CHAPTER 5

HUMAN CAPITAL FORMATION

Indian Economic Development | Class XI

Comprehensive Study Notes
5.1 Introduction
• Human resources are vital for economic development — a nation's true wealth lies in its
people.
• Development of human resources means increasing the quality of human beings, which
helps economic growth and development.

Physical Capital vs. Human Capital

Physical Capital All inputs required for further production — plant, machinery, factory,
buildings, raw materials, etc.

Human Capital Skills a person acquires through education, training, and/or

experience, adding to their value in the production process.

Human Capital creates BOTH Private and Social Benefits. Physical Capital creates ONLY
private benefits.

Comparison: Physical Capital vs. Human Capital

Physical Capital Human Capital
Tangible; can be bought and sold in the market. Intangible; only services can be sold — owner
must be present.
Depreciates with the passage of time. Depreciation can be reduced through
continuous investment in education and health.
More mobile between countries. Less mobile — movement restricted by
nationality and culture.
Can be separated from its owner. Inseparable from its owner.
Outcome of a conscious economic & technical Partly a social process and partly a conscious
decision. decision of the possessor.
Can be built through imports. Must be formed through conscious policy
formulations.

People become a Resource when they use their skills, knowledge, and abilities. When
further developed through education and health, it is called Human Capital Formation.
5.2 Meaning of Human Capital Formation (HCF)
Human Capital The process of addition made to the stock of skilled and capable
Formation (HCF) people in the country over a period of time. It refers to development of
abilities and skills among the population.

• HCF is the process of acquiring and increasing the number of persons who have skills,
education, and experience.
• Example: If human capital stock rises from 30 lakh to 34 lakh skilled workers in a year, HCF
= 4 lakh skilled workers.
• HCF is associated with investment in human beings and their development as creative and
productive resources.

5.3 Sources of Human Capital Formation

Five key sources through which human capital can be increased:

1. Expenditure on Education
• Labour skill of an educated person is much higher than that of an uneducated person →
higher income.
• Spending on education by individuals = spending on capital goods by companies
(investment in future income).
• Education contributes to economic growth because it:
◦ Confers higher earning capacity on people
◦ Gives better social standing and pride
◦ Enables better choices in life
◦ Provides knowledge to understand societal changes
◦ Stimulates innovations
◦ Facilitates adaptation of new technologies

2. Expenditure on Health
• Poor health and undernourishment adversely affect the quality of manpower.
• Expenditure on health builds and maintains productive labour force and improves quality of
life.
• Forms of Health Expenditure include:
◦ 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
• Productivity of physical capital is substantially enhanced with improvement in human capital.
• Many firms provide on-the-job training to workers — fast, cost-effective.
• Increases skill and efficiency of workers → increase in production and labour productivity.
• Forms: In-firm training under a skilled worker OR off-campus training.
• After training, firms insist workers work for a specific period so firms can recover the benefit
of enhanced productivity.

4. Expenditure on Migration
• People migrate from one place to another in search of jobs that fetch higher salaries.
• Two types: Rural → Urban (unemployed people) and Developing → Developed countries
(qualified professionals — brain drain risk).
• Migration costs: Transportation, higher cost of living in new place, and Psychic Cost (stress
from cultural adjustment).
• This is a source of HCF when enhanced earnings in migrated place > increase in costs due
to migration.

5. Expenditure on Information
• Expenditure incurred to acquire information relating to labour market and other markets.
• Includes information about educational institutions, their standards, and cost of education.
• Necessary to make decisions regarding investments in human capital and for efficient
utilisation of acquired human capital.

5.4 Human Capital and Economic Growth

• Economic growth = increase in real national income of a country.
• Educated person contributes MORE to economic growth than an illiterate person.
• Healthy person contributes to economic growth by providing uninterrupted labour supply
over a longer period.
• Education, health, on-the-job training, job market information, and migration together
increase the income-generating capacity of an individual.

HCF Promotes Inventions, Innovations, and Technological Improvements

• HCF not only increases productivity but also stimulates innovations and creates ability to
absorb new technologies.
• Education provides knowledge to understand scientific changes, facilitating inventions.
• Educated labour force facilitates adaptation to new technologies.
Difficulty in Proving Cause and Effect
• Measurement problems make it difficult to conclusively prove that human capital causes
economic growth.
• Education measured in terms of years of schooling/enrolment may not reflect quality of
education.
• Health measured in monetary terms/life expectancy may not reflect true health status.

The relationship between human capital and economic growth flows in BOTH directions:
High income → High human capital; High human capital → High income.

