Chapter 4:

Human Capital Formation in India

4.1 INTRODUCTION
Meaning
• Human beings acquire knowledge, skills, and capabilities through education and

training.
• An educated and skilled worker is more productive, earns more income, and

contributes more to economic growth than an uneducated worker.

Why education matters
• Enhances earning capacity

• Improves social status

• Improves decision-making

• Encourages innovation and creativity

• Helps understand social and technological changes

Key Idea
Investment in people (education, training, health) is as important as
investment in physical capital (machines, factories).

4.2 WHAT IS HUMAN CAPITAL?

Definition
Human capital refers to the stock of skills, abilities, knowledge, and aptitude of
individuals, which increases their productivity and earning capacity.
Human Capital vs Human Resources
• Human Resources = total population, including all individuals.

• Human Capital = population that becomes productive through education,

training, and health.

Need for human capital
• To generate a skilled workforce, such as engineers, doctors, and teachers.

• To create more human capital for the future (teachers training students, doctors

improving health, etc.)

• Countries invest in education, health, and skill development.

4.3 SOURCES OF HUMAN CAPITAL FORMATION

There are five main sources:

1. Expenditure on Education
• Education develops skills, technical knowledge, and mental abilities.
• Individualsspend on education expecting higher future income (like companies
invest in capital goods for profit).
• Society benefits through:

o Higher productivity

o Technological progress

o Innovation and research

2. Expenditure on Health
“A healthy worker is a productive worker.”
Forms of health expenditure
• Preventive medicine (vaccination)

• Curative medicine (treatment)

• Social medicine (health awareness)

• Safe drinking water and sanitation

Why is health human capital

• Reduces sick days

• Increases longevity

• Enhances efficiency

• Leads to an uninterrupted labour supply

3. On-the-Job Training
Companies train workers to improve their skills.
Types
• On-site training – inside the firm under supervision

• Off-site training – external training institutions

Importance
• Improves productivity

• Return from training > cost incurred

• A direct investment in human capital

4. Migration
People migrate:
• Rural → urban areas (jobs, higher wages)

• India → foreign countries (brain drain)

Why migration is human capital formation

• Higher earnings at destination > cost of migration

• Cost includes: travel, higher living expenses, and social adjustment

5. Expenditure on Information
People spend money to gather information about:
• Job opportunities

• Salaries in various sectors

• Quality and cost of education

• Health services

This helps make better investment decisions in education and jobs.

4.4 HUMAN CAPITAL & ECONOMIC GROWTH

How human capital contributes to growth
1. Raises productivity
2. Increases the income of individuals and the nation
3. Creates the ability to absorb new technologies
4. Promotes innovations
5. Improves adaptability to changes in society and economy
Example
• A software engineer contributes more to national income than an unskilled

labourer due to higher productivity.

But there are measurement issues

• Education is measured by:

o Literacy rate

o Years of schooling

o Teacher-pupil ratio

→ but these do not measure quality.

• Health is measured by:

o Life expectancy

o Mortality rate

→ but do not give a full picture of the health infrastructure.

Key Finding
Even though developing countries show faster growth in education & health, their
per capita income does not rise as fast.
Thus, causality runs both ways:
1. More income → more spending on human capital
2. More human capital → more income
Both are interdependent.

4.5 HUMAN CAPITAL & HUMAN DEVELOPMENT

Difference
• Human Capital → means of increasing productivity & income

• Human Development → result: improving well-being, choices, and quality of life

Example:
• Education increases a person’s capability (human capital)

• It also improves dignity, awareness, and life opportunities (human development)

Thus, human capital formation leads to the holistic development of society.

4.6 ROLE OF GOVERNMENT IN HUMAN CAPITAL FORMATION

Government plays a major role because:
1. Education & health create social benefits
2. The private sector underinvests because returns are long-term
3. Children in poor families cannot afford high expenditure
4. Education and health improve equality and reduce poverty
Government initiatives
• Free & compulsory education till class 8 (RTE Act)

• Mid-Day Meal Scheme

• Public health programmes

• Skill development missions

• NEP 2020 reforms

4.7 NATIONAL EDUCATION POLICY (NEP) 2020 – HUMAN CAPITAL FUTURE

NEP 2020 recognises changing needs:
• Rise of AI, robotics, and machine learning

• Need for skills in mathematics, coding, and data science

• Climate change & environmental jobs

• Need for interdisciplinary learning

• Demand for humanities, arts, social sciences

• Research to handle pandemics & global challenges

Vision
NEP aims to make India:
• A skilled and knowledge-driven economy

• Among the top three global economies

• A nation with globally relevant human capital

HUMAN CAPITAL AND HUMAN DEVELOPMENT

Although the terms human capital and human development seem similar, they are
conceptually different.
1. Human Capital Perspective
• Education and health are viewed as means to increase productivity.

