CHAPTER-4

HUMAN CAPITAL FORMATION

1. Concepts:
A. Physical Capital: It includes all those inputs which are required in the process of production,
such as plant, raw materials, machinery, building etc.
B. Human Capital: It refers to the knowledge, skill and efficiency of human beings in a national
at a point of time.
C. Human Capital Formation: It is the process of acquiring and increasing the number of
persons who have the skill, education and experience which are essential for the economic
and political development of the nation.
D. Human Resource Development: It refers to the development of the set of individual that
makes up the workforce of an organization, business sector or economy.

2 Sources of Human Capital Formation:

1. Investment/expenditure on education: The most important source of human capital

formation is to invest on the education system and training of people. Education enables an
individual to make good living throughout his life. A good education system results in the
overall development of the economy as education generate technical skills and creates
manpower which suites for improving the total productivity of the economy.

2. Expenditure on health: ‘Health is wealth’ is an old saying which directly signifies that a
health mind is much more effective and productive than a sick mind. Expenditure on health
makes an individual more productive and hence it contributes more in the GDP of the nation.

3. On the job training: It refers to the training of employees while they are performing a job.
The concept of on-the-job training increases the productivity of labour and sharpens their
skills as they work under professional guidance and with practical application. Moreover, it
enables the workers to adapt new technologies and hence creates human capital.

4. Expenditure on information: Information related to job markets and educational institutes

offering specialized skills is an important determinant of skill formation as it enables the
individuals to actualize their true potential.

5. Migration: It refers to moving from one place to other. It contributes to human capital
formation as it enables the utilization of inactive skills of the peoples or it facilitates better
utilization of resources. People migrate from rural to urban areas in order to find better
earnings and good standard of living.
3. Role of Human Capital Formation in Economic Growth
1. Increases production: Human capital formation focuses on building a productivity
 environment by providing skills and education to the people of the country. The productivity
of the economy will automatically increase with increase in the level of education and skilled
workforce.
2. Raises life expectancy: Human capital formation increases the life expectance of the
people. Better health facility and good food increases the life span of people and raises the
quality of life.
3. Improves the quality of life: People migrate for better earning and quality of life. The quality
of life depends upon the level of education, health care facilities, better working environment
and good quality food. Human capital formation increases the quality of life of the people of
the economy.
4. Increases participation and brings equality: Here participation refers to the percentage of
labour force participating the process of production. Human capital formation leads to
enhancement of productive capacity of the labour which ultimately leads to greater
employment and equality in the distribution of income and wealth.
5. Innovative skills: - With the increase in the number of skilled and trained workers, the
possibilities of innovation also increase in the process of production. Innovation always plays
a key role in the path of development of the economy and generation of income.
4. Problems Facing in Human Capital Formation

1. Rising population: Increasing population reduced the per head availability of existing
resources and facilities such as hospital, education, employment, water supply etc. The
reduction in resources reduces the quality of life the people.
2. Brain drain: Skilled and technically efficient people migrate from India to foreign countries
in search of better salaries and standard of life. This is a threat in the process of human capital
formation for the country as it slows down the pace of development of the economy.
3. Insufficient man power planning: One of the main causes of unemployment is the deficit
of proper man power planning. There is always a gap between demand and supply of rising
labour force in the country. Increase in the number of employment opportunities is far behind
the number of Available work force.
4. Inefficient education system: Everything in the economy changes with the changing
environment except the education system of our economy. The education system of our
economy is around 100 years old. The number of universities increases with the great pace
lacking behind the quality of education.
5. Inefficient on the job in agriculture: Indian is an agriculture-based economy and yet
agriculture does not receive much attention in the area of professional skills. The concept of
on-the-job training rarely applied in this sector which ultimately results in traditional methods
of farming and low level of productivity.
6. Inefficient resources: The amount of resources allotted for the development of human
capital is very low as compared to actual amount of resources required. Due to this the
resources remains inadequate and insufficient for the formation of human capital.
5. Reports on the Indian Economy

