Development is not merely a matter of machines, roads and factories; it is fundamentally about people. A country's growth depends on the skill, education, health and knowledge of its workforce. The process of increasing the productive capacity of the people through education, health, training and on-the-job experience is called human capital formation. Just as physical capital - machines and buildings - raises the productive capacity of a nation, so human capital raises the productive capacity of its people.
Human capital formation is the process of increasing the knowledge, skills and capabilities of the people of a country. Investment in human capital is made through education, health, on-the-job training, migration and information. Such investment raises the productivity of labour, which in turn raises the national income and the well-being of the people.
This chapter explains the concept of human capital, the link between human capital and economic growth, the sources of human capital formation, the state of education and health in India, the education and health sectors in the Five-Year Plans, and the problems in human capital formation, with special reference to the gender dimension.
Human capital refers to the stock of skill and productive knowledge embodied in people. Human capital treats human beings as a means of production - the skills and knowledge that can be used to increase output. Human development, on the other hand, regards human beings as the end of all development - the goal is the expansion of people's capabilities, freedoms and well-being.
The two concepts are related but distinct. Human capital is concerned with the role of people as inputs in production; human development is concerned with the wellbeing of people as the ultimate objective. Investment in education and health raises both: it makes workers more productive (human capital) and improves the quality of life (human development). A nation must invest in its people not only to grow economically but also because the well-being of its citizens is itself the purpose of development.
The important sources of human capital formation are:
There is a two-way relationship between human capital formation and economic growth:
This mutually reinforcing relationship means that investment in education and health is a powerful engine of long-term development. The experience of countries like Japan, South Korea and China shows that rapid growth was accompanied by heavy investment in human capital.
India's human capital situation has improved considerably since independence, but major gaps remain:
Education: The literacy rate has risen from about 18 percent at independence to over 70 percent today. Gross enrolment ratios in schools have improved, and the Sarva Shiksha Abhiyan and the Right to Education Act (2009) have promoted universal elementary education. However, India still has a large illiterate population in absolute numbers, female literacy is lower than male literacy, there are wide differences across states, and the quality of education and the dropout rates remain concerns.
Health: Life expectancy has risen from about 32 years at independence to about 68-70 years today. Infant mortality and maternal mortality have declined substantially. However, India still spends a small share of GDP on public health, health facilities in rural areas are inadequate, and malnutrition and communicable diseases remain widespread.
Gender dimension: Human capital formation in India has a strong gender bias. Female literacy is lower than male literacy, girls have lower enrolment and higher dropout rates, and women's health and nutrition receive less attention. Since women are a large part of the workforce, especially in agriculture, improving their education and health is essential for development. In recent years, programmes like Beti Bachao Beti Padhao have sought to address this bias.
In the early Five-Year Plans, the share of expenditure on education and health was small, and the emphasis was on physical capital - industry, power and transport. Over time, the expenditure on education and health has increased, and several programmes have been launched:
Despite these efforts, the public expenditure on education (about 3-4 percent of GDP) and on health (about 1.2-1.5 percent of GDP) remains below the desired levels, and the quality and coverage of services need improvement.
The problems in human capital formation in India are:
The demographic dividend - a large and young working-age population - gives India a unique opportunity. If the young population is educated, trained and healthy, India can reap a demographic dividend that boosts growth. The success of the Indian software and IT sector, built on investment in technical education, shows the power of human capital. Going forward, higher investment in education, skill development (through programmes like Skill India) and health is essential to convert the demographic dividend into economic growth.
| Source of Human Capital | How it Adds to Human Capital |
|---|---|
| Education | Raises skill, productivity, innovation |
| Health | Raises capacity to work and earn |
| On-the-job training | Increases worker productivity |
| Migration | Improves earning capacity |
| Information | Better decisions and opportunities |
| Indicator | At Independence | Now (approximate) |
|---|---|---|
| Literacy rate | ~18 percent | over 70 percent |
| Life expectancy | ~32 years | ~68-70 years |
| Female literacy | much lower than male | still lower than male |
| Infant mortality | very high | substantially reduced |
This chapter examined human capital formation, the process of increasing the productive capacity of people through education, health, training, migration and information. We distinguished human capital, which treats people as inputs in production, from human development, which treats their well-being as the ultimate goal. We studied the sources of human capital formation and the two-way relationship between human capital and economic growth, and reviewed the state of education and health in India, noting the substantial improvements in literacy and life expectancy as well as the persistent gender bias and quality gaps. We examined the education and health programmes of the planning era and the problems of low public expenditure, dropouts, poor quality and brain drain. Finally, we saw that India's young population offers a demographic dividend that can be realised only through heavy investment in education, skills and health - the foundation of sustained development. The next chapter turns to the rural economy, where most of India's people live and work.