• Purpose: To make labour more efficient, more skilled, and more productive.

• Human beings are treated as inputs for production.

• Investment is considered useful only if it increases the output of goods and

services.
Key idea:
Human beings are a means to an economic end (higher production and income).

2. Human Development Perspective

• Education and health are seen as basic rights and are valuable in themselves.

• Purpose: To enable individuals to lead healthy, knowledgeable, and meaningful

lives.
• Human beings are treated as ends in themselves.

• Investment is desirable even if it does not directly increase productivity.

Key idea:
The goal is the expansion of human capabilities, not just output.

3. Key Differences—Board Ready Table

Basis Human Capital Human Development
Main Focus Productivity & income Well-being & capability
Human beings are… Means to an end Ends in themselves
Value of education & Only if productivity Valuable in themselves
health increases
Objective Increase national Expand choices & improve
output quality of life
Failure to increase Considered Still considered essential
productivity unproductive

4. Right-Based View
• Every individual has a right to basic education and health.

• These services should be provided even to:

o Poor households

o Socially disadvantaged groups

• The value of education/health is beyond economic gains.

4.5 STATE OF HUMAN CAPITAL FORMATION IN INDIA — EXAM-READY NOTES

Human capital formation is mainly through:
• Education

• Health

• On-the-job training

• Migration

• Information

But education and health are the most important in India's context.

1. India’s Federal Structure & Shared Responsibility

India has 3 levels of government:
• Union Government

• State Governments

• Local Governments (Municipalities, Panchayats)

Education and health are joint responsibilities of all three.

2. Why Government Intervention Is Needed in Education & Health?

(A) Presence of Private and Social Benefits
• Education & health provide:

o Private benefits (higher income, better jobs)

o Social benefits (lower crime, healthier society, skilled workforce)

→ Hence, both public and private institutions exist.

(B) Long-term Impact & Irreversible Consequences

• Once a child enters a poor-quality school or hospital:

o Damage is long-lasting

o Hard to reverse

→ Therefore, the government must regulate quality.

(C) Incomplete Information

Consumers (parents, patients) often do not know:
• Real quality of institutions

• Real cost of services

This creates a risk of exploitation by private providers.

Government role:
• Set quality standards

• Prevent overcharging

• Ensure safety and fair practices

3. Key Government Bodies in Education
• Ministry of Education (Union & State)

• NCERT – school curriculum, textbooks

• UGC – higher education coordination & funding

• AICTE – technical education standards

Key Government Bodies in Health

• Ministry of Health (Union & State)

• National Medical Commission (NMC)

• ICMR – research and medical studies

4. Need for Public Provision in a Developing Country Like India

• Large population living below the poverty line

• Many cannot afford:

o Basic education

o Basic healthcare

o Higher education

o Advanced hospitals

Hence, the government must provide free or subsidised services.

5. Rights-Based Approach in India

• Education and health are now considered rights, not privileges.

• Government must ensure:

o Free education (especially basic education)

o Free/affordable healthcare

o Special support for economically and socially weaker sections

6. Increase in Government Expenditure

Both Union and State governments have:
• Increased spending on education for:

o Higher literacy

o Higher educational attainment

o Equal access

• Aim: 100% literacy and improved human development indicators.

4.6 EDUCATION SECTOR IN INDIA – Detailed Notes

1. Growth in Government Expenditure on Education
Government expenditure on education is measured in two important ways:
(i) Education Expenditure as a % of Total Government Expenditure
• Shows how much priority the government gives to education compared to
other sectors like defence, health, infrastructure, etc.
• If the percentage rises → It means the government is giving more importance to

education.
(ii) Education Expenditure as a % of Gross Domestic Product (GDP)
• Shows how much of the country's total income is being spent on educational

development.
• Higher percentage → indicates stronger commitment to human capital

development.
Trend: From 1952–2020
• As % of total government expenditure:

Increased from 7.92% → 16.54%

• As % of GDP:

Increased from 0.64% → 4.47%

• The growth has been irregular, not continuous. Some years saw a rise, some a fall.

Private Expenditure
• Apart from the government, individuals and NGOs also spend on education.

• If we include this private expenditure, total spending on education becomes

much higher.

2. Distribution of Education Expenditure

The major share goes to Elementary Education
• Elementary (primary) education receives the largest portion of the government

budget.
Least share goes to Higher/Tertiary Education
• Colleges, universities, IITs, IIMs, and polytechnics get the smallest share.

