Introduction
Human beings are an intelligent species on this planet who are capable of mass production of goods for their use. This production process is subject matter of Economics and in economics, human is one the factors of production. It is called human resource or human capital in the context of an economic activity. In these notes, we will study various interlinked issues related to human capital formation.
Human Resource, Human Capital, Physical Capital and Human Capital Formation.
Human Resources: Human is a resource in the sense that he contributes to the production of goods and services with the help of his abilities like skill and expertise. Example: A doctor is a resource as he has abilities to help cure the sick person with his expertise in Medical Field.
Human Capital: It refers to the store of knowledge and skill in a person. Human capital is intangible in nature and cannot be separated from its owner. However, services of Human Capital can be sold.
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Physical Capital: It refers to tangible assets like building, machines, money, raw material etc. It is of two types – Fixed Capital (building, machines etc.) and Working Capital (Money, raw material).
Human Capital Formation: It refers to addition to the stock of human capital over time. The process helps in increasing the level of knowledge, expertise and skill in human beings. This results in building of production capacity in a country.
Note: Human Capital is a stock concept while Human Capital Formation is a flow concept.
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Human Development and Human Capital
Human Development: Human Development is a wider concept which includes increase is such things (material or non-material) which enhance human welfare. These things may include high level of per capita incomes, better education & health facilities, no-societal discrimination of any kind, safety & security etc.
Human development is different from the human capital as the latter is a means to an end i.e. human development. So, human capital may be considered just a part of human development.
Human Capital is purely an economic concept. It is linked to value addition in an economy. On the other hand, Human development also includes factors other than human capital.
Sources of Human Capital Formation
Human capital formation depends upon many factors which are detailed as below:
1. Expenditure on Education: Education is one of the most important factors for both human capital formation and human development. Education expands the knowledge and skills of persons enhancing their production capabilities. An educated person is likely to make good living. The returns (earnings) on education are often very large as compared to the expenditure incurred on gaining education.
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2. Expenditure on Health: A healthy person can better contribute to the production process. He is more efficient and more productive than a sick/unhealthy person. So, expenditure on health is a great determinant of supplying healthy workforce in an economy.
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3. On the job training: A person may be educated. However, to work in a particular field, he needs to sharpen his skills. Here, on the job training really helps him. A trained person is likely to increase the production capacity of a firm. So, many firms/establishments provide on the job training to their employees under a trained person in or off-campus.
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4. Study Programs: Apart from formal education, adults can be given knowledge about skill and expertise in study programs. These study programs are often organized by the governments and NGOs to enhance the efficiency of the people in their field.
5. Migration: Migration means shifting from one place to another place especially in search of better livelihood conditions. Migration can happen intra-state, inter-state or international migration. People of India migrate to USA, Canada. Likewise, people from backward states like Bihar, Orrisa migrate to more prosperous regions of Haryana, Punjab, Maharashtra. Migration helps in human capital formation through fuller utilization of skills of a person. A person can earn more at the new place than the old place.
6. Expenditure on Information: This is the age of information. A person may have potential to develop his skill and expertise. However, due to lack of information, his abilities may not grow to its full potential and he may be underutilized in the process of growth. Hence, expenditure on useful information is likely to enhance human capital.
Relationship between Human Capital and Economic Growth
It is difficult to prove a definite relationship between these two variables. This may arise due to measurement problem. This can be understood by following examples:
Education measured in terms of years of schooling, enrolment rates may not necessarily reflect quality level of the education. Similarly, Life Expectancy or mortality rates may not reflect the true status of the health in the country.
However, it may be noted that an educated and a healthy person in more capable in generating higher income than an uneducated and unhealthy person. Moreover, an educated person is more capable in understanding the various changes in society which encourages further inventions and innovations. An educated person is likely to adapt to new technology faster.
So, we may say that it is good to have better human capital stock in order to enhance economic growth of the country.
Moreover, both human capital and economic growth stimulate each other. High level of income causes higher human capital formation and high human capital formation causes increased economic growth.
India as a knowledge Economy
India recognized importance of Human Capital formation in its 7th Five Year Plan (1985-90). The plan called human capital an asset in accelerating the economic growth and a vehicle of social change in desired directions.
India is transitioning itself into a knowledge based economy by using the advanced information technology. We can see these changes by the fact that many services are provided online. These technologies are being used to provide wages to workers to teaching the students.
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Use of Information Technology (IT) makes the processes more effective and approachable to the general public. However, to create a knowledge based economy, India needs to develop basic infrastructure for implementing and using the IT services.
A prediction had been made by the World Bank in its Report ‘India and the Knowledge Economy-Leveraging Strengths and Opportunities’ that India could increase its Per Capita Income from USD 1000 in 2002 to USD 3000 in 2020. However, India has fell short of this target as its PCI could reach to USD 2410 only in 2022. So, we need to increase our efforts at all levels from government to general public to make it a knowledge economy to have a greater increase in PCI.
State of Human Capital Formation in India
India has the biggest population of the world and maintaining good quality of human capital is a challenge. In order to enhance human capital formation, state of two of the most important indicators of human capital formation i.e. Health and Education become very critical. Since, India has a large population, role of government in providing and facilitating health & education services is also very important.
Why Government intervention is needed to provide health and education facilities.
Poverty: A large section of Indian population still lives in poverty. People cannot afford even the basic health and education facilities from the private sector at market price.
Welfare state: India is a welfare state and providing & facilitating basic education and health as people’s rights is duty of the government.
Social Benefits: Better education and health facilities create private as well as social benefit. These benefits cannot be easily reversed. They are long lasting. So, government needs to intervene in these sectors especially for economically and socially backwards groups.
