Current Economic Challenge

HUMAN CAPITAL FORMATION

Physical capital refers to all those inputs which are required for further production, like plant and
machinery, factory, buildings, raw materials, etc.
involved in the
Human capital refers to the stock of skill, ability, expertise, education and knowledge
people.
COMPARISON BETWEEN PHYSICAL CAPITAL' AND HUMAN CAPITAL'.

Physical Capital
a) Physical capital is tangible and can be easily sold in the market.
b) It depreciates with the passage of time.
c) It is more mobile between countries
d) Physical capital (like machinery) separated from its owners.
economic
e) Physical capital is the outcome of the conscious decision of the owner and is mainly an
and technical process.
) It can be fault through inspects.

Human Capital
intangible and cannot be sold in the market.
a) Human capital ishuman
b) Depreciation capital (due to again) can be reduced by making continuous investment in
education & health.
c) Human capital is less mobile between countries as compared to physical capital.
d) Human capital (like skills of a person) cannot be separated from the own.
e) Formation of human capital is partly a social process by partly a conscious decision of the possessor
of the human capital.
) Human capital formation is to be done through conscious policy formulations.
Meaning of Human Capital formation: Human capital formation means the development of abilities
and skills among the population of the country.
Sources of Human Capital Formation:
1) Expenditure on education: (It is one of the most important sources of human capital formation)
proper utility of man power depends on the system of education, training and industrial experience of
the people. Spending on education by individuals is similar to spending on capital goods by companies
with the objective of increasing future profits once aperiod of time. This increase the income of the
people and their standard of living.
Investment in education is not only highly productive but also it is yields increasing retum and
accelerates economic growth of all the resources education receives most importance because it gives
maximum contribution to the development of the country.

2) Expenditure on Health: Health is an important input for a development of a nation. Expenditure

on health is needed in the following areas.
a. Apreventive medicine known as vaccination curative medicines, i.e., medical intervention during
the time of illness is very important.
b. Provision of clean drinking water and good sanitation is very important for improvement of health.
Health expenditure directly increases the physical capacity of human being and it raises the supply of
healthy labor force.

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3.n the job training: productivity of physical capital is substantially increased with the
improvement in human capital. Due to this reason many firms provide on the job training to their
workers. Such training has the advantage that it can be provided fast and without much cost. It
increases the skill and efficiency of the workers and leads to an increase in production by productivity.
Expenditure regarding on the job training is the source of human capital formation because it increase
labor productivity than its cost.
4. Expenditure on migration: -people migrate to one place to another that gives them higher salaries.
Unemployment people from rural migrate to urban areas technically qualified people migrate to other
countries for higher salaries. Though it results in cost of migration and higher cost of living due to
migration in migrated place it enhances earning that their cost of migration. Hence it is a source of
human capital formation.
[Link] on Information:- Expenditure is incurred to acquire information relating to labour
market and other market. It involves amount spent on seeking information about educational
institutions, education standard their educational needs and cost of education. This information is
necessary to make decisions regarding investment in human capital as well as for efficient utilization
of the acquired human capital stock.
Importance of Human capital formation
1. Human Capital formation is very important for the growth of an economy.
() Effective use of physical capital: Its growth and productivity depends on human capital formation.
(i) Human capital formation raises the productivity and production as knowledgeable and skilled
worker makes the better (use of the resources). Increase in productivity and quality production depends
on technical skill of the people which carn be acquired only by education or training and maintaining
health of the people.
2. Inventions, innovations and technological improvement are all due to the extra knowledge acquired
during education which provides lot of innovations and inventions.
3. The knowledgeable, skilled and physically fir people help in the human capital formation.
4. Increases life expectancy: Formation of human capital raises life expectancy of the people. Health
facilities and availability of nutritive food enable people to live a healthy and long life. This in turn,
adds to the quality of life.
5. Improves Quality of life: The quality of population depends upon the level of education health of a
person and skillformation acquired by the people. Human capital formation not only makes people
productive and creative but also transforms the lives of the people.
6. Control of population growth: It has been observed that educated persons have smaller families as
compared to illiterate families, So, spread of education is necessary to control the population growth
rate.