• BUT expenditure per student is higher at the tertiary level because:

o Higher education requires advanced labs, equipment, professional faculty, and

research facilities.
Should we shift money from higher education to elementary education?
• No.

Because:
o To expand school education, we need trained teachers, who are produced in

higher education institutions.

o Hence, all levels require more spending, not reallocation.

3. Interstate Variation in Expenditure (2020–21)

Per capita public expenditure on elementary education differs widely:
• Highest: Sikkim – ₹96,968 per student
• Lowest: Bihar – ₹10,710 per student

Impact of this variation

• Creates unequal educational opportunities across states.

• States that invest more achieve better outcomes:

o Higher literacy

o Better school infrastructure

o Higher completion rates

4. Recommended vs. Actual Spending on Education

Education Commission (1964–66) Recommendation
• India should spend 6% of its GDP on education.

Tapas Majumdar Committee (1999) Findings

• India needs ₹1.37 lakh crore (over 1998-99 to 2006-07)

To bring all 6–14-year-olds into school.

Where do we stand now?
• Actual spending is a little over 4% of GDP.

• This is below the recommended level.

• The target of 6% of GDP is essential for substantial improvement.

5. Right to Education (RTE) Act, 2009

In 2009, the Government enacted:
Right of Children to Free and Compulsory Education Act
• Makes free and compulsory education a Fundamental Right.

• Applicable to all children aged 6–14 years.

• Government must:

o Provide schools

o Ensure enrolment

o Ensure retention

o Maintain quality education

6. Education Cess
• Government levies a 2% education cess on all Union taxes.

• The collected revenue is specifically used for elementary education.

• Helps the government raise additional resources for Sarva Shiksha Abhiyan and

other schemes.

7. Expenditure on Higher Education

• Additional budget is sanctioned to improve:
o Universities

o Colleges

o Research institutions

o Professional institutions

• Also, new student loan schemes help students pursue higher studies.

8. Educational Achievements in India

Educational progress is measured by:
(i) Adult Literacy Rate
• % of adults (15+ years) who can read and write.

(ii) Primary Education Completion Rate

• % of children who complete primary school.

(iii) Youth Literacy Rate

• % of young people (15–24 years) who are literate.

These indicators show gradual improvement over the past two decades.

Exam-Oriented Summary
• Government expenditure on education is measured as % of total govt.

Expenditure and GDP.

• Increased from 7.92% → 16.54% and 0.64% → 4.47% (1952–2020).

• The elementary level gets the highest share; the tertiary level gets the least.

• Per-student expenditure is highest at the tertiary level.

• Big interstate differences: Sikkim ₹96,968 vs. Bihar ₹10,710.

• Education Commission recommends 6% of GDP → still unmet.

• RTE Act 2009 made education a fundamental right (6–14 years).

• Govt. introduced 2% education cess for elementary education.

• India still needs major investment to improve literacy and completion rates.

4.7 FUTURE PROSPECTS —

1. Education for All — Still a Distant Dream
Even though India has made significant progress in literacy:
• Adult literacy and youth literacy rates have increased,

BUT the number of illiterates in India is still extremely high.

• In fact, today’s number of illiterate people is equal to India’s total population

at independence (1951).
Directive Principle of the Constitution
The Constitution (1950) stated:
• The government must provide free and compulsory education
for all children up to age 14
Within 10 years (i.e., by 1960).
What went wrong?
• India failed to achieve universal schooling by 1960,

And even today, full literacy is not achieved.

• If India had met this goal → we would have 100% literacy today.

Therefore:
“Education for All” remains unfinished.

2. Gender Equity — Better, But Still Not Enough

A positive development:
• The gender gap in literacy (male vs female) has reduced.

• This indicates improvement in gender equality.

Why is women’s education crucial?

Educating women leads to:
1. Higher economic independence
2. Improved social status
3. Lower fertility rate
4. Better health care for women and children
5. More informed family planning
Present situation:
• Although literacy is improving,

India is still far from achieving 100% literacy, especially for women.
• Government must continue promoting female literacy.

3. Higher Education — A Few Takers

India’s education system looks like a pyramid:
• Large base: Primary education

• Narrow top: Higher/tertiary education

This means:
• Fewer people reach college or university level.

• Dropout rates rise as the education level increases.

4. Unemployment Among Educated Youth

A serious challenge:
NSSO Data (2011–12)
Category Unemployment Rate
Rural Male Graduates 19%
Urban Male Graduates 16%
Rural Female Graduates 30% (worst-affected group)
Primary-educated youth Only 3–6%
So, more education does NOT always mean guaranteed employment.
PLFS 2022–23
• Situation has improved moderately.

• Still, the educated unemployment problem remains.

