Human Capital Formation in India

Written and reviewed by Devendra Dubey, Mathematics & Commerce faculty at UniDrill (M.Sc. Mathematics, Osmania University · 10 years teaching). Based on NCERT Economics Class XI (Indian Economic Development), Chapter 4.

Can a person be a form of capital?

A factory is easy to count: so many machines, so much output. But a trained nurse, a farmer who can read a weather forecast or an engineer who knows how to design a bridge are also productive assets. They do not appear on a balance sheet, yet a country with more of them grows faster. This chapter treats people as a form of capital, explains how that capital is built, and then asks how well India has built it.

From human resources to human capital

Just as land is turned into a factory (physical capital), human resources such as students, farmers, nurses and teachers are turned into human capital such as engineers and doctors. Human capital is the stock of skill, expertise and productive capacity embodied in people. The labour of an educated person is more productive than that of an uneducated person, so she earns more and contributes more to growth. Producing human capital also needs human capital: teachers and doctors must be trained before they can train others.

The five sources of human capital formation

Education is the principal source. Individuals invest in education in the same way a company invests in a machine, expecting higher earnings later. The returns are not just money. They include better choices and better citizenship.

Health, in three forms.

Provision of clean drinking water and good sanitation also raises the supply of a healthy labour force.

Why migration and training are costly but worthwhile. Firms often require trained workers to serve for a fixed period so the firm can recover the productivity gain. Migration involves transport costs, a higher cost of living and the psychic cost of leaving family and home. The earnings gain is expected to outweigh these costs.

Pause and predict: an engineer moves from a small town to a large city for a much higher salary but pays a higher rent and misses her family. Which source of human capital formation is this, and what costs does she bear?

Check your answer: it is migration. She bears transport costs, a higher cost of living and the psychic cost of being away from home. She moves because the extra earnings are expected to exceed those costs.

Physical capital versus human capital

The social benefit point is the most-tested: an educated citizen takes part more fully in democracy, and a vaccinated person does not pass disease on to others. These gains spread beyond the individual.

Human capital and growth: what we know

Education, health, training, information and migration all raise income-generating capacity. Yet it is hard to measure precisely how much each contributes. Years of schooling and enrolment rates may not capture the quality of schooling, and health spending or life expectancy may not capture true health.

Two views. For the exam: more and better human capital raises productivity and so promotes growth. Another reading: the causation can run both ways. Richer countries can afford more education and health, and better-educated, healthier people can in turn produce more. Evidence also shows that countries have become more alike in human capital indicators without becoming more alike in per capita real income. So investment in people is necessary but not a guarantee of fast growth.

Beyond the textbook. For the exam: a strategy for development needs a key role for human resources, a point the Seventh Plan stressed, particularly for a country with a large population. In reality: as big data, machine learning and artificial intelligence spread, many unskilled jobs may be done by machines, while demand will grow for skills in mathematics, computer science, data science and multidisciplinary work. That is the outlook on which the National Education Policy 2020 builds, with an aim for India to be among the three largest economies.

Human capital or human development?

Two views. For the exam: human capital measures people by what they add to output, and human development measures them by their well-being. Another reading: the two overlap in practice, because better health and education usually raise both productivity and well-being. The distinction is in what is treated as the goal and what as the means.

Role of the government

Expenditure on education and health is shared by the Union, the States and local bodies in India's federal structure. The government has to be involved for three reasons.

Institutions include the ministries of education and health at the Union and State level, together with bodies such as the National Council of Educational Research and Training, the University Grants Commission and the All India Council for Technical Education in education, and the National Medical Commission and the Indian Council of Medical Research in health.

Government spending on education: the numbers

Education spending is measured as a share of total government spending and as a share of GDP.

Worked example: how big was the rise? Step 1: for GDP share, $4.47 - 0.64 = 3.83$ percentage points. Step 2: for share of government spending, $16.54 - 7.92 = 8.62$ percentage points. Step 3: compare with the 6% target: $6 - 4.47 = 1.53$ points short. A common wrong step is to compare 16.54% (a share of the government budget) with 6% (a share of GDP). They are different bases.

Elementary education gets the biggest share of spending. Tertiary education gets the smallest share, but spending per student is higher at the tertiary level.

States differ widely. In 2020–21, per capita public spending on elementary education was ₹96,968 in Sikkim and ₹10,710 in Bihar.

Pause and predict: the Education Commission asked for 6% of GDP to be spent on education, and spending reached 4.47% by 2020. Is the target met?

Check your answer: no. Spending is about 1.5 percentage points short. The 16.54% figure is a share of government expenditure, so it cannot be compared with the 6% of GDP target.

The government also levies a 2% education cess on all Union taxes, earmarked for elementary education, and gives large outlays for higher education and student loan schemes.

How well has India done?

Some indicators of development show real progress between 1951 and 2018–22.

Educational attainment also rose between 1990 and 2017–18.

The gender gap is narrowing, which matters because women's education supports their economic independence and status, decisions about fertility and the health of mothers and children.

What is still missing

India still faces challenges. Even though literacy has risen, the number of illiterate people in absolute terms is as large as the whole population of India at independence. The Directive Principles asked for free and compulsory education for all children up to 14 within ten years of the Constitution coming into effect, and this was not achieved.

The Indian education pyramid is steep: far fewer people reach higher education than start school. At the top there is educated unemployment. The survey data for 2011–12 show a clear pattern.

Hence, India needs to build its stock of scientific and technical manpower in quality and also create conditions to use it inside the country.

Exam traps

60-second revision

Where this chapter connects

• Previous: Liberalisation, Privatisation and Globalisation: An Appraisal covers the reforms whose service-sector growth raised the demand for skills.
• Earlier chapter: Indian Economy on the Eve of Independence gives the 1947 literacy and life expectancy baseline used in the tables above.
• Next: Rural Development turns to credit, marketing and diversification in the villages where much of this human capital is built.
• Also see: Employment: Growth, Informalisation and Other Issues continues the educated unemployment theme.