – 09, nearly 90%
of children in rural areas have been enrolled in schools.
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 Govt. of India made free and compulsory education, a fundamental right of

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all children in the age group of 6 - 14 years.

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 In order to meet expenditure on free compulsory education, the government

imposed a 2% education cess on all union taxes.
 There are 12 lakh 70 thousand Primary schools as per economic survey 2015
– 16.

3. Secondary education
 It starts with classes IX and X and moves to XI and XII at senior secondary
level.
 There are 2 lakh 52 thousand secondary schools as per economic survey 2015
– 16.
 NCERT (National Council of Educational Research and Training) was set up in 1981
to promote school education. It works as an academic advisor to Ministry of
Human Resource Development, Govt. of India.

4. Higher Education
 It refers to general, managerial, medical and other forms of professional
education.
 Expansion of general education is more as compared to that of professional
education. Nearly 80% enrolment is for general education.
 Nearly 799 universities are providing higher education in India.
 University Grants Commission (UGC) promotes and coordinates university
education. It also controls the finances, expenditure and the standard of
examination, etc.
 Indira Gandhi National Open University (IGNOU) was set up in 1985 to
promote distance education based on the educational structure of the country.

5. Technical Education
 Technical education is very important in developing human resource. There
has been significant expansion to technical education in the country since
independence.
 There were 43 diploma level polytechnics at the time of independence; this
number has now increased to nearly 1914.
 The number of degree level engineering institutions increased from 40 to
nearly 3400.

6. Rural Education
 There has been phenomenal expansion of rural education since
independence.
 National Rural Higher Education Council has been set up to expand
educational facilities in rural sector.
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 14 rural education institutions are operational under this council.

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 Efforts have been made to provide free rural education to children of

scheduled castes and scheduled tribes.

7. Adult Education
 Special plans and arrangements have been made to eradicate illiteracy among
the adults.
 National literacy mission has been set up in this regard in 1998.
 Efforts have been made to provide free education to needy ones and to
arrange classes in the evening for working adults.

Inadequacies and Challenges in Education

Though there has been massive expansion and development in the educational
sector in India, still the education system suffers some problems.
These are:

1. High illiteracy rate

India has the largest number of illiterates in the world. As per 2001 census,
the literacy rate is 64.8%. Nearly 20% of the children in the age group of 6 –
14 years are still not going to schools for obtaining education. As per
UNESCO report 2010, 37% of the illiterate adults in the world are Indians.

2. Gender bias
The enrolment of girls in elementary education is much below the enrolment
of boys. According to census 2001, the female literacy rate is nearly 54% as
compared to male literacy rate of around 76%. The difference in literacy rates
between males and females are narrowing signifying a positive development
in gender equity but the attitude of people still has not changed towards
providing education to female population.

3. Lack of vocational training

Education in India still continues to be degree – oriented rather than job –
oriented. Emphasis is only on education thus neglecting vocational and
technical aspect of education. This has led to massive unemployment among
the masses.

4. Low standard of education

In India, quality or standard of education is very low as the syllabus
prescribed by various boards and universities does not match with the job
requirement. Though there have been efforts undertaken to bring desired
change in the pattern of examination and evaluation by CCE, yet much still
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has to be done.
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5. Insufficient government expenditure

Government spends nearly 4% of its expenditure on education which is less
than the desired expenditure of 6%. If govt. spends more on education,
noticeable rate of growth in educational achievement can be made.

6. Privatization of education
There is a growing tendency towards attaining education in private
institutions. Though facilities are better but it is very expensive. Because of
heavy expenditure, it goes beyond of many to obtain education in private
institutions.

7. Low access level in rural areas

There is a high degree of disparity in reaching out to facilities of education.
The access level to education is very low for the people in rural areas as
compared to people in the urban areas.

Future Prospects of Education

Future prospects of education can be made clear from the following points.:
(a) Education for all – still a distant dream. Though literacy rates for both
adults as well as youth – have increased, still the absolute number of
illiterates in India is as much as India’s population was at the time of
independence.

(b) Gender equity – Better than before. The difference in literacy rates
between males and females are narrowing signifying a positive development
in gender equity, sill the need to promote education for women in India is
imminent for various reasons such as improving economic independence and
social status of women and also because women education makes a
favourable impact on fertility rate and health care of women and children.

(c) Higher education – A few takers. The Indian education pyramid is steep,
indicating lesser and lesser number of people reaching the higher education
level. Moreover, the level of unemployment among educate youth is the
highest.

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