Human Capital Formation (ol naa 4.1. Introduction 4.2 Meaning of Human Capital Formation 1 INTRODUCTION quman resources are vital from the point BF view of economic development. In the (HCF) modern world, all the planners believe that 4.3 Sources of Human Capital Formation the building of a strong nation depends upon 4.4 Human Capital and Economic Growth lopment of people and the organisation 4.5. Importance or Role of Human Capital Ofhuman activity. If this resource is developed Formation Eoperly, it can do wonders. The development 4.6 Problems of Human Capital Formation pf human resources means increasing the quality 4.7 Human Capital & Human Development uuman beings, which helps in the process of i as Sind development of te economy, 48 Eurnen copa Formation in India: Great Wealth is neither in its land and water, nor in 4.9 Educational Sector in India sts and mines, norinits flockand herds, nor in 4.10 Educational Achievements in India lars but in its wealthy and happy men, women 4.11 Future Prospects in Educational Sector Physical Capital and Human Capital economic development of a country is possible only when there is optimum utilisation of sical and human resources. Physical Capital: 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. * Its accumulation is quite important for economic growth of a country. * 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 physical capital formation is mainly an economic and technical process. 412, Human Capi Tengibility | Physical apitalis tangible and can be easily | Human capitalis intangible and cannot be soldin Depreciation | Itdepreciates with continuous use, passage Mobility | Although physical capital is completely Indian Economic Developmen ills that a person acquires through education, training and oy : It refers to the Fah ee erience, adding to his/her value to the production process. oo. rt is the: tockot skill, ability, expertise, education & knowledge embodied in the peopte + 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 oy of human resources. * Societies need sufficient human capital 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, etc.) | Seventh Five Year Plan recognised the importance of human capital. 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. Both forms of capital formation are outcomes of conscious investment decisions. HUMAN CAPITALVS PHYSICAL CAPITAL Let us understand the concept of these two terms with the help of an examp| ‘new business and invests 90 Lakhs as follows: ‘ Malina Building: 60 lacs ‘Machinery: 20 lacs Employees'Training: 10 lacs SUPPOSE, a Person starts a In the given case: 1ess:Itis 90 Lakhs, [Link] amount invested into the business to produce goods andservices. + Physical Capital: It is€ 80 Lakhs (=¥ 60 Lakhs + & 20 Lakhs), Le. investment in Building and Machinery, ie. in tangible assets, which can be seen. + Human Capital: tis 10 Lakhs, ie. investment in stock of skills and knowledge (i.e. Employees’Training), i.e. in intangible assets, which cannot be seen. Comparison between Physical Capital and Human Capital Lap Eee ticle Human Capital sold in the market, themarket. Only the services ofhuman capitalcan be sold. So, owner of the human capital needs t0 be present at the place of production. Although depreciation occurs ageing: but it can be reduced by making continuous investments in education and health. Human capital is less mobile between countries Y | as compared to physical capital as movement Festricted by nationality and culture. of time and expected obsolescence, mobile between countries, but its mot is restricted due to trade barriers,apter4 © Human Capital Formation _ Phys! e o jeparability | Physical capital (like machinery) ean be | Huan eapital like skill of a person) cannot be fromowner_| Separated from Its owner separated frarn the oviner. ature of | Phystcalecapitalis the outcomeofconsclous + decision of owner and Is mainly economic and technical process, Formation of human capital (4 partly a soe an| process and partly a conscious deckion of the possessor of the hurnan capital mation | It can be built through imports, Human capital formation is to be done through conscious policy formulations. tea) Human Capital creates both Private and Social Benefits Nature of benefits from human capital is different from that of physical capital. + Human Capital benefits not only the owner but also society in general. For example, an educated person can effectively participate in a democratic process and contribute to the socio- economic progress of a nation. Similarly, a healthy person prevents the spread of contagious diseases and epidemics by maintaining personal hygiene and sanitation. Thus, human capital creates both private and social benefits. + Onthe other hand, Physical Capital creates only private benefits. It happens because, benefits froma capital good flow to those who pay the price for the product and services produced by it. jow do People become Resources? eople become resources by using their skills, knowledge, productivity and abilities. When juman resources are further developed by becoming more educated and healthy, we call this luman Capital Formation’. 4.2 MEANING OF HUMAN CAPITAL FORMATION (HCF) iuman Capital Formation refers to the process of addition made to the stock of skilled and capable people ‘a country over a period of time. In other words, HCF refers to development of abilities and skills .ong the population of the country. ". It is the process of acquiring and increasing the number of persons, who have the skills, education and experience. For example, if in the beginning of a year, human capital stock ofa nation consists of 30 lakh skilled workers and at the end of the year, it increases to 34 lakh skilled workers, then there is human capital formation to the extent of 4 lakh skilled workers in a year. + Human capital formation is associated with investment in man and his development as a creative and productive resource. * Human capital is a stock concept, while human capital formation is a flow concept. Flow Variable refers to that variable, which is measured over a period of time, while stock variable refers to that variable, which is measured at a particular point of time. 4.3 SOURCES OF HUMAN CAPITAL FORMATION Phere are a number of ways by which human capital can be increased. The different sources of juman capital formation are 1. Expenditure on Education: Proper utility of manpower depends on thesystem of education and training of people.Re Seasons : i {nian Economie Develo 3 su Prnen rit a4 es nore than that of ait generate more nomists have portunities + Latour skill of an ednented person is ™ uneduentad person, which enables hin | income than the uneducated person. Heor stressed the need to expand educational 0} ; ina nation as it accelerates the development process: , * Spending on education by individuals is lar 3 Nyy spending on capital goods by companies. Individuals invest in education to increase their future income and Education transforms a pey raise their living standard. Expenditure on education tollveabeterifeandtasa g stan : arkable effect on one turns human beings into human capital. Personality * Education contributes to economic growth and development because: * It provides knowledge to understan: scientific advancements; * It stimulates inventions and innovations in the economy; * The availability of educated labour force facilitates adaptation to new technologies, * Education confers higher earning capacity to people, which gives them better social standing and pride; _ * Technical skills acquired through education provide an opportunity tomakebetter use of given resources thereby promoting economic development of the nation, 2. Expenditure on Health: Health expenditure is a source of human capital formation as it directly increases the supply of healthy human force. * Poor health and undernourishment adversely affect the quality of manpower. A sick labour, without access to medical facilities, is compelled to abstain from work, which leads to a loss of productivity. + Therefore, expenditure on health is important to build and maintain a productive labour force and to improve the quality of life of people in society. ‘* Adequate food and proper nourishment to people, along with adequate health and sanitation facilities lead to qualitative improvement in human capital. + Forms of Health Expenditure: The various forms of health expenditures include amount of money spent on: * Preventive Medicine known as vaccination; + Curative Medicine, i.e. medical intervention during illness; + Social Medicine, i.e. spread of health literacy; + Provision of clean drinking water; + Good Sanitation facilities. On-the-Job Training: As stated earlier, 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. * Such training has the advantage that it can be provided fast and without much cost. * Itincreases the skill and efficiency of the workers and leads [Link] increase in production of goods and productivity of labour, Ledny d the changes taking place in society ang