Reasons for poor Human Capital formations are:

I)Insufficient Resources:- The resources allocated to the formation of human capital have been much
less than the resources required for meeting the educational & health needs of the country. Due to this
reason, the facilities for the formation of human capital have remained grossly inadequate.
2) Serious Inefficiencies: There are a lot of wastages of society's resources as capabilities of educated
people are either not made use of (in case of unemployment or are underutilized in case of
unemployment). Massive literacy, non-education of many children, poor health facilities are other
inefficiencies, which have not been attended to adequately& properly.
3) High Growth of population: The continuous rise in population has adversely affected the quality
of human capital.
4) Lack of proper manpower planning: There is an imbalance between the demands for the supply
of human resources of various categories, especially in case of highly skilled personnel. The absence
of such balancing has resulted in the wastage of resources.

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Human Capital & Human Development
1. Human Capital consider education & health as a means to increase labour productivity Human
Development is leased on the ldea that education & health are integral to human well being
2. In Human capital, investment in education and health is considered to be unproductive, if it does not
increase output of goods &services In case of human development, investments in education and health
is taken to be productive, even if it does not leads to higher output
3. Human capital treats human beings as a means to an end; the end being the increase in productivity
In the human development perspective, human welfare should be increased through investment in
education && health as every individual &health as every individual has a right to be literate &lead a
healthy life
Growth of Education Sector in India
There has been considered growth in the field of Education. The number of schools increased from
230.7 thousands (1950-51 )to 1,215.8 thousands (2005-06). The no. of teachers in the same period
increased from 751 thousand to 6010 thousands &no of students from 23,800 thousands to 2, 22,700
thousands.

Gross Environment Ratio

Gross Enroliment Ratio (GER) is the total enrolment of pupil in grade or cycle or level of cducation,.
regardless of age, expressed as percentage of the corresponding eligible official age group population
in a given school year. GER in elementary education increased steadily from 82% in 1950-51 to 94.85%
in 2005-06.

Literacy Rate
The literacy rate has increased from 18.33% to in 1951 to 64.84% in 2001

Elementary Education in India

Elementary Education in India means eight years of schooling from the age of six i.e., primary& middle
therefore is the
school education together, is called Elementary Education. Elementary Education,
foundation on which the development of every citizens and the nation as auniversal whole hinges. The
government has made elementary education compulsory and free. But, the goal of elementary
In December 2002, the government of
education in India has been very difficult to achieve til now.
children in the age group of 6- 14
India made free and compulsory education, a fundamental right of all
years.

Primary Education Schemes

following are the few
Government has made number of schemes to make "Education for all" The
schemes
Sarva Shiksha Abhiyan (SSA)
Education in India through
It was launched in 2001 to universalize & improve the quality of Elementary
community ownership of Elementary Education. The SSA years. is being implemented in partnership with
states to address the needs of children in age group of 6-14 The achievements under SSA up to
classrooms, 1, 72,381 drinking water
September 30, 2007, include constructions of 7, 13,179 additional
textbooks of 6.64 crore children &
facilities, construction of 2, 18,075 toilets. Supply of free new schools.
31.3.07)
appointment of 8.10 lakh teacher's besides opening of 1, 86,985 (till
Education (NPEGEL):
National Programme for Education of Girls at Elementary for development
The programme is aimed at enhancing girl's education by providing additional support mobilization and
with more intense community
of a model girl child friendly school. In every cluster 35,252 models schools have been opened.
supervision of girls enrolment in schools. Under NPEGEL,
Care & Education (ECCE) centers. Besides, 24,837
In addition to supporting 25,537 Early Childhood 18.75 lakh teachers have been given training on
additional classrooms have been constructed and
gender sensitization.
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Kasturba Gandhi Balika Vidyalaya (KGBV)
The Kasturba Gandhi Balika Vidyalaya (KGBV) scheme was launched in July 2004 for setting up
residential schools at upper primary level, for girls belonging predominantly to the SC, ST, OBC &
minority community. The scheme ran as separate scheme for two years but was merged with Sarva
Shiksha Abhiyan w.e.f April 1, 2007.
Secondary Education
Secondary Education, which starts with classes IX and X leads to senior secondary classes XI and XII
aims to in cooperate basic skills &analytical abilities. It provides a stepping stone to higher professional
and technical education.

