CBSE Class 11 Economics Human Capital Formation In India Notes Set 01

HUMAN CAPITAL FORMATION IN INDIA

• Concept of Human Capital and Human Capital Formation
• Determinants/Sources of Human Capital Formation
• Role of Human Capital Formation Or Human Capital Formation and Economic Growth
• Problems Facing Human Capital Formation in India
• Education as an Essential Element of Human Resource Development

I. CONCEPT OF HUMAN CAPITAL AND HUMAN CAPITAL FORMATION

Human capital refers to the stock of 'skill and expertise' of a nation at a point of time. It is the sum total of skill and expertise of engineers, doctors, professors and workers of all types who are engaged (or have the capacity and expertise to be engaged) in the process of production.

Skill and Expertise—The Core Determinants of Growth

Human capital formation is the process of adding to the stock of human capital over time. If 'human capital stock' of a nation consists of 10,000 skilled workers at the beginning of 2018, and if at the beginning of 2019 it increases to 12,000 skilled workers (implying an increase of human capital stock by 2,000 workers in a year), there is human capital formation to the extent of 2,000 skilled workers in a year.

"Human Capital Formation is the process of acquiring and increasing the number of persons who have the skill, education and experience which are essential for the economic and political development of a country" —G.M. Meier

Human Capital is Different from Physical Capital and Financial Capital

• Physical capital refers to the produced means of production. Stock of physical capital measures production capacity of a nation.
• Financial capital refers to paper claims against physical capital.
• Human capital refers to skill and expertise acquired by man over time. Human capital is the cause behind physical capital. Indeed, it is the ultimate cause of an exponential pace of growth and development in advanced economies of the world.

2. DETERMINANTS/SOURCES OF HUMAN CAPITAL FORMATION

Determinants of human capital refer to the sources of human capital formation, or the ways of adding to the stock of human capital. Following are some important ways of adding to the existing stock of human capital:

(1) Expenditure on Education: Expenditure on education is the most effective way of raising a productive workforce in the country. It is, therefore, a very important determinant of human capital formation. Most families decide to incur huge expenditure on education, even when they have to raise loans. Reason: Returns on such expenditures are substantially large. Education enables an individual to make a good living throughout his life. His total earnings during his life span would far exceed his initial expenditure on education.

• Monetary benefits of education (in terms of earnings of the educated person during his life time) far exceed the cost of education.
• The difference between benefit and cost is an approximate market value of human capital formation.

(2) Expenditure on Health: "A sound mind in a sound body" is an old saying. Expenditure on health makes a man more efficient and, therefore, more productive. His contribution to the production process tends to rise. He adds more to GDP of the nation than a sick person. Expenditure on health, therefore, is an important determinant of human capital formation.

(3) On-the-Job Training: On-the-job training helps workers to hone/sharpen their specialised skills. It enables them to raise the level of their efficiency/productivity. Firms are always inclined to undertake 'on-the job-training' programmes. Because, returns (on account of enhanced productivity) far exceed the cost of such programmes. Expenditure on such training programmes, therefore, is yet another important determinant (and a source) of human capital formation.

(4) Study Programmes for Adults: Other than formal education at the primary, secondary and university levels, the Government and NGOs organise study programmes for adults to make them proficient in their work areas. This enhances their productivity, serving as a source of human capital formation.

(5) Migration: Migration contributes to human capital formation as it facilitates utilisation of (otherwise) inactive skills of the people, or it facilitates fuller/better utilisation of the skills. Migration involves cost: (i) cost of transportation from one place to the other, and (ii) cost of living in different social environment. Yet people migrate in search of better job opportunities. Because: Gains of migration (in terms of higher salaries) are greater than the cost of migration. Implying that migration leads to human capital formation, through fuller/better utilisation of skills.

(6) Expenditure on Information: Information relating to job markets and educational institutions offering specialised skills is an important determinant of skill formation. It enables people to actualise their productive potential. Accordingly, expenditure on information is another determinant of human capital formation.

