NCERT Textbook - Human Capital Formation in India Commerce Notes | EduRev

Economy and Indian Economy (Prelims) by Shahid Ali

Created by: Lakshya Ias

UPSC : NCERT Textbook - Human Capital Formation in India Commerce Notes | EduRev

 Page 1


82 INDIAN ECONOMIC DEVELOPMENT
 After studying this chapter, the learners will understand
• the concepts of Human Resource, Human Capital Formation and Human
Development
• the links between investment in human capital, economic growth and
human development
• the need for government spending on education and health
• the state of India’s educational attainment.
HUMAN CAPITAL
FORMATION IN INDIA
5
2015-16(20/01/2015)
Page 2


82 INDIAN ECONOMIC DEVELOPMENT
 After studying this chapter, the learners will understand
• the concepts of Human Resource, Human Capital Formation and Human
Development
• the links between investment in human capital, economic growth and
human development
• the need for government spending on education and health
• the state of India’s educational attainment.
HUMAN CAPITAL
FORMATION IN INDIA
5
2015-16(20/01/2015)
83 HUMAN CAPITAL FORMATION IN INDIA
5.1 INTRODUCTION
Think of one factor that has made a
great difference in the evolution of
mankind. Perhaps it is man’s capacity
to store and transmit knowledge
which he has been doing through
conversation, through songs and
through elaborate lectures. But man
soon found out that we need a good
deal of training and skill to do things
efficiently. We know that the labour
skill of an educated person is more
than that of an uneducated person
and hence the former is able to generate
more income than the latter and his
contribution to economic growth is,
consequently, more.
Education is sought not only as it
confers higher earning capacity on
people but also for its other highly
valued benefits: it gives one a better
social standing and pride; it enables
one to make better choices in life; it
provides knowledge to understand the
changes taking place in society; it also
stimulates innovations. Moreover,
the availability of educated labour
force facilitates adaptation of new
“... the wisdom of expending public and private funds on education is not to be
measured by its direct fruits alone. It will be profitable as a mere investment,
to give the masses of  people much greater opportunities than they can generally
avail themselves of. For by this means many, who would have died unknown,
are enabled to get the start needed for bringing out their latent abilities”.
Alfred Marshall
Fig. 5.1 Adequate education and training to  farmers can raise productivity in farms
2015-16(20/01/2015)
Page 3


82 INDIAN ECONOMIC DEVELOPMENT
 After studying this chapter, the learners will understand
• the concepts of Human Resource, Human Capital Formation and Human
Development
• the links between investment in human capital, economic growth and
human development
• the need for government spending on education and health
• the state of India’s educational attainment.
HUMAN CAPITAL
FORMATION IN INDIA
5
2015-16(20/01/2015)
83 HUMAN CAPITAL FORMATION IN INDIA
5.1 INTRODUCTION
Think of one factor that has made a
great difference in the evolution of
mankind. Perhaps it is man’s capacity
to store and transmit knowledge
which he has been doing through
conversation, through songs and
through elaborate lectures. But man
soon found out that we need a good
deal of training and skill to do things
efficiently. We know that the labour
skill of an educated person is more
than that of an uneducated person
and hence the former is able to generate
more income than the latter and his
contribution to economic growth is,
consequently, more.
Education is sought not only as it
confers higher earning capacity on
people but also for its other highly
valued benefits: it gives one a better
social standing and pride; it enables
one to make better choices in life; it
provides knowledge to understand the
changes taking place in society; it also
stimulates innovations. Moreover,
the availability of educated labour
force facilitates adaptation of new
“... the wisdom of expending public and private funds on education is not to be
measured by its direct fruits alone. It will be profitable as a mere investment,
to give the masses of  people much greater opportunities than they can generally
avail themselves of. For by this means many, who would have died unknown,
are enabled to get the start needed for bringing out their latent abilities”.
Alfred Marshall
Fig. 5.1 Adequate education and training to  farmers can raise productivity in farms
2015-16(20/01/2015)
84 INDIAN ECONOMIC DEVELOPMENT
technologies. Economists have stressed
the need for expanding educational
opportunities in a nation as it
accelerates the development process.
5.2 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.
Let us understand a little more of
what human capital means by posing
the following questions :
(i) What are the sources of human
capital?
(ii) Is there any relation between
human capital and economic
growth of a country?
(iii) Is the formation of human
capital linked to man’s all-round
development or, as it is now called,
human development?
(iv) What role can the  government
play in human capital formation
in India?
5.3 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.
Why do your parents spend money
on education? 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
income.
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.
Who can work better—a sick
person or a person with sound health?
A sick labourer without access to
medical facilities is compelled to
abstain from work and there is loss of
productivity. Hence, expenditure on
health is an important source of
human capital formation.
Work This Out
ØTake three families from
different strata (i) very poor
(ii) middle class and (iii)
affluent. Study the
expenditure pattern of the
families on education of
male and female children.
2015-16(20/01/2015)
Page 4