Higher Education
The Higher Education System comprises both general and technical education. The higher education
has undergone a manifold expansion since Independence. The no. of universities in the country has
increased from 27 in 1950-51 to 350 in 2005-06 University Grants Commission (UGC) takes measures
for promotion and coordination of university education and determination and maintenance of
standards in teaching, examination and research in universities and allocation and disbursement of
grants to them.

Technical Education
Technical Education plays a vital role in human resources development of the country by creating
skilled manpower, enhancing Industrial productivity and improving the quality of life.
Since independence, there has been a phenomenal expansion of Technical Education Sector in the
country. With 43 diploma level polytechnic at the time of independence, the no. increased to 1,231 in
2000-01. Similarly., the no. of degree level engineering institutions rose from 38 in 1947to 1265 in
2001- 02. All India Council for Technical Education (AICTE) is the apex body in the field of Technical
Education.

Weakness of the Education Sector

1. High Iliteracy: According to 2001 census, the literacy rate of 64.8 percent is still far off the 100
percent mark.
2. Gender Bias: Education in India is gender biased. The enrolment of girls in both primary and upper
primary classes is much below the boys.
3. Low Quality Education: The quality of the education is fairly low.
4. Lack of Vocational and Technical Training: Too much emphasis on general education neglecting
the Vocational and Technical Education.
5. Low Level of Government Expenditure: Actual level of expenditure is only 3.469% compared to
the desired level of 6%

Multiple Choice Questions (MCQs):

1. Which of the following is not an example of physical capital:
(a) Machinery
(b) Raw Material
(c) Building
(d) Education and Knowledge in people
2. Which of the following is a major source of human capital formation in a country:
(a) Expenditure on education
(b) Expenditure on Infrastructure
(c) Expenditure on Defense
(d) None of these

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 3. In which five year plan importance of human capital recognized:
(a) Third
(b) Sixth
(c) Seventh
(d) Eight
4. What is the full form of ICMR:
(a) International council of Medical Research
(b) Indian council of Medical Recourses
(c) International council of Medical Recourses
(d) Indian council of Medical Research
$. (a)
Which one of the following is a reason for poor human capital formation in India:
Brain drain
(b) Insufficient Resources
(c) High growth of population
(d) All of these
Ans. 1. (d) 2. (a) 3. (c) 4. (d) 5. (d)
Very Short Answer Questions for 3 Marks:
Q.1. Briefly discuss the meaning of human capital.
Ans. It refers to the stock of skill, ability, expertise, education and knowledge embodied in the people.
Human capital is needed to make effective use of physical capital. there is a need for investment in
human capital to produce more human capital out of human resources.
Q.2. Discuss the concept of physical capital.
Ans. It includes all those inputs which are required for further production, like plant and machinery.
factory, buildings, raw materials etc. the physical capital is needed to make use of physical resources.
Q.3. What factors contribute to human capital formation?
Ans. The following factors contribute to human capital formation: (1) Expenditure on Education (2)
Expenditure on Health (3) On-the-job-Training (iv) Expenditure on Migration and (v) Expenditure on
Information
Q.4. Mention two government organizations each that regulate the health and education sectors.
Ans. Regulatory authority in Health : (1) Ministries of Health at the union and state level (üi)Indian
council for Medical Research (ICMR)
Regulatory authority in Education : (1) Ministries of Education at the union and state level (ii)
National Council of Educational Research and Training (NCERT)
Q.5. Bring out the differences between human capital and human development.
Ans. These two terms are sound similar yet there is a clear demarcation between them.
Human Capital Human Development
(i) Human capital considers (i) Human Development is based on the idea that
education and health as a means to education and health are integral to human
increase labour productivity. well being because when people have the
ability to read and apply their knowledge to
derive maximum benefit they will be able to
lead a long and healthy life.
(ii) Human capital treats human
(ü) Human development on the other hand is a
beings as a means to achieve an broader concept which considers human
end which is higher productivity. beings as end in themselves and their welfare
failing which the investment is not
considered to be as the objective which can be achieved
through investments in education and health.

