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Human Capital Formation In India | Class 12 Indian Economic Development Notes

What is Human Capital?

Just as a country can turn physical resources like land into physical capital like factories, similarly, it can also turn human resources like students into human capital like engineers and doctors.

Societies need sufficient human capital in the first place in the form of competent people who have themselves been educated and trained as professors and other professionals.

In other words, we need good human capital to produce other human capital. This means that we need investment in human capital to produce more human capital out of human resources.

Sources of Human Capital

Investment in education is considered as one of the main sources of human capital.

There are several other sources as well.

  • Investments in health

  • On- the-job training

  • Migration

  • Information

; are the other sources of human capital formation. Individuals invest in education with the objective of increasing their future income.

Investment in Health

Like education, health is also considered as an important input for the development of a nation as much as it is important for the development of an individual.

Hence, expenditure on health is an important source of human capital formation.

Preventive medicine (vaccination), curative medicine, social medicine and provision of clean drinking water and good sanitation are the various forms of health expenditures.

Health expenditure directly increases the supply of healthy labour force and is, thus, a source of human capital formation.

Firms spend on giving on-the-job-training to their workers.

This may take different forms: one, the workers may be trained in the firm it under the supervision of a skilled worker; two, the workers may be sent for off-campus training.

In both these cases firms incur some expenses. Firms will, thus, insist that the workers should work for a specific period of time, after their on-the-job training, during which it can recover the benefits of the enhanced productivity owing to the training.

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.

Why do people migrate?

People migrate in search of jobs that fetch them higher salaries than what they may get in their native places.

Unemployment is the reason for the rural-urban migration in India. Technically qualified persons, like engineers and doctors, migrate to other countries because of higher salaries that they may get in such countries.

Migration in both these cases involves cost of transport, higher cost of living in the migrated places and psychic costs of living in a strange socio-cultural setup.

The enhanced earnings in the new place outweigh the costs of migration; hence, expenditure on migration is also a source of human capital formation.

Physical and Human Capital

Both the forms of capital formation are outcomes of conscious investment decisions.

Decision regarding investment in physical capital is taken on the basis of ones knowledge in this regard.

The entrepreneur possesses knowledge to calculate the expected rates of return to a range of investments and then rationally decides which one of the investments should be made.

The ownership of physical capital is the outcome of the conscious decision of the owner the physical capital formation is mainly an economic and technical process.

A substantial part of the human capital formation takes place in ones life when she/he is unable to decide whether it would maximize her/his earnings.

Children are given different types of school education and health care facilities by their parents and the society. The peers, educators and society influence the decisions regarding human capital investments even at the tertiary level, that is, at the college level.

Moreover, the human capital formation at this stage is dependent upon the already formed human capital at the school level.

Human capital formation is partly a social process and partly a conscious decision of the possessor of the human capital.

Differences between Physical and Human Capital:

Physical capital is tangible and can be easily sold in the market like any other commodity. Human capital is intangible; it is endogenously built in the body and mind of its owner.

Human capital is not sold in the market; only the services of the human capital are sold and, hence, there arises the necessity of the owner of the human capital to be present in the place of production.

The physical capital is separable from its owner, whereas, human capital is inseparable from its owner.

The two forms of capital differ in terms of mobility across space.

Physical capital is completely mobile between countries except for some artificial trade restrictions.

Human capital is not perfectly mobile between countries as movement is restricted by nationality and culture.

Therefore, physical capital formation can be built even through imports, whereas human capital formation is to be done through conscious policy formulations in consonance with the nature of the society and economy and expenditure by the state and the individuals.

Both forms of capital depreciate with time but the nature of depreciation differs between the two.

Continuous use of machine leads to depreciation and change of technology makes a machine obsolete.

In the case of human capital, depreciation takes place with ageing but can be reduced, to a large extent, through continuous investment in education, health, etc.

This investment also facilitates the human capital to cope with change in technology which is not the case with physical capital.

Human Capital and Economic Growth:

Economic growth means the increase in real national income of a country; naturally, the contribution of the educated person to economic growth is more than that of an illiterate person.