Briefly, human capital formation is promoted by investment on education and health, besides 'on-the-job training' programmes. Investment on migration and information relating to availability of specialised skills and job markets also contributes to human capital formation.

Human Capital and Human Development

• Human Capital and Human Development are related concepts, but certainly not identical.
• Human capital is a means to an end.
• Human capital is a means in the sense that it consists of 'skills' as used in the process of production. It consists of 'know-how', abilities and expertise used as inputs in the production activity. Increase in productivity (referring to output per unit of input) is the end result. Thus, we want to achieve higher and higher levels of output through extensive and intensive application of human capital.
• Human development is an end itself. It refers to development of the individuals as valuable personalities by acquiring good education and attaining good health. Human development occurs when more and more individuals in a society are educated, healthy and skill-oriented.

3. ROLE OF HUMAN CAPITAL FORMATION OR HUMAN CAPITAL FORMATION AND ECONOMIC GROWTH

Following observations highlight how human capital formation contributes to the process of growth and development:

(1) Change in Emotional and Material Environment of Growth: Human capital formation generates a change in emotional and material environment of growth.

• Emotional environment becomes conducive to growth as people tend to acquire growth-oriented attitude and aspirations.
• Material environment becomes helpful to growth as the society now possesses higher number of skilled and trained workers to implement the plans and programmes of economic growth.

(2) Higher Productivity of Physical Capital: Human capital formation increases productivity of physical capital (referring to output per unit of capital). Specialised engineers and skilled workers can certainly handle machines better than the others. It enhances productivity and accelerates the pace of growth.

(3) Innovative Skills: Human capital formation facilitates innovations, the under-current of growth and development. Larger the number of skilled and trained personnel, greater the possibilities of innovations in the area of production and related activities. Innovation is the life-line of growth, we all know.

(4) Higher Rate of Participation and Equality: By enhancing productive capacities of the labour force, human capital formation induces greater employment. This increases the rate of participation (percentage of labour force participating in the process of production or simply the percentage of employment of the existing labour force). Higher the rate of participation, greater is the degree of economic and social equality in the society.

Thus, there is a cause and effect relationship between human capital and economic growth: human capital formation stimulates the process of economic growth. However, economic growth also impacts human capital formation. Growth implies increase in per capita real income (or increase in per capita availability of goods and services). Higher income facilitates higher investment on education and skills. Implying human capital formation. Thus, human capital formation prompts the process of growth, and growth prompts the process of human capital formation.

Chain Effect of Human Capital Formation

Human Capital Formation [increase in the stock of human capital]
\( \implies \) Better/Efficient utilisation of physical capital
\( \implies \) Increase in productivity (output per unit of labour/capital)
\( \implies \) Increase in GDP growth along with higher rate of participation/employment
\( \implies \) Higher level of income of the individuals and households
\( \implies \) Higher expenditure on education and health
\( \implies \) Increase in the stock of human capital (implying human capital formation).

4. PROBLEMS FACING HUMAN CAPITAL FORMATION IN INDIA

The major problems facing the human capital formation are as under:

(1) Rising Population: Rapidly rising population adversely affects the quality of human capital. This is because it reduces per head availability of the existing facilities relating to housing, sanitation, drainage, water-system, hospitals, education, power supply, etc. Reduced availability of these facilities leads to a fall in the quality of life. In turn, this leads to a fall in the capacity to acquire specialised skills and knowledge.

(2) Brain Drain: Migration of persons (born, educated and trained in India) to developed countries is a serious threat to the process of human capital formation in the country. Those who decide to migrate are persons of high calibre such as scientists, administrators, executives, engineers, physicians, educationists, etc. This is described as the problem of brain drain. This slows down the process of human capital formation in the domestic economy.

(3) Deficient Manpower Planning: Not enough efforts have been made to maintain the demand-supply balance of the ever-rising labour force in the country. As a result, India is facing an explosive problem relating to graduate unemployment. It is a sad reflection on the wastage of human power and human skill.