82 INDIAN ECONOMIC DEVELOPMENT
 After studying this chapter, the learners will understand
• the concepts of Human Resource, Human Capital Formation and Human
Development
• the links between investment in human capital, economic growth and
human development
• the need for government spending on education and health
• the state of India’s educational attainment.
HUMAN CAPITAL
FORMATION IN INDIA
5
2015-16(20/01/2015)
83 HUMAN CAPITAL FORMATION IN INDIA
5.1 INTRODUCTION
Think of one factor that has made a
great difference in the evolution of
mankind. Perhaps it is man’s capacity
to store and transmit knowledge
which he has been doing through
conversation, through songs and
through elaborate lectures. But man
soon found out that we need a good
deal of training and skill to do things
efficiently. We know that the labour
skill of an educated person is more
than that of an uneducated person
and hence the former is able to generate
more income than the latter and his
contribution to economic growth is,
consequently, more.
Education is sought not only as it
confers higher earning capacity on
people but also for its other highly
valued benefits: it gives one a better
social standing and pride; it enables
one to make better choices in life; it
provides knowledge to understand the
changes taking place in society; it also
stimulates innovations. Moreover,
the availability of educated labour
force facilitates adaptation of new
“... the wisdom of expending public and private funds on education is not to be
measured by its direct fruits alone. It will be profitable as a mere investment,
to give the masses of  people much greater opportunities than they can generally
avail themselves of. For by this means many, who would have died unknown,
are enabled to get the start needed for bringing out their latent abilities”.
Alfred Marshall
Fig. 5.1 Adequate education and training to  farmers can raise productivity in farms
2015-16(20/01/2015)
84 INDIAN ECONOMIC DEVELOPMENT
technologies. Economists have stressed
the need for expanding educational
opportunities in a nation as it
accelerates the development process.
5.2 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.
Let us understand a little more of
what human capital means by posing
the following questions :
(i) What are the sources of human
capital?
(ii) Is there any relation between
human capital and economic
growth of a country?
(iii) Is the formation of human
capital linked to man’s all-round
development or, as it is now called,
human development?
(iv) What role can the  government
play in human capital formation
in India?
5.3 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.
Why do your parents spend money
on education? 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
income.
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.
Who can work better—a sick
person or a person with sound health?
A sick labourer without access to
medical facilities is compelled to
abstain from work and there is loss of
productivity. Hence, expenditure on
health is an important source of
human capital formation.
Work This Out
ØTake three families from
different strata (i) very poor
(ii) middle class and (iii)
affluent. Study the
expenditure pattern of the
families on education of
male and female children.
2015-16(20/01/2015)
85 HUMAN CAPITAL FORMATION IN INDIA
Preventive medicine
(vaccination), curative
medicine (medical
intervention during
illness), social medi-
cine (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 and is, thus, a source of
human capital formation.
Firms spend on
giving on-the-
job-training to
their workers.
This may take
different forms:
one, the workers
may be trained
in the firm itself under the supervision
of a skilled worker; two, the workers
may be sent for off-campus training.
In both these cases firms incur some
expenses. Firms will, thus, insist that
the workers should work for a specific
period of time, after their on-the-job
training, during which it can recover
the benefits of the enhanced
productivity owing to the training.
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.
People migrate in search of jobs
that fetch them higher salaries than
what they may get in their native
places. Unemployment is the reason
for the rural-urban migration in India.
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 socio-
cultural 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.
People spend to acquire
information relating to the labour
market and other markets like
education and health. For example,
people want to know the level of salaries
associated with various types of jobs,
whether the educational institutions
provide the right type of employable
skills and at what cost. This information
is necessary to make decisions
regarding investments in human capital
as well as for efficient utilisation of the
acquired human capital stock.
Expenditure incurred for acquiring
information relating to the labour
market and other markets is also a
source of human capital formation.
2015-16(20/01/2015)
Page 5