If a healthy person could provide uninterrupted labour supply for a longer period of time, then health is also an important factor for economic growth.

India as a Knowledge Economy

The Indian software industry has been showing an impressive record over the past decade.

Entrepreneurs, bureaucrats and politicians are now advancing views about how India can transform itself into a knowledge-based economy by using information technology (IT).

There have been some instances of villagers using e-mail which are cited as examples of such transformation.

Likewise, e-governance is being projected as the way of the future. The value of IT depends greatly on the existing level of economic development.

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 the idea that education and health are integral to human well-being because only when people have the ability to read and write and the ability to lead a long and healthy life, they will be able to make other choices which they value.

In this view, any investment in education and health is unproductive if it does not enhance output of goods and services. In the 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. Therefore, basic education and basic health are important in themselves, irrespective of their contribution to labour productivity.

In such a view, every individual has a right to get basic education and basic health care, that is, every individual has a right to be literate and lead a healthy life.

State of Human Capital Formation in India

The Constitution of India mentions the 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 the three tiers of the government.

In India, the ministries of education at the union and state level, departments of education and various organizations 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 the education sector.

Similarly, the ministries of health at the union and state level, departments of health and various organizations like Indian Council for Medical Research (ICMR) facilitate institutions which come under the health sector.

In a developing country like ours, 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.

Moreover, a substantial section of our people cannot afford to reach super specialty health care and higher education.

Furthermore, when basic education and health care is considered as a right of the citizens, then 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.

Both, the union and state governments, have been stepping up expenditures in the education sector over the years in order to fulfill the objective of attaining cent per cent literacy and considerably increase the average educational attainment of Indians.

Education Sector in India

The percentage of education expenditure of total government expenditure indicates the importance of education in the scheme of things before the government.

The percentage of education expenditure of GDP expresses how much of our income is being committed to the development of education in the country.

During 1952-2002, education expenditure as percentage of total government expenditure increased from 7.92 to 13.17 and as percentage of GDP increased from 0.64 to 4.02.

Throughout this period the increase in education expenditure has not been uniform and there has been irregular rise and fall. To this if we include the private expenditure incurred by individuals and by philanthropic institutions, the total education expenditure should be much higher.

Elementary education takes a major share of total education expenditure and the share of the higher/ tertiary education is the least. Though, on an average, the government spends less on tertiary education, expenditure per student in tertiary education is higher than that of elementary.

This does not mean that financial resources should be transferred from tertiary education to elementary education. As we expand school education, we need more teachers who are trained in the higher educational institutions; therefore, expenditure on all levels of education should be increased.

The per capita education expenditure differs considerably across states from as high as Rs 3,440 in Lakshadweep to as low as Rs 386 in Bihar. This leads to differences in educational opportunities and attainments across states.

Future Prospects

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 Indias population was at the time of independence.

In 1950, when the Constitution of India was passed by the Constituent Assembly, it was noted in the Directive Principles of the Constitution that the government should provide free and compulsory education for all children up to the age of 14 years within 10 years from the commencement of the Constitution.

Had we achieved this, we would have cent per(100%) cent literacy by now.

Gender Equity

Better than Before: The differences in literacy rates between males and females are narrowing signifying a positive development in gender equity; still 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 favorable impact on fertility rate and health care of women and children.

Therefore, we cannot be complacent about the upward movement in the literacy rates and we have miles to go in achieving cent per cent adult literacy.

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 educated youth is the highest. As per NSSO data, in the year 2000, the rate of unemployment among youth with education up to secondary level and above was

7.1 per cent whereas the rate of unemployment for youth with education up to primary level was only 1.2 per cent.

Therefore, the government should increase allocation for higher education and also improve the standard of higher education institutions, so that students are imparted employable skills in such institutions.


The economic and social benefits of human capital formation and human development are well known.

The union and state governments in India have been earmarking substantial financial outlays for development of education and health sectors.

He spread of education and health services across different sectors of society should be ensured so as to simultaneously attain economic growth and equity.

India has a rich stock of scientific and technical manpower in the world. The need of the hour is to better it qualitatively and provide such conditions so that they are utilized in our own country.


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