Why are educated people more unemployed? (Exam Question)

1. Mismatch between education and job requirements
→ Students lack practical and employable skills.
2. Poor quality of higher education institutions
→ Many colleges do not meet industry standards.
3. Limited job creation in modern sectors
→ Not enough high-skilled jobs for graduates.
4. High aspirations of educated youth
→ They do not want low-paying or manual jobs.
5. Preference for government jobs
→ High competition, limited vacancies.
What should the government do?
• Increase funding for higher education

• Improve the quality of colleges and universities

• Provide skill-based, vocational, technical training

• Encourage entrepreneurship and start-ups

4.8 CONCLUSION — Detailed Summary

Human capital (education + health) is essential for:
• Economic growth

• Social development

• Income equality

• Improved productivity

India’s Progress
• Both the Central and State governments are spending significant amounts on

health and education.

• India has a large pool of scientific and technical manpower, one of the largest in
the world.
But challenges remain:
1. Education and health services are not equally distributed across society.
2. Quality of services needs improvement.
3. High-skilled individuals often migrate abroad due to better opportunities (brain
drain).
Need of the hour
• Improve the quality of education and health.

• Ensure equal access to all sections of society.

• Create conditions that allow India’s skilled manpower to stay and work within the

country.

✔ Ready-for-Exam Summary (Very Short)

• Literacy rates are rising, but illiteracy is still extremely high.

• Gender gap narrowing, but women’s education still needs more focus.

• Higher education enrolment is low (pyramid structure).

• Educated unemployment is high (especially among rural females).

• Solutions: better quality education, employable skills, and higher investment.

• India must strengthen human capital to achieve growth and equity.

Facts in Figures – India (Latest)

(Population, Economy, Education, Health, Agriculture, Industry, Employment)

1. General Facts About India

Indicator Latest Figure
Geographic Area 3.28 million sq. km
Population (2023 estimate) 142 crore (1.42 billion)
India’s Rank in Population 1st in the world
Population Density 464 persons/sq. km
Sex Ratio (NFHS-5) 1020 females per 1000 males
Literacy Rate (2023 est.) 77.7%
States 28
Union Territories 8

2. Economic Indicators
Indicator Value
GDP Size (2023–24) ₹293 lakh crore (approx.)
GDP Growth Rate (2023–24) 7.6%
Per Capita Income (2023–24) ₹1,72,000 (approx.)
India’s Rank in GDP 5th largest economy
Inflation (2024) 5–6%
Fiscal Deficit (2023–24) 5.8% of GDP
Foreign Exchange Reserves ~$645 billion

3. Education Indicators (Human Capital Formation)

Indicator Figure
Total Literacy Rate 77.7%
Male Literacy 84.7%
Female Literacy 70.3%
Govt. expenditure on education 4.4% of GDP
Target recommended by the Kothari Commission 6% of GDP
School Gross Enrolment Ratio (GER) 96% (Primary)
Higher Education GER 28.4%
Pupil–Teacher Ratio (Primary) 26:1

4. Health Indicators
Indicator Figure
Govt. expenditure on health 2.1% of GDP
IMR (Infant Mortality Rate) 28 per 1,000 live births
MMR (Maternal Mortality Ratio) 103 per 1 lakh live births
Life Expectancy 70.1 years
Number of AIIMS 23 (operational + under development)

5. Employment Indicators (Labour Force)

Indicator Figure
Unemployment Rate (PLFS 2022–23) 3.2%
Youth Unemployment 10–12%
Female Labour Force Participation 37%
Share of workforce in agriculture 45%
Share of workforce in industry 24%
Share of workforce in services 31%

6. Agriculture Indicators
Indicator Figure
Contribution of agriculture to GDP 15%
Largest producer of Milk, Spices, Pulses
Foodgrain Production (2023–24) 329 million tonnes
Wheat Production 112 million tonnes
Rice Production 135 million tonnes
Total Irrigated Land ~55% of the cropped area

7. Industrial Sector Indicators

Indicator Figure
Contribution of industry to GDP 28%
Contribution of manufacturing 17%
India’s rank in steel production 2nd in the world
India’s rank in the automobile market 3rd largest
MSMEs in India 6.3 crore units
Employment in MSMEs 11 crore people

8. Services Sector Indicators

Indicator Figure
Sector contribution to GDP 57%
India’s rank in IT services Top exporter globally
FDI inflow (2023–24) $70 billion

9. Infrastructure & Digital India

Indicator Figure
Total mobile users 115 crore
Internet users 88 crore
UPI transactions (monthly avg) ₹18–20 lakh crore
Total national highways 1.45 lakh km
Railway route length 68,000 km