82 INDIAN ECONOMIC DEVELOPMENT
 After studying this chapter, the learners will understand
• the concepts of Human Resource, Human Capital Formation and Human
Development
• the links between investment in human capital, economic growth and
human development
• the need for government spending on education and health
• the state of India’s educational attainment.
HUMAN CAPITAL
FORMATION IN INDIA
5
2015-16(20/01/2015)
83 HUMAN CAPITAL FORMATION IN INDIA
5.1 INTRODUCTION
Think of one factor that has made a
great difference in the evolution of
mankind. Perhaps it is man’s capacity
to store and transmit knowledge
which he has been doing through
conversation, through songs and
through elaborate lectures. But man
soon found out that we need a good
deal of training and skill to do things
efficiently. We know that the labour
skill of an educated person is more
than that of an uneducated person
and hence the former is able to generate
more income than the latter and his
contribution to economic growth is,
consequently, more.
Education is sought not only as it
confers higher earning capacity on
people but also for its other highly
valued benefits: it gives one a better
social standing and pride; it enables
one to make better choices in life; it
provides knowledge to understand the
changes taking place in society; it also
stimulates innovations. Moreover,
the availability of educated labour
force facilitates adaptation of new
“... the wisdom of expending public and private funds on education is not to be
measured by its direct fruits alone. It will be profitable as a mere investment,
to give the masses of  people much greater opportunities than they can generally
avail themselves of. For by this means many, who would have died unknown,
are enabled to get the start needed for bringing out their latent abilities”.
Alfred Marshall
Fig. 5.1 Adequate education and training to  farmers can raise productivity in farms
2015-16(20/01/2015)
84 INDIAN ECONOMIC DEVELOPMENT
technologies. Economists have stressed
the need for expanding educational
opportunities in a nation as it
accelerates the development process.
5.2 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.
Let us understand a little more of
what human capital means by posing
the following questions :
(i) What are the sources of human
capital?
(ii) Is there any relation between
human capital and economic
growth of a country?
(iii) Is the formation of human
capital linked to man’s all-round
development or, as it is now called,
human development?
(iv) What role can the  government
play in human capital formation
in India?
5.3 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.
Why do your parents spend money
on education? 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
income.
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.
Who can work better—a sick
person or a person with sound health?
A sick labourer without access to
medical facilities is compelled to
abstain from work and there is loss of
productivity. Hence, expenditure on
health is an important source of
human capital formation.
Work This Out
ØTake three families from
different strata (i) very poor
(ii) middle class and (iii)
affluent. Study the
expenditure pattern of the
families on education of
male and female children.
2015-16(20/01/2015)
85 HUMAN CAPITAL FORMATION IN INDIA
Preventive medicine
(vaccination), curative
medicine (medical
intervention during
illness), social medi-
cine (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 and is, thus, a source of
human capital formation.
Firms spend on
giving on-the-
job-training to
their workers.
This may take
different forms:
one, the workers
may be trained
in the firm itself under the supervision
of a skilled worker; two, the workers
may be sent for off-campus training.
In both these cases firms incur some
expenses. Firms will, thus, insist that
the workers should work for a specific
period of time, after their on-the-job
training, during which it can recover
the benefits of the enhanced
productivity owing to the training.
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.
People migrate in search of jobs
that fetch them higher salaries than
what they may get in their native
places. Unemployment is the reason
for the rural-urban migration in India.
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 socio-
cultural 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.