(4) Insufficient On-the-Job Training in Primary Sector: Primary sector (agriculture in particular) is the backbone of Indian economy. Unfortunately, it has not received due attention in the area of professional skills. Two notable points are that: The traditional wisdom predominates the primary sector, and that 'On-the-job training programmes' are highly scant, if not listless. Accordingly, there is a serious deficiency of human capital formation in primary sector of the economy.

(5) Low Academic Standards: In our enthusiasm to spread higher education, we have been opening many universities, unmindful of their academic standards. Consequently, we have a large army of half-baked graduates and post-graduates whose deficient skills only lowers the level of efficiency/productivity. This also impairs our competitiveness in the international market of human capital.

Measurement Problem

• In case of physical capital formation, the change can be measured in terms of units. But, it is difficult in case of human capital formation.
• This is because, a large number of factors that impact productivity of human beings are non-quantifiable.
• Further, it is difficult to identify a suitable scale of measuring human capital formation.

5. EDUCATION AS AN ESSENTIAL ELEMENT OF HUMAN RESOURCE DEVELOPMENT

Education is an essential element of human resource development. Education implies the process of teaching, training and learning, (especially in schools or colleges). It improves knowledge and develops skills. Education is the under-current of economic and social change. However, compared to other countries of the world, spread of education in India has not been so encouraging. Even literacy rate in the country continues to be very low. According to the Census 2011, barely 74.04 per cent of the population is literate as against 90 to 95 per cent literacy in developed countries of the world.

Education and Literacy are not Identical Terms

• Education is a much wider concept than literacy.
• Literacy just refers to the ability to read and write.
• Education, on the other hand, encompasses three parameters, viz., primary education, secondary education and tertiary or higher education.
• While all educated people are literate, all literate people are not necessarily educated.

Importance and Objectives of Education

Following points highlight the importance and objectives of education:

• Education produces responsible citizens.
• It develops science and technology.
• It facilitates use of natural and human resources of all regions of the country.
• It expands mental horizon of the people.
• It helps economic development through greater participation of the people in the process of growth and development.
• It promotes cultural standard of the citizens.
• It develops human personality.

Need for Government Intervention in Education and Health

Need for government intervention in education and health arises primarily on account of the following facts:

• These sectors need huge investment with a very high fixed expenditure.
• It is difficult to expect private investors to invest in health and education unless they are allowed to recover their huge costs through high price of these services.
• People in a poor country like ours cannot afford high price for education and health.

Accordingly, these services would remain beyond the reach of most people unless these are subsidised or directly provided by the government.

Growth of Education Sector in India

(1) Expansion of General Education: Table 1 shows the expansion of general education during the period of Five Year Plans:

Table 1. Expansion of General Education

• I. Institutions (1950-51 vs 2015-16):
  • Primary and Middle Schools: 2.23 lakh to 12.70 lakh
  • Secondary and Senior (Higher) Secondary Schools: 7.4 thousand to 2.52 lakh
  • Colleges (General): 578 to 39,071
  • Universities (including Deemed Universities): 27 to 799
• II. Number of Students (1950-51 vs 2015-16):
  • Primary and Middle: 19.15 lakh to 17 crore
  • High and Higher Secondary Schools: 15.0 lakh to 3.2 crore
  • Higher Education: 3.6 lakh to 346 lakh

(Note: Primary and middle school education together is called elementary education.)

Table 1 suggests that substantial progress has been made in the field of education. During the plans, the number of educational institutions providing elementary education has increased roughly by five times and the number of students has increased ten-fold. In 1951, hardly 18.33 per cent of the total population was literate. In 2011, the percentage of literates increased to 74.04 per cent.

