NCERT Textbook: Human Capital Formation in India | Economics Class 12 - Commerce PDF Download

 Page 1


CURRENT CHALLENGES FACING THE
INDIAN ECONOMY
UNIT
III
UNIT
III
2024-25
Page 2


CURRENT CHALLENGES FACING THE
INDIAN ECONOMY
UNIT
III
UNIT
III
2024-25
 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
4
2024-25
Page 3


CURRENT CHALLENGES FACING THE
INDIAN ECONOMY
UNIT
III
UNIT
III
2024-25
 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
4
2024-25
59 HUMAN CAPITAL FORMATION IN INDIA
4.1 INTRODUCTION
Think of one factor that has made a
great difference in the evolution of
mankind. Perhaps it is human
capacity to store and transmit
knowledge which they have been doing
through conversation, through songs
and through elaborate lectures. But
humans 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 or her 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. 4.1 Adequate education and training to  farmers can raise productivity in farms
2024-25
Page 4


CURRENT CHALLENGES FACING THE
INDIAN ECONOMY
UNIT
III
UNIT
III
2024-25
 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
4
2024-25
59 HUMAN CAPITAL FORMATION IN INDIA
4.1 INTRODUCTION
Think of one factor that has made a
great difference in the evolution of
mankind. Perhaps it is human
capacity to store and transmit
knowledge which they have been doing
through conversation, through songs
and through elaborate lectures. But
humans 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 or her 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. 4.1 Adequate education and training to  farmers can raise productivity in farms
2024-25
60 INDIAN ECONOMIC DEVELOPMENT
technologies. Economists have stressed
the need for expanding educational
opportunities in a nation as it
accelerates the development process.
4.2 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
nurses, farmers, teachers, 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, nurses, farmers, teachers,
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 people’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?
4.3 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
Ø Identify and collect the data
from 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.
2024-25
Page 5


CURRENT CHALLENGES FACING THE
INDIAN ECONOMY
UNIT
III
UNIT
III
2024-25
 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
4
2024-25
59 HUMAN CAPITAL FORMATION IN INDIA
4.1 INTRODUCTION
Think of one factor that has made a
great difference in the evolution of
mankind. Perhaps it is human
capacity to store and transmit
knowledge which they have been doing
through conversation, through songs
and through elaborate lectures. But
humans 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 or her 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. 4.1 Adequate education and training to  farmers can raise productivity in farms
2024-25
60 INDIAN ECONOMIC DEVELOPMENT
technologies. Economists have stressed
the need for expanding educational
opportunities in a nation as it
accelerates the development process.
4.2 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
nurses, farmers, teachers, 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, nurses, farmers, teachers,
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 people’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?
4.3 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
Ø Identify and collect the data
from 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.
2024-25
61 HUMAN CAPITAL FORMATION IN INDIA
The amount of money
spent on 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 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.
2024-25