People spend to acquire
information relating to the labour
market and other markets like
education and health. For example,
people want to know the level of salaries
associated with various types of jobs,
whether the educational institutions
provide the right type of employable
skills and at what cost. This information
is necessary to make decisions
regarding investments in human capital
as well as for efficient utilisation of the
acquired human capital stock.
Expenditure incurred for acquiring
information relating to the labour
market and other markets is also a
source of human capital formation.
2015-16(20/01/2015)
86 INDIAN ECONOMIC DEVELOPMENT
Box 5.1: Physical and Human Capital
Both the forms of capital formation are outcomes of conscious investment decisions.
Decision regarding investment in physical capital is taken on the basis of one’s knowledge
in this regard. The entrepreneur possesses knowledge to calculate the expected rates of
return to a range of investments and then rationally decides which one of the
investments should be made. The ownership of physical capital is the outcome of the
conscious decision of the owner —  the physical capital formation is mainly an economic
and technical process. A substantial part of the human capital formation takes place
in one’s life when she/he is unable to decide whether it would maximise her/his earnings.
Children are given different types of school education and health care facilities by their
parents and the society. The peers, educators and society influence the decisions
regarding human capital investments even at the tertiary level, that is, at the college
level. Moreover , the human capital formation at this stage is dependent upon the already
formed human capital at the school level. Human capital formation is partly a social
process and partly a conscious decision of the possessor of the human capital.
You know that the owner of a physical capital, say a bus, need not be present in
the place where it is used; whereas, a bus-driver, who possesses the knowledge and
ability to drive the bus, should be present when the bus is used for transportation of
people and materials. Physical capital is tangible and can be easily sold in the market
like any other commodity. Human capital is intangible; it is endogenously built in the
body and mind of its owner. Human capital is not sold in the market; only the services
of the human capital are sold and, hence, there arises the necessity of the owner of the
human capital to be present in the place of production. The physical capital is
separable from its owner, whereas, human capital is inseparable from its owner.
The two forms of capital differ in terms of mobility across space. Physical capital is
completely mobile between countries except for some artificial trade restrictions. Human
capital is not perfectly mobile between countries as movement is restricted by nationality
and culture. Therefore, physical capital formation can be built even through imports,
whereas human capital formation is to be done through conscious policy formulations
in consonance with the nature of the society and economy and expenditure by the
state and the individuals.
Both forms of capital depreciate with time but the nature of depreciation differs
between the two. Continuous use of machine leads to depreciation and change of
technology makes a machine obsolete. In the case of human capital, depreciation takes
place with ageing but can be reduced, to a large extent, through continuous investment
in education, health, etc. This investment also facilitates the human capital to cope
with change in technology which is not the case with physical capital.
Nature of benefits flowing from human capital are  different from that of physical
capital. Human capital benefits not only the owner but also the society in general. This
is called external benefit. An educated person can effectively take part in a democratic
process and contribute to the socio-economic progress of a nation. A healthy person,
by maintaining personal hygiene and sanitation, stops the spread of contagious diseases
and epidemics. Human capital creates both private and social benefits, whereas physical
capital creates only private benefit. That is, benefits from a capital good flow to those
who pay the price for the product and services produced by it.
2015-16(20/01/2015)
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