Development Indicators (Table 5.1 Summary)

Indicator 1951 → 2016-17
Real Per Capita Income (₹) 7,651 → 77,659
Crude Death Rate (per 1,000) 25.10 → 6.30
Infant Mortality Rate 146 → 33
Life Expectancy — Males (yrs) 37.20 → 67
Life Expectancy — Females (yrs) 36.20 → 70
Literacy Rate (%) 16.67 → 76

National Education Policy 2020: Urgent demand for skilled workforce in maths, computer
science, data science, biology, chemistry, agriculture, and humanities — driven by
technological change, climate challenges, and pandemics.

5.5 Importance / Role of Human Capital Formation

• 7 key roles of HCF:

1. Effective Use of Physical Capital

• Physical capital can be created only by hard and intelligent work of human beings.
• Human skill and effort enable effective utilisation of physical capital.

2. Higher Productivity and Production

• Knowledgeable and skilled workers make better use of resources.
• Investment in human capital helps acquire new skills and knowledge in management,
technology, and production.
3. Inventions, Innovations, and Technological Improvement
• HCF stimulates innovations and creates ability to absorb new technologies.
• Educated labour force facilitates adaptation to new technologies.

4. Modernisation of Attitudes
• Knowledgeable, skilled, and fit people are powerful instruments of change.
• Investment in human capital helps change mental outlook and promotes development of the
economy.

5. Increases Life Expectancy

• Health facilities and nutritive food enable people to live a healthy and long life.
• This, in turn, adds to the quality of life.

6. Improves Quality of Life

• Quality of population depends upon level of education, health, and skill formation.
• HCF makes people productive and creative, and transforms lives.

7. Control of Population Growth

• Educated persons have smaller families compared to illiterate families.
• Spread of education is necessary to control the population growth rate.

5.6 Problems of Human Capital Formation

• 7 key problems of HCF in India:

1. Insufficient Resources
• Resources allocated to human capital formation are much less than required → facilities
remain grossly inadequate.

2. Serious Inefficiencies
• Wastage of resources: educated people are either unemployed or underemployed.
• Massive illiteracy, non-education of children, and poor health facilities are other
inefficiencies.

3. Brain Drain
• Migration of quality people (doctors, engineers) to other countries for better salaries.
• The cost of such loss is very high for a developing country.
4. High Growth of Population
• Continuous rise in population adversely affects quality of human capital.
• It reduces per head availability of education and health facilities.

5. Several Imbalances
• Disproportionate resources diverted to higher education (meant for few) rather than
primary/secondary education.
• This keeps general productivity of the economy low.

6. Lack of Proper Manpower Planning

• Imbalance between demand and supply of human resources of various categories,
especially highly skilled personnel.
• Absence of balancing has resulted in wastage of resources.

7. Weak Science and Technology

• Performance in fields of science and development of modern technology is particularly
unsatisfactory.

5.7 Human Capital vs. Human Development

Human Capital Human Development
Considers education and health as a MEANS Considers education and health as INTEGRAL
to increase labour productivity. to human well-being — people lead healthy,
literate lives to make choices they value.
Narrow concept: treats human beings as a Broader concept: treats human beings as
means to increase productivity. Investment is ENDS in themselves. Human welfare should be
unproductive if it does not enhance output. increased through education and health even if
labour productivity doesn't rise.

Human Development Perspective: Every individual has a right to basic education and health
care, irrespective of their contribution to labour productivity. Every individual has a right to
be literate and lead a healthy life.

5.8 Human Capital Formation in India: Great Prospects

• HCF is the outcome of investments in education, health, on-the-job training, migration, and
information — with education and health being the most critical.
 • India is a federal country: Education and health expenditures are carried out simultaneously
by Union, State, and Local Governments.
• Education and health care create both private and social benefits → both private and public
institutions exist in these markets.

Need for Government Intervention

• Education and health expenditures have substantial long-term impact that cannot be easily
reversed.
• Individual consumers lack complete information about quality and costs of services.
• Providers may acquire monopoly power and get involved in exploitation.
• Government ensures private providers adhere to standards and charge correct prices.

Regulatory Authorities
NCERT National Council of Educational Research and Training — set up in
1961 to assist and advise governments on qualitative improvement in
school education.

UGC University Grants Commission — since 1953/1956; coordinates,

determines, and maintains standards of teaching, examination, and
research in university education.

AICTE All India Council of Technical Education — set up November 1945;

apex advisory body for proper planning and coordinated development
of technical education.

ICMR Indian Council for Medical Research — apex body for formulation,
coordination, and promotion of biomedical research in India.

Basic Education and Health: Fundamental Right

• Large section of India's population lives below poverty line — unable to afford basic
education and health care.
• When basic education and health are considered rights, government must provide them free
of cost for deserving citizens.
• Both Union and State governments have been raising expenditures on education to achieve
100% literacy.
5.9 Educational Sector in India

Government Expenditure on Education — Two Measures

• As % of Total Government Expenditure: Indicates importance of education to the
government. Increased from 7.92% (1952) to 15.7% (2014).
• As % of GDP: Indicates proportion of income spent on education. Increased from 0.64%
(1952) to 4.13% (2014).