Two independent reports on the Indian Economy, in recent times, have identified that India
would grow faster due to its strength in human capital formation.
 ➢ Deutsche Bank, a German bank in its report on “Global Growth Centers” identified
that India will emerge as one among four major growth centres in the world by the
year 2020. With reference to India it states, ―Between 2005 and 2020 we expect a
40% rise in the average years of education in India.
➢ World Bank, in its recent report, “India and the knowledge economy- Leveraging
strengths and opportunities”, states that India should make a transition to the
knowledge economy and if it uses its knowledge as much as Ireland does then the per
capita income of India will increase from US$1000 IN 2002 to US$3000 in 2020. It
further states that the Indian economy has all the key ingredients for making this
transition such as, a critical mass of skilled workers, a well-functioning democracy and
diversified science and technology infrastructure.

6. Government intervention in Education and health sectors

➢ Expenditure on education and health makes substantial long-term impact and they
cannot be easily reversed; hence, government intervention is essential.
➢ The role of government is to ensure that the private providers of these services
adhere to the standards stipulated by the government and charge the correct price.
➢ In a developing country like India, with a large section of the population living below
the poverty line, many of us cannot afford to access basic education and health care
facilities.
➢ Basic health care and education is a right of the citizens. So, it is essential that the
government should provide education and health services free of cost for the
deserving citizens and those from the socially oppressed classes.

6. Educational sector: An essential part of human capital formation

Education refers to the process of teaching, training and learning especially in schools and
colleges to improve knowledge and to develop skill. Basically, education is termed to be the
most important part of human capital formation as it enables the people to change their
outlook, become more efficient and to increase their productivity. In India the education
sector has been developed since independence.

1.Elementary education:
• It covers the students from class 1 to class 8(6-14 years)
• The number of primary and middle school (up to class 8) has increased from 2.24 lakhs in
1950-51 to 11.92 lakhs in 2011-12
• Nearly 97% children receive elementary education.
• Government introduced various policies to strengthen elementary education such as Sarva
Siksha Abhiyan, right to education, mid-day meal programme and so on.

2. Secondary and senior secondary education:

• It covers the students from class 9 to class 12(14-19 years)
 • The number of Secondary and senior secondary school has increased from 7.4 thousand in
1950-51 to 2.32 lakhs in 2011-12.
• The number of students also increases from 15 lakhs in 1950-51 to 482 lakhs in 2011-12.
An important role is played by Navodaya schools and Kendriya Vidhyalayas at central level.

3. Higher education:
• The number of colleges (general) has increased from 578 in 1950-51 to 35,839 in 2011-12.
• The number of universities has also increased from 27 to 665.
• The number of students getting higher education is about 130 lakhs(2011-12.)
• The expenditure on education has also increased from 1.5% of GDP in 1950 to 3.1% in 2015-
16.
7. Growth of education sector in India: -
➢ 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.
➢ In 2009, the Government of India enacted the Right to Education Act to make free
education a fundamental right of all children in the age group of 6-14 years.
➢ Government of India has also started levying a 2 % “Education Cess” on all Union
taxes. The revenues from education cess have been earmarked for spending on
elementary education.
➢ In addition to this, the government sanctions a large outlay for the promotion of
higher education and new loan schemes for students to pursue higher education.
8. Provision for Free and Compulsory Education: -
➢ The Tapas Majumdar Committee was appointed by Indian Government in 1998. It
estimated an expenditure of around Rs. 1.37 lakh crore over 10 years (1998-99 to
2006-07) to bring all Indian children in the age group of 6-14 years under the purview
of school education.
➢ In 2009, the Government of India enacted the Right to Education Act to make free
education a fundamental right of all children in the age group of 6-14 years.
➢ Government of India has also started levying a 2 % “Education Cess” on all Union
taxes. The revenues from education cess have been earmarked for spending on
elementary education.
➢ In addition to this, the government sanctions a large outlay for the promotion of
higher education and new loan schemes for students to pursue higher education.
9. (a) Low Government Expenditure on Education:
The government has failed to fulfil its commitment of spending nearly 6 per cent of GDP on
education: actual expenditure has been around 4 per cent only. This points to the gap
between what is intended or desired and what is actually achieved.
(b) Difference in Educational Opportunities across States:
In 2014-15, the per capita education expenditure differs considerably across states from as
high as 34,651 in Himachal Pradesh to as low as 4,088 in Bihar. This leads to differences in
educational opportunities and attainments across states
10. FUTURE PROSPECTS IN EDUCATIONAL SECTOR

