What is the role of education in human capital formation?

What is the role of education in human capital formation?

The role of education in human capital formation is significant, as the education improves productivity and prosperity of a society. Education enables a person in developing human capital i.e., skill, knowledge, wisdom. The importance of human capital formation cannot be overemphasized and predominantly it has been the fulcrum of all forms of developmental outcomes. Here, we’ve discussed the role of education in human capital formation.

“The highest education is that which does not merely give us information but makes our life in harmony with all existence.” Rabindranath Tagore

What is Human Capital Formation?

How to define human capital formation: A country can turn physical resources like land, mineral products, water power into physical capital like factories, power stations, dams & reservoirs, etc. To run physical resources, we need good human capital. Like physical capitals, the country can turn human resources like students into human capital like engineers, doctors, administrative officers, scientists, architects, teachers and so on. Human capitals are needed to develop and run physical capitals as well as human capitals. People with human capital like knowledge, skills, expertise, experience, represent the country in front of the world. These persons enrich society and the nation. To run a country well, we need good human capital and a well infrastructured human capital formation system.
Human Capital refers to skill, ability, expertise, knowledge in a person.

What is Human Capital Formation
What is Human Capital Formation

Human Capital Formation is the development of skill, ability, expertise, knowledge of a person for years. Quality education, sound health, well-behaved communication are recognizable manifestations of a well human capital formation. Human capital formation helps the economic and political development of a country.

What are the Sources of Human Capital Formation?

What are the Sources of Human Capital Formation
What are the Sources of Human Capital Formation

Human capital needs to be well furnished. The use of human capital is a blessing to mankind. So, what factors contribute to Human Capital Formation? There are five sources or factors of Capital Formation of Human:

Investment in Education: An educated person is an asset for a nation and is capable to produce more effort for the upliftment of society. On the other hand labour with more efficiency contributes to the economic growth of a nation. And labour becomes efficient or skilled with the inclusion of education. Spending on education by individuals enables the development of the human capital in that person, which helps that person to increase productivity and efficiency of labour. That’s why spending on education is as effective as spending on physical capital. 

  • Education gives a person a better standing in social life.
  • Education enables a person to make better choices in life.
  • Education provides knowledge.
  • Education helps a person to innovate and invent.
  • Education makes a person curious and thus empowers them to question.

Health Investment: A healthy person can supply more workforce than an unhealthy person. Education stimulates knowledge to grow. Knowledge enables one to get better job opportunities with a better salary amount, which is spent on healthy foods. Healthy foods make a person healthier. In addition, it helps to create a habitat with a sound lifestyle. Availability of medicines, clean drinking water and good sanitation facilities are necessary to lead a healthy lifestyle.

Giving On-the-Job-Training Investment: Different types of works need different types of capabilities to pursue. An educated one can make oneself more pursuable for a job by getting on-the-job training.

Investment for Migration: Everyone needs a job. People migrate in search of jobs with higher salaries from their native places. Unemployment and better job opportunity are reasons for rural-urban migration in India. The cost of transport, cost of living and psychological cost for a new socio-cultural setup are included in the expenditure of migration. Hence, expenditure on migration becomes a source of human capital formation.

Investment for Information: Knowledge is the key thing to do a job. A proper supply of information builds intelligence. People spend lots of time and money to acquire information related to their labour, society, lifestyle, etc. This information helps to make decisions regarding the investment in human capital as well as its efficient utilisation. Thus, expenditure on information is also a source of human capital formation.

Importance of Role of Human Capital Formation

  • Proper Use of Physical Capital: Increment in productivity of physical capital widely depends on human capital. Educated, skilled, experienced and healthy people effectively make use of physical capital and raise the productivity of capital.
  • Inventions, Innovations and Improvement: Human capital formation can trigger inventions to bring innovations in labour to make it easy. Education also creates the ability in human capital to absorb new technological improvements.
  • Improvement in Quality of Life: Human capital formation raises the life expectancy in people. Educated and healthy people can lead a good quality of life.
  • Population Growth Control: It has been observed through many studies that educated persons have smaller families, compared to uneducated ones. So, it is believed that education can control the population growth rate of a country.

Relationship Between Human Capital and Economic Growth

What is Economic Growth? Economic growth is calculated by the increase in per capita income or increase in the per capita availability of goods and services of a country.

Role of Human Capital Formation in Economic Growth

Human capital formation and the economic growth of a country is directly connected. Education helps a person to build up human capital like skill, excellence, experience, which is used in labour by that person. The person incomes and gets other allowances in return for his labour. The income is spent on buying necessary goods. Thus, the money moves into society and creates growth in the economy of a country. How human capital formation helps in the economic growth of a country is discussed below:

  • A healthy person can contribute to economic growth by providing an uninterrupted labour supply than that an illiterate person.
  • Human capital formation not only increases the productivity of human resources but also stimulates innovations and creates the ability to absorb new technologies.
  • Education provides knowledge to understand changes in society and scientific advancements, thus, facilitating inventions and innovations.
  • The availability of an educated labour force facilitates adaptation to new technologies.


Difference Between Physical and Human Capital

Physical and Human Capital – both forms of capital formation are outcomes of conscious investment decisions based on one’s knowledge. Physical capital formation is an economic and technical process that possesses the ownership of an owner. Men, women and children can avail different types of education and health care facilities. The educators and society influencers have taken decisions regarding human capital investments even at the tertiary level for sustainable action for transforming human capital. Moreover, the human capital formation depends upon the already formed human capital through school education. 

Human capital formation has a dependency on both the social process and the conscious policy formulations in consonance with the nature of the society and economy and expenditure by the state and the individuals made for the process of human capital formation. Human capital is an intangible sense that is endogenously built-in body and mind. On the other side, physical capital is tangible and can be easily bought or sold in the market as a commodity. Moreover, physical capital can be built with the help of human capital. Everything grows old as time passