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Human Capital Formation in India

Just as a country can turn physical resources like land into physical capital like factories, similarly, it can also turn human resources...


What is Human Capital?

Just as a country can turn physical resources like land into physical capital like factories, similarly. It can also turn human resources like students into human capital like engineers and doctors.
Societies need sufficient human capital in the first place—in the form of competent people who have themselves been educated and trained. As professors and other professionals. In other words, we need good human capital to produce other human capital (say, doctors, engineers…).
This means that we need investment in human capital to produce more human capital out of human resources.

Sources of Human Capital:

Investment in education is considered as one of the main sources of human capital. There are several other sources as well. Investments in health, on- the job training, migration and information are the other sources of human capital formation. Spending on education by individuals is similar to spending on capital goods by companies with the objective of increasing future profits over a period of time. Likewise, individuals invest in education with the objective of increasing their future
Like education, health is also considered as an important input for the development of a nation as much as it is important for the development of an individual. Preventive medicine (vaccination), curative medicine (medical intervention during illness), social medicine (spread of health literacy) and provision of clean drinking water and good sanitation are the various forms of health expenditures. Health expenditure directly increases the supply of healthy labour force.
Expenditure regarding on-the-job training is a source of human capital formation as the return of such expenditure in the form of enhanced labour productivity is more than the cost of it.
Technically qualified persons, like engineers and doctors, migrate to other countries because of higher salaries that they may get in such countries. Migration in both these cases involves cost of transport, higher cost of living in the migrated places and psychic costs of living in a strange sociocultural setup. The enhanced earnings in the new place outweigh the costs of migration;
Hence, expenditure on migration is also a source of human capital formation. Expenditure incurred for acquiring information relating to the labour market and other markets is also a source of human capital formation.

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Human Capital and Economic Growth:

We know that the labour skill of an educated person is more than that of an uneducated person and that the former generates more income than the latter.

Economic growth means the increase in real national income of a country; naturally, the contribution of the educated person to economic growth is more than that of an illiterate person. If a healthy person could provide uninterrupted labour supply for a longer period of time, then health is also an important factor for economic

Thus, both education and health, along with many other factors like on-the-job training, job market information and migration, increase an individual’s income generating capacity.

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Education provides knowledge to understand changes in society and scientific advancements, thus, facilitate inventions and innovations.
Similarly, the availability of educated labour force facilitates adaptation to new technologies. An analysis of improvement in education and health sectors and growth in real per capita income in both developing and developed countries shows that there is convergence in the measures of human capital. But no sign of convergence of per capita real income. In other words, the human capital growth in developing countries has been faster. But the growth of per capita real income has not been that fast. Causality between human capital and economic growth flows in either directions.

That is, higher income causes building of high level of human capital and vice versa, that is, high level of human capital causes growth of income. India recognised the importance of human capital in economic growth long ago in the Seventh Five Year Plan. It is difficult to establish a relation of cause and effect from the growth of human capital (education and health) to economic growth.
Two independent reports on the Indian economy, in recent times, have identified that India would grow faster due to its strength in human capital formation.

Deutsche Bank, a German bank, in its report on ‘Global Growth Centres’ (published on 1.7.05) identified that India will emerge as one among four major growth centres in the world by the year 2020.

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Human Capital and Human Development:

Human capital considers education and health as a means to increase labour productivity. Human development is based on the idea that education and health are integral to human well-being. Because only when people have the ability to read and write and the ability to lead a long and healthy life.

They will be able to make other choices which they value. In the human development perspective, human beings are ends in themselves. Human welfare should be increased through investments in education and health even if such investments do not result in higher labour productivity.

State of Human Formation in India:

Human capital formation is the outcome of investments in education, health, on-the-job training, migration and information. Of these education and health are very important sources of human capital formation. We know that ours is a federal country with a union government, state

governments and local governments (Municipal Corporations, Municipalities and Village Panchayats). The Constitution of India mentions the functions to be carried out by each level of government. Accordingly, expenditures on both education and health are to be carried out simultaneously. By all the three tiers of the government. Education and health care services create both private and social benefits and this is the reason for the existence of both private and public institutions in the education and health service markets.

The role of government in this situation is to ensure that the private providers of these services adhere to the standards stipulated by the
government, charge the correct price and do not acquire monopoly.

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