Education Commission (1964-66) recommended at least 6% of GDP should be spent on

education. Current level is only ~4%, which is quite inadequate.

Important Points about Government Expenditure

• Government spends MORE on Elementary Education (primary school) — it takes the major
share.
• Expenditure on Tertiary Education: Expenditure per student is higher, but overall share is
least. Expanding school education needs more trained teachers, so all levels need more
funding.
• Difference across States: Per capita education expenditure ranges from ₹34,651 (Himachal
Pradesh) to ₹4,088 (Bihar) in 2014-15 — leading to differences in educational attainment.

Provision of Free and Compulsory Education

• Tapas Majumdar Committee (1998): Estimated ₹1.37 lakh crore needed over 10 years
(1998-2006-07) to bring all children aged 6-14 under school education.
• Right to Education Act (2009): Free education made a fundamental right for all children
aged 6-14 years.
• Education Cess: Government levies 2% 'education cess' on all Union taxes, earmarked for
elementary education.

5.10 Educational Achievements in India

Educational achievements are measured through: Adult Literacy Rate, Primary Completion Rate,
and Youth Literacy Rate.

Indicator 1990 → 2017-18

Adult Literacy Rate — Male (%) 61.9% → 82%
Adult Literacy Rate — Female (%) 37.9% → 66%
Primary Completion Rate — Male (%) 78% → 93%
Primary Completion Rate — Female (%) 61% → 96%
Youth Literacy Rate — Male (%) 76.6% → 93%
 Youth Literacy Rate — Female (%) 54.2% → 90%

Key Definitions
Adult Literacy Ratio of literate adult population (15+) to the total adult population in a
Rate country.

Primary Percentage of students completing the last year of primary school.

Completion Rate

Youth Literacy Percentage of people aged 15-24 who can read and write a short,
Rate simple statement on their everyday life.

Female adult literacy rate, though improved from 37.9% to 66%, is still far below the
satisfaction level.

5.11 Future Prospects in Educational Sector

Education for All: Still a Distant Dream
• Literacy rates have increased, but the absolute number of illiterates is still as large as India's
population at independence.
• The 1950 Constitution Directive: Free and compulsory education for all children up to 14
years — had this been done, 100% literacy would have been achieved by now.

Gender Equity: Better than Before

• Male-female literacy gap is narrowing — a positive development in gender equity.
• Women's education needs further promotion to:
◦ Improve economic independence and social status of women.
◦ Favourably impact fertility rate and health care of women and children.

Beti Bachao, Beti Padhao (2015): Campaign to prevent gender-biased sex selective
elimination, ensure survival and protection, and ensure education and participation of the
girl child.

Higher Education: Few Takers

• India's education pyramid is steep — fewer and fewer people reach higher education level.
• In 2011-12, ~19% of rural male graduates were unemployed; ~30% of young rural female
graduates were unemployed.
• Only 3-6% of primary-level educated youth in rural and urban areas were unemployed.
 • Government needs to increase allocation for higher education AND improve standards so
institutions impart employable skills.

Conclusion: India has a rich stock of scientific and technical manpower. We need to improve
it qualitatively and provide conditions so that it is utilised within our own country.

Key Takeaways

5 Most Essential Points from Chapter 5

1. Human Capital ≠ Physical Capital: Human capital is intangible, inseparable from its owner,
and creates both private and social benefits. Unlike physical capital which only creates
private benefit, investing in human beings benefits the entire society — making government
intervention in education and health essential.
2. 5 Sources of HCF: Expenditure on (1) Education, (2) Health, (3) On-the-Job Training, (4)
Migration, and (5) Information — all increase the stock of human capital by improving skills,
productivity, and earning capacity.
3. Human Capital vs. Human Development: Human Capital treats people as a MEANS to
economic productivity (narrow view). Human Development treats people as ENDS in
themselves — education and health are rights regardless of their contribution to labour
output (broader view).
4. 7 Problems of HCF in India: Insufficient resources, serious inefficiencies
(unemployment/underemployment of educated), brain drain, high population growth,
imbalance between higher vs. primary education funding, lack of manpower planning, and
weak science & technology performance.
5. Education Progress with Gaps Remaining: India's literacy and completion rates have
improved significantly (female adult literacy: 37.9% → 66%; male adult literacy: 61.9% →
82% by 2017-18). However, absolute number of illiterates remains high, government spends
only ~4% of GDP on education (vs. 6% recommended), and a steep education pyramid
means few reach higher education.