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Very Short Answer Questions for 4 Marks:
Q.1. Identify how human development index 0s calculated.
Ans. Human Development Index (HDI) is a comprehensive index of development. It is calculated by
combining all variables which influence quality of life of people.
These factors are: (i) Longevity or life expectancy at birth (i) Educational attainment (iii) Real GDP
per capita
HDI is calculated by calculating an average of all three. They all are rated on a scale of 0-1, the higher
the index, the higher is the development.
Q.2. What role can the government play in human capital formation in India?
Ans. Both education and health have been considered as important for human capital formation. The
provision of basic education and health facilities has been accepted as a goal in all societies. It is
important that these facilities be made available free for the poor classes who cannot afford them in
order to insure better skills and health of manpower.
However the private sector will not be forthcoming in making large investments in non-profitable or
free distribution of such services. Hence the government has an important role to play.
Q.3. Bring out the need for on-the-job-training for a person.
Ans. The productivity of physical capital is substantially enhanced with the improvement in human
capital. Due to this reason, many firms provide on the job training to their workers.
(a) training has the advantage that it can be provided fast and without much cost.
(b) It increases the skill and efficiency of the workers and leads to an increase in production and
productivity.
© On-the-job-training may take different forms; workers may be trained in the firm itself under
the supervision of a skilled worker as well as workers may be sent for off campus training.
(d) It is a source of human capital formation as return of expenditure on such training in the form
of enhanced labour productivity is more than the cost of it.

Q.4. Why do so many children drop out from different levels of education in India?
Ans. The rate of drop outs from school is one of the major problems in achieving the
objective of 100 percent literacy levels. The rate is higher at higher levels of education and among
females. A large section of the population lives BPL and do not have access to basic educational
facilities. A substantial section cannot afford to reach higher education.

Q.5. Explain the relationship between human capital and economic growth.
Ans. Role of human capital formation in increasing the rate of economic growth.
(i) Investment in human capital formation yields higher returns in future by yielding
larger outputs.
(ii) It improves the social outlook of the workers and helps to increase mobility of
labour.
(iii) When existing human resource is further developed by becoming more educated and
healthy, human capital formation take place. This adds to the productive power of
the country by increasing the efficiency of workers.
Long Answer Questions for 6 marks:
Q.1. Explain the role of education and health in economic development.
Ans. Education is an important source of human capital formation:
(i) It generates technical skills and creates manpower., well suited for improving labour
productivity and thus sustaining rapid economic development.
(ii) It also tends to bring down birth rates, bringing a decline in population growth rate.
Consequently it makes more resources available per person coupled with enhanced
productivity.
(iii) It also results in social benefits.
 Health is also an important source of human capital formation:
(i) Health is directly increases the supply of healthy labour force.
(ii Poor health and undernourishment adversely affect the quality of man power. Asick labour
without access to medical facilities is compelled to abstain from work and there is loss of
productivity.
(iii) Adequate food and proper nourishment to people along with adequate health and sanitation
facilities leads to qualitative improvement in human capital.
Q.2. What are main problems of human capital formation in India?
Ans. Problems of human capital formation in India are:
(i) Rapidly rising population adversely affects the quality of human capital fomation in
developing countries. It reduces per capita availability of existing facilities. A large
population also requires large investment in education and health.
(ii) The process of human development is a long period policy because skill formation is time
consuming. The process which produces skilled manpower is thus slow.
(iii) Regional and gender inequality lowers the human development levels.
Migration of highly skilled labour termed as "Brain Drain", adversely affects the economic
(iv)
development.
(V) Agricultural sector is neglected where the workers are not given on the job training to absorb
emerging new technologies.
(vi) Alarge section of the population lives below poverty line and do not have access to basic
health and educational facilities. A substantial section cannot afford to reach higher
education or expensive medical treatment for major illness.

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