Select Board & Class


Unit III- Human Capital Formation In India

Meaning of Human Capital and Sources of Human Capital Formation


After going through this lesson, you shall be able to understand the meaning of human capital and human capital formation. Also, we will explore the various sources of human capital formation.

Human Capital and Human Capital Formation

You can see around yourself people having varied knowledge and skill. Some are doctors, engineers, professors, artisans, scientist, researchers, etc. All these people are a capital for the economy.  They contribute to the process of economic growth. An educated and skilled labour force is more productive and efficient than an uneducated labour force. Similarly, a healthy person can contribute more effectively to the work. The stock of such skills and expertise of nation at a particular point of time is called as human capital. In other words, it is the sum total of skills and expertise of all persons engaged in the process of production. Human resource (population) becomes a human capital when it is endowed with education, training, skill and health. It is the human capital and not the human resource that contributes to the production process and thereby, to the economic growth. The contribution of human skills and expertise towards economic growth and development is invaluable. This is because a stock of quality-enriched human capital raises individual efficiency and productivity thereby, raising the aggregate production and economic well-being of a country.

Over time, with constant efforts in the form of investment in the education and health, the stock of human capital builds up. The number of skilled and educated professionals (such as doctors, teachers, engineers, etc.) who can contribute positively to the production process also increases. This process of addition to the stock of human capital overtime is referred as human capital formation. For example, if the number of skilled persons in a labour force increases from 1 crore to 1.5 crore, then there is human capital formation by 0.5 crore.

Sources of Human Capital Formation  

Human capital formation is an aggregate outcome of the investments in education, health, transport and communication sector, technical know-how and on-the-job training and migration. These factors are explained below.

1. Education: Education increases the productive capacity and productivity of a nation’s workforce by honing their skills. An educated labour force is not only more productive, but it also increases the acceptability of the modern techniques. Besides, education also helps in raising the standard and quality of living. It also encourages modern attitudes of people. It facilitates a primitive economy to break the shackles of tradition and backwardness. An investment in educational sector has two fold benefits. It not only increases the income earning capacity but also reduces the skewed distribution of income, thereby, forming an egalitarian society. The investment in educational sector has long lasting returns. It not only enhances the present economic condition but also improves the future prospects of a country. The importance of education is not only limited to making  people educated but also in facilitating  an underdeveloped economy to solve different but interrelated macro economic problems such as poverty, income inequality, population, investments and under utilisation of resources. Therefore, investment in education must be accorded high priority in a country.

2. Health: There is a saying “The greatest wealth is health”. The wealth of a country can be increased with the efforts of healthy workforce. Investment in health sector increases efficiency, efficacy and productivity of a nation’s workforce. In contrast to an unhealthy person, a healthy person can work better with more efficiency and, consequently, can contribute relatively more to the GDP of a country. Good health and medical facilities not only increases the life expectancy but also improve quality and standard of living. Investing in health sector ensures the perennial and uninterrupted supply of healthy workforce. Some of the common expenditures incurred in the health sector are on providing better medical facilities, easy availability of life saving drugs, common vaccination, spread of medical knowledge, provision of proper sanitation clean drinking water, etc. Thus, the expenditure incurred on health is important in building and maintaining a productive work force.

3. On-the-Job Training: Training refers to the act of acquiring skills, knowledge and competency required to perform a particular job efficiently and effectively. On-the-job training is the most effective kind of training to a trainee, imparting him the technical ...

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