Human Capital Formation in India — Notes

Human capital is the stock of skill, knowledge, expertise and health embodied in the people of a country at a point of time. Human capital formation is the process of adding to this stock over time by spending on education, health, training, migration and information.

A large population becomes a productive asset only when it has human capital; otherwise it can be a burden on scarce resources.

1. Education: spending on schooling and higher studies raises future earnings and output; it is an investment because the return comes later.
2. Health: preventive medicine (immunisation), curative medicine (treatment), social medicine (health literacy), clean water and sanitation raise the capacity to work.
3. On-the-job training: firms train workers at the workplace or send them for courses, expecting extra output; they often bind trained workers to stay for a period.
4. Migration: moving to where skills earn more (rural to urban, or abroad); it counts only if the returns exceed the costs (transport, higher cost of living, psychic costs).
5. Information: spending on information about jobs, wages, education and health helps people make better choices.

• Nature: physical capital is tangible; human capital is intangible.
• Separability: a machine can be sold apart from its owner; skill cannot be separated from the person.
• Mobility: physical capital moves fairly easily between countries; people face restrictions of nationality and culture.
• Depreciation: machines wear out; skills become outdated, and people age, so continuous learning is needed.
• Benefits: physical capital mainly benefits its owner; human capital also creates social benefits (an educated person helps others learn and stay healthy).

The two are complements: modern machinery needs trained people to run it.

Growth: human capital raises labour productivity, encourages innovation and helps the economy use physical capital well. Higher growth in turn gives families and governments more to spend on schools and hospitals. The link is two-way, and it is hard to show which comes first.

Human development treats education and health as ends in themselves, part of well-being; human capital treats them as means to raise productivity. Human development is the wider idea.

Knowledge economy: India's IT and software services show the potential of a skilled workforce, but much of the workforce still has little schooling or training; quality education for the majority is the condition for this potential to be realised.

Why the State intervenes: returns come over a long period and poor families cannot pay now; education and health have social benefits; families face information gaps and may be overcharged; and equity requires that the poor are not shut out. Education is on the concurrent list, so both the Centre and the states are responsible; private institutions also provide it.

Indicators: education expenditure as a percentage of (i) total government expenditure, which shows priority, and (ii) GDP, which shows how much of national income goes to education.

Goal: the Education Commission (1964–66) recommended about 6 per cent of GDP; the National Education Policy 2020 repeated it. Public spending has remained below this level.

Right to education: Article 21A makes free and compulsory education for children aged 6 to 14 a fundamental right; the RTE Act 2009 gives effect to it (neighbourhood schools, 25 per cent of entry-level seats in private unaided schools for weaker sections, norms for teachers and facilities).

Achievements (broad): literacy has risen from under one in five people in 1951 to about three in four (Census 2011); primary enrolment is close to universal; midday meals and free textbooks help keep poor children in school; a large system of higher and technical education has grown.

Problems: low quality of learning; gender gap (female literacy below male literacy); regional and rural–urban gaps; dropouts after the elementary stage; public spending below the 6 per cent goal; brain drain; unemployment among educated youth.

Way forward: raise public spending towards 6 per cent of GDP; train and support teachers; measure learning outcomes, not only enrolment; link vocational education to jobs; focus on girls and lagging regions.