Exploitation by Private Sector: Another reason is that monopoly of private sector in education and health sector may lead to economic exploitation of the general public. So, government needs to ensure that private sector adhere to quality standard and charge reasonable prices.
Education Sector in India
Government Expenditure: Government expenditure on education can be categorized in two ways:
1. Education expenditure as a percentage of total budget expenditure.
2. Education expenditure as a percentage of GDP.
Government expenditure as a percentage of total budget expenditure increased from 7.92 to 9.5 percent between 1952-2022. It was 15.7 percent in 2014.
Education expenditure as a percentage of GDP increased from 0.64 to 3.5 percent during 1952-2022. It was 4.13 percent in 2014.
It may be noted that government expenditure in both the above categories has increased overtime. However, the increase in not sufficient. It has seen rise and fall intermittently. However, if we include expenditure by private individuals and institution, then the expenditure on education seems high. Public and private expenditure on education were 3.9% and 2.7% respectively of GDP in 2018-19. Hence the country spent 6.6% of GDP on education in that year.
However, India needs to spend 6% of GDP as recommended by various committees and commissions like:
1. Education Commission (1964-66)
2. Tapas Majumdar Committee (1999)
3. National Education Policy (2020)
Share of Education Expenditure:
Share of expenditure on elementary (primary) education is highest while that of tertiary (higher) education is least. However, it may be noted that expenditure per student in higher for tertiary education. Moreover, there is also difference between various states doing per capita expenditure on elementary education. As per 2014-15 data, Himachal Pradesh spends Rs 34,651/- while Bihar spends Rs 4088/- per capita on elementary education. This leads to differences in educational opportunities and attainments across states.
Some other efforts by the government
Government of India enacted Right to Education-2009 in order to provide free and compulsory education to children between the age of 6 to 14.
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Government of India has also imposed 2 percent cess on all Union Taxes. The money collected is reserved for elementary education.
Govt also provides various scholarship and loan facilities to students for pursuing higher studies.
Achievement and challenges in Education Sector.
Educational Attainment in India: Literacy rate has considerably increased over the years from 18 percent in 1951 to 74 percent in 2011. Now, over 90 percent people are completing their primary education. Youth Literacy (people aged 15 to 24) has also crossed 90 percent mark.
However, it may be noted that India still has crores of illiterate persons. Why? Just ponder. Comment in Comment Section.
Education and Unemployment
Though education achievements of the Indian people are increasing, these educated persons are facing employment crisis. As per NSSO data (2011-12), unemployment rate for youth males with graduation and above in rural areas was 19 per cent while it was 16 percent in urban areas. Condition of young rural female graduates is worse as they face 30 percent unemployment rate.
In contrast to this, it may be noted that only about 3-6 per cent of primary level educated youth in rural and urban areas were unemployed.
Q. Why educated people are more unemployed than those of less educated people? Comment in Comment Section.
Challenges of Education Sector
Large No. of illiterates: India still has over 30 crores illiterates who are more than the population of the most of the countries in the world. Illiteracy hinders economic growth especially when the growth is driven by the use of information technology.
Inadequate vocationalisation: Indian education system has been a system which promoted bookish knowledge. There had been lack of vocationalisation of education. Education is degree oriented and students get little exposure to the practical work of functioning of the economy in different sectors. This is the reason that unemployment is increasing among educated persons as many of them are unemployable.
Gender Bias: In overall literacy rate, female literacy is considerably lower than that of male literacy. However, overtime, female enrollment at primary levels has caught up male enrollment. Still, problems remain with female education as overall drop-out of females is higher than the males. Female and male overall dropout rates were 14.7 % and 13.2% respectively for rural area as per 2017-18 data whereas it was 9.7 percent and 9.5 percent respectively for urban area.
Privatisation: Private education sector is considerably increasing after 1990. Increasing Privatisation of education has made education an expensive affair. This has widen the gap between rich and poor in access of quality education, thus limiting education opportunities for poorer section of society.
Lower Government Expenditure: As discussed earlier in the chapter, public expenditure has been below the desired level of 6% of GDP. This has mainly affected human capital formation of poorer section.
The way ahead
Advance level of human capital formation is need of hour for India, considering its huge youth population. Quality human capital will certainly help in economic development of India. For this, govt needs to enhance its expenditure in various field especially in health and education sector. Gap in access to opportunities between rich and poor needs to be narrowed. Moreover, gender bias for women is also needed to be addressed at all level for providing various facilities so that they can also actively participate in economic development of the country.
Some Important Concepts
Life Expectancy at birth
Life Expectancy at birth refers to the average number of years a person is expected to live. This estimation is done on the basis of current mortality rate.
Mortality Rate
Mortality Rate refers to death of persons in a given year out of every 1000 persons in a population.
Privatisation
Privatisation is a process in which government assets are sold to private sector.
Literacy Rate
Literacy rate refers to the percentage of population from the age group of 7 years and above which can read and write a language.
Elementary Education
Elementary education covers classes till 8th class. There are two stages of elementary education. First is Primary stage till Class V and second stage is Middle Stage which covers Class VI to Class VIII.
FAQs
Q.1 Are Human Development and Human Capital similar concepts?
Ans: No, they are different concepts. Human Development is broader concept than Human Capital.
Q.2 What is the percentage of GDP should the government expend on education?
Ans: 6 percent of GDP.
Q.3 When was Kothari Commission formed?
Ans: Kothari Commission was form in 1964 as an ad-hoc education commission under the chairmanship of Daulat Singh Kothari. It was dissolved in 1966.
Q.4 What is the literacy rate of India as per Census 2011?
Ans: As per Census 2011, literacy rate of India is 74.04%. Literacy rate for males is 82.14% while the female literacy rate is 65.46%.
Some Important links
Economic Reforms in India since 1991