Introduction and the Concept of Human Capital

Introduction

The evolution of humankind has been significantly influenced by the capacity to store and transmit knowledge. It is well understood that education and skills enhance a person's efficiency and productivity. An educated person possesses greater labour skills than an uneducated one, enabling them to generate more income and contribute more substantially to economic growth.

Education is sought not only for its potential to increase earning capacity but also for its numerous other valued benefits. It provides a better social standing, enables individuals to make better life choices, imparts knowledge to understand societal changes, and stimulates innovation. The presence of an educated labour force is crucial for a nation as it facilitates the adaptation of new technologies and accelerates the overall development process.

What is Human Capital?

Just as a country can convert physical resources like land into physical capital like factories, it can also transform human resources (like students, farmers, teachers) into human capital (like engineers, doctors, skilled workers). Societies require a foundation of competent, educated, and trained individuals to produce more human capital. In essence, investment in human capital is necessary to create more human capital from existing human resources.

Physical Capital vs. Human Capital

The concept of human capital is derived from the concept of physical capital. While there are similarities between them, there are also striking dissimilarities.

Sources of Human Capital and its Link to Economic Growth

Sources of Human Capital

Investment in education is considered a primary source of human capital. However, several other sources are equally important for human capital formation.

1. Expenditure on Education

Spending on education by individuals is similar to how companies spend on capital goods. The objective is to increase future income. This is one of the most important investments a person or a nation can make.

2. Expenditure on Health

A person with sound health can work more efficiently and for longer periods. Expenditure on health is a crucial source of human capital formation as it increases the supply of a healthy and productive labour force. 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 and good sanitation.

3. On-the-Job Training

Firms spend on training their workers to enhance their skills and productivity. This can be done in two ways:

• Training within the firm under a skilled supervisor.
• Sending workers for off-campus training.

Firms incur costs for this training and expect to recover it through the enhanced productivity of the workers. This expenditure is a source of human capital formation.

4. Expenditure on Migration

People often migrate in search of jobs that offer higher salaries. This includes rural-urban migration within the country and migration of technically qualified professionals to other countries. Migration involves costs (transport, higher cost of living, psychic costs), but since the enhanced earnings in the new place outweigh these costs, it is considered an investment in human capital.

5. Expenditure on Information

People spend money to acquire information about the labour market, educational institutions, and health services. This information is necessary to make informed decisions regarding investments in human capital and to efficiently utilize the skills one has acquired.

Human Capital and Economic Growth

Economic growth is defined as the increase in the real national income of a country. The enhanced productivity of human capital contributes substantially to economic growth by increasing labour productivity, stimulating innovation, and creating the ability to absorb new technologies.

The Indian Context and Causality

Empirical evidence to prove a direct cause-and-effect relationship between human capital and economic growth is complex, partly due to measurement problems (e.g., years of schooling does not reflect the quality of education). It is widely believed that the causality flows in both directions:

• Higher income allows for greater investment in education and health, leading to the formation of high-level human capital.
• A high level of human capital leads to higher productivity and innovation, which in turn causes income growth.

India recognized this link early on. The Seventh Five Year Plan stated, "Human resources development has necessarily to be assigned a key role in any development strategy..." An analysis of key indicators shows that human capital sectors and per capita income have grown simultaneously in India.

Human Capital and Human Development

Distinguishing Between the Two Concepts

Although the terms 'human capital' and 'human development' sound similar, they are distinct concepts. The key difference lies in their perspective on human beings—whether they are a means to an end or an end in themselves.

In the human development perspective, development is about removing obstacles like illiteracy, ill health, lack of resources, and lack of civil and political freedoms, thereby expanding the range of things a person can do and be in life.

The State of Human Capital Formation in India: The Education Sector

The Government's Role in Education and Health

In India, a federal country, expenditures on education and health are carried out by all three tiers of government: union, state, and local. Government intervention is essential in these sectors for several reasons:

• Expenditures on education and health have substantial long-term impacts and cannot be easily reversed.
• Individual consumers often lack complete information about the quality and costs of these services.
• Private providers may acquire monopoly power and engage in exploitation.
• A large section of the population living below the poverty line cannot afford to access basic education and healthcare facilities.

The government's role is to ensure that private providers adhere to standards and charge correct prices, and to provide these services free of cost to deserving citizens. Key regulatory bodies in India include NCERT, UGC, and AICTE for education, and the National Medical Commission and ICMR for health.

Growth in Government Expenditure on Education

Government expenditure on education is expressed in two ways: (i) as a percentage of total government expenditure and (ii) as a percentage of Gross Domestic Product (GDP).

• From 1952 to 2014, education expenditure as a percentage of total government expenditure increased from 7.92% to 15.7%.
• As a percentage of GDP, it increased from 0.64% to 4.13% during the same period.

However, this increase has been irregular. Elementary education takes the largest share of total education expenditure, but the 'expenditure per student' is higher in tertiary education.

Inadequacy of Expenditure

The current level of education expenditure (a little over 4% of GDP) is considered inadequate. The Education Commission (1964–66) had recommended that at least 6 per cent of GDP be spent on education for a noticeable growth in educational achievements. This goal has been accepted but is yet to be reached.

Recent Government Initiatives

• Right of Children to Free and Compulsory Education Act (2009): Made free education a fundamental right for all children aged 6-14 years.
• Education Cess: A 2 per cent 'education cess' is levied on all Union taxes, with the revenue earmarked for elementary education.

Educational Achievements in India

Educational achievements are generally indicated by literacy rates and education completion rates.

Future Prospects and Conclusion

Future Prospects: Continuing Challenges

Despite progress, India faces significant challenges in the education sector.

Education for All — Still a Distant Dream

Although literacy rates have increased, the absolute number of illiterates in India today is as much as its total population was at the time of independence. The constitutional directive of 1950 to provide free and compulsory education for all children up to the age of 14 within 10 years has not been achieved, delaying the goal of 100% literacy.

Gender Equity — Better than Before

The literacy gap between males and females is narrowing, which is a positive development. However, promoting education for women remains a priority to improve their economic independence and social status, and due to its favorable impact on fertility rates and the health of women and children.

Higher Education — a Few Takers

The Indian education pyramid is steep, indicating that a progressively smaller number of people reach higher education levels. A significant concern is the high level of unemployment among educated youth.

• As per NSSO data (2011-12), the unemployment rate for young rural males with a graduation degree or higher was 19%.
• For young rural female graduates, the unemployment rate was nearly 30%.
• In contrast, unemployment among primary-level educated youth was only about 3-6%.

This points to a mismatch between the skills imparted by higher education institutions and the skills demanded by the job market. The government needs to increase allocation for higher education and improve its quality and relevance.

Conclusion

The economic and social benefits of human capital formation and human development are well-established. Both the union and state governments in India have been allocating substantial financial outlays for the education and health sectors. To achieve both economic growth and equity, it is crucial that the spread of these services is ensured across all sections of society. India possesses a rich stock of scientific and technical manpower, one of the largest in the world. The need of the hour is to improve this stock qualitatively and create conditions for its effective utilization within the country.

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