(a) Education for all: Still a distant dream

➢ The literacy rates for both adults as well as youth have increased. However, the
absolute number of illiterates is still as much as India's population was at the time of
independence.
➢ In 1950, it was noted in the Directives of the Constitution that the government
should provide free and compulsory education for all children up to the age of 14
years. Had we done this, we would have achieved 100% literacy by now.

(b) Gender Equity: Better than Before

The differences in literacy rates between males and females are narrowing. It indicates a
positive development in gender equity. However, women education needs to be promoted:
➢ To improve economic independence and social status of women; and
➢ Women education makes a favorable impact on fertility rate and health care of
women and children.
So, we cannot be satisfied about the upward movement in the literacy rates, until 100%
literacy rate is achieved.
11. REGULATORY AUTHORITY

S. No. Regulatory Full Form Regulates Establishment

Authority Year
1. NCERT National Council of School Education 1961
Educational Research Syatem
and Training
2. UGC University Grants University Education 28th December
Commission System 1953
3. AICTE All India Council of Technical Education November 1945
Technical Education System
4. ICMR Indian Council for Medical Research Previously
Medical Research Bodies (Hospitals and known as IFRA
Colleges) (1911) Renamed
as ICMR in 1949
12. COMMITEES AND THEIR OBJECTIVES:

S. No Committee Year Objectives

1. Education commission 1965 It had recommended that at least 6% of GDP be
spent on education so as to make a noticeable rate
of growth in educational achievements.
2. The Tapas Majumdar 1998 It estimated an expenditure of 1.37 lakh crore
Committee over 10 years (1998-99 to 2006-07) to bring all
Indian children in the age group of 6-14 years
under the purview of school education.
 3. Right to Education Act 2009 It was enacted by the Government of India to
make free education a fundamental right of all
children in the age group of 6-14 years.
13. EDUCATIONAL ACHIEVEMENT IN INDIA:

(a) Adult Literacy Rate: Adult literacy rate refers to the ratio of literate adult population to the
total adult population in a country.
➢ In case of males, the adult literacy rate increased from 61.9% in 1990 to 82% in 2017-
➢ In case of females, the literacy rate was just 37.9% in 1990, which increased to 66% in
2017-18, which is still far below the satisfaction level.
(b) Primary Completion Rate: It is the percentage of students completing the last year of
primary school.
➢ In case of males, the primary completion rate increased from 78% in 1990 to 93% in
2017-18.
➢ In case of females, the rate increased from 61% in 1990 to 96% in 2017-18.
(c) Youth Literacy Rate: It is the percentage of people aged 15-24 who can, with
understanding, read and write a short, simple statement on their everyday life.
➢ In case of males, there was marginal increase in youth literacy rate from 76.6% in 1990
to 93% in 2017-18.
➢ In case of females, the youth literacy rate increased from 54.2% in 1990 to 90% in
2017-18.
14. Important terms:
1. Gross Enrollment ratio: - It refers to the number of students enrolled in school at different
grade levels (primary, middle and high school.)
2. Literacy rate: - It refers to the percentage of people above 7 years who can read, write and
understand any one language. The literacy rate of India is approx 74.4%. Most literate state
is Kerala with 93.9% whereas the least literate state is Bihar with 63.8%