Important Regulatory Organisations

• NCERT (National Council of Educational Research and Training): It is basically engaged in designing text material upto the senior secondary level.
• UGC (University Grants Commission): It is primarily the funding authority for university education. It also enforces the rules and regulations regarding higher education in the country.
• AICTE (All India Council of Technical Education): It enforces rules and regulations regarding technical/engineering education in the country.
• ICMR (Indian Council for Medical Research): It enforces rules and regulations relating to education and research in the health sector.

(2) Elementary Education: Elementary education covers students from class 1 to class 8 (primary and middle) in the age-group of 6 to 14 years. The number of primary and middle schools has considerably increased. In 1950-51, their number was 2.23 lakh. In 2015-16, it increased to 12.70 lakh. However, low percentage of admission of children in primary classes points to educational backwardness in the country. Social and economic poverty is the principal cause of educational backwardness.

Question. How can gross enrolment ratio be more than 100 per cent?
Answer: Yes, it has happened because in our country lots of students even beyond the age group of 6-14 years enrol themselves for elementary education.

Question. What is the formula for Gross Enrolment Ratio for Elementary Education?
Answer: \[ \text{Gross Enrolment Ratio} = \frac{\text{Number of students enrolled for elementary education}}{\text{Total number of the individuals in the age group of 6-14 years}} \times 100 \]

(3) Secondary and Senior Secondary Education: In 1950-51, there were 7.4 thousand secondary and senior secondary level schools with 15.0 lakh students. In 2015-16, the number of secondary and senior secondary schools rose to 2.52 lakh and the number of students went up to 3.2 crore.

In 1987-88, Navodaya Vidyalaya were established to impart modern education of good standard to talented students of rural areas. Presently, 565 Navodaya schools are functioning. Central government has established Kendriya Vidyalaya (Central Schools) for the benefit of the children of transferable employees. Currently, the number of central schools in the country is estimated to be 1,128. Three Kendriya Vidyalayas, one at Kathmandu, one at Moscow and another at Tehran are also functioning.

Areas of Limited Success in Secondary Education

• Enrolment ratio referring to enrolment of students in the age group of 14-18 years for the secondary and senior secondary is far from satisfactory. Presently, it is around 52 per cent for secondary classes and 28 per cent for senior secondary classes.
• Vocationalisation of education remains a far cry. Against the target of diverting nearly 25 per cent of senior secondary students to the vocational streams, actual achievement is limited just to 5 per cent.

(4) Higher Education: After independence, higher education has shown a convincing growth over time. As many as 799 universities are providing higher education in the country. Of these, there are 44 central universities. Besides, there are 40 deemed to be universities. The total number of colleges for general education in the country is 39,071. The number of students in all universities is 346 lakh in 2015-16. University Grants Commission regulates and guides higher education in India.

Areas of Concern in Higher Education

(i) That the expansion is largely confined to general education. Of the total enrolment for higher education nearly 80 per cent is for the general education, and only 20 per cent for the professional education.

(ii) There is a growing gulf between the supply of job seekers with higher education and their demand. Accordingly, the problem of unemployment is assuming alarming proportions.

(5) Vocationalisation of Secondary Education: In February 1988, the central government launched a plan to vocationalise secondary education. Under the plan, financial assistance is given to those schools who start vocational course at higher secondary (+2) level. By 2012-13, permission was granted to nearly 11,000 schools in the country to start vocational courses. About 10 lakh students are getting vocational education in these schools.

(6) Technical, Medical and Agricultural Education: Since independence, the number of institutions imparting technical and professional education has increased significantly. In 1951, there were 43 diploma level polytechnical institutions. Their number has significantly risen to 1,914. There are 3,400 recognised engineering colleges. Presently, there are 289 medical colleges and 282 dental colleges.

(7) Rural Education: National Rural Higher Education Council has been set-up for this purpose. Under this Council, 14 rural educational institutions have been functioning. Children of scheduled castes and scheduled tribes get free education in all the states.

(8) Adult and Female Education: In order to eradicate illiteracy among the adults, special arrangements have been made. National Literacy Mission was set-up in 1988. Since 1976, formal education programme has been launched. In order to provide technical education to the women, many women polytechnics have also been established.

(9) Total Literacy Campaign: National Literacy Mission was launched to render everybody literate in the country. This programme has now been recast as 'Saakshar Bharat' with a central focus on female education. The programme covers all those in the age group of 15 and above. It may be noted that there are 11 crore illiterates in the country between the age group of 15-25 years.

RTE (Right to Education)

• In the year 2009, the Government of India has brought about an Act, called RTE.
• It promises free and compulsory education to all.
• It makes education a matter of right to all children in the age group of 6-14 years.
• However, it is hoped that RTE will transform dreams into reality by offering basic education to all, free of cost.

EDUCATIONAL FINANCE: WHO SPENDS ON EDUCATION AND HOW MUCH?

(i) The State Governments: A state government is spending between 10-30 per cent of its total annual budget. State government budgets amount to approximately 74 per cent of the total education budget for India.

(ii) The Central Government: Rs. 45,000 crore annually (nearly 3 per cent of its total annual budget).

(iii) Total Percentage Expenditure by the Governments (states as well as the centre): 80-90 per cent.

(iv) The Parents (by way of fees) for their children: 4-5 per cent.

(v) The Private Trusts: 7 per cent.

(vi) Endowments: 3 per cent.

A broad conclusion thus emerges that in India, despite a significant trend towards privatisation of education, the bulk of spending is done by the central and the state governments.

Education still a Challenging Proposition

Despite the constitutional provision for free and compulsory education for the children between the age group of 6-14 years, quality of education and infrastructure continues to be disappointing. This along with the following facts and figures makes education still a challenging proposition in India:

(1) Large Number of Illiterates: India harbours the largest number of illiterates in the world. Presently, nearly 36 crore people are estimated to be illiterate.

(2) Inadequate Vocationalisation: Education continues to be largely degree-oriented. Vocationalisation of education is still a far cry.

(3) Gender Bias: There is still a significant 'gender-bias' in offering opportunities of education to male and female children.

(4) Low Rural Access Level: There is a high degree of disparity in access to education. The 'access level' is considerably low for the rural population.

(5) Privatisation: There is a growing trend towards privatisation of education. Being very expensive, private education has tended to widen the gulf between the rich and the poor.

(6) Low Government Expenditure on Education: The government has failed to fulfil its commitment of spending nearly 6 per cent of GDP on education: actual expenditure has been around 4-5 per cent only.

Power Points & Revision Window

• Human Capital: It refers to the stock of 'skill and expertise' of a nation at a point of time.
• Human Capital Formation: It refers to the process of adding to the stock of human capital over time.
• Determinants/Sources of Human Capital Formation: (i) Expenditure on education, (ii) Expenditure on health, (iii) On-the-job training, (iv) Study programmes for adults, (v) Migration, (vi) Expenditure on information.
• Role of Human Capital Formation: (i) Change in emotional and material environment of growth, (ii) Higher productivity of physical capital, (iii) Innovative skills, (iv) Higher rate of participation and equality.
• Problems Facing Human Capital Formation: (i) Rising population, (ii) Brain drain, (iii) Deficient manpower planning, (iv) Insufficient on-the-job training in primary sector, (v) Low academic standards.
• Importance and Objectives of Education: (i) Education produces good citizens, (ii) It develops science and technology, (iii) It facilitates use of resources, (iv) It expands mental horizon, (v) It helps in economic development, (vi) It promotes cultural standards, (vii) Education develops human personality.
• Growth of Education Sector in India: It includes: Expansion of general education, Elementary education, Secondary and senior secondary education, Higher education, Vocationalisation, Technical education, Rural education, Adult and female education, and Total literacy campaign.
• Problems Relating to Development of Education in India: (i) Large number of illiterates, (ii) Inadequate vocationalisation, (iii) Gender bias, (iv) Low rural access level, (v) Privatisation, (vi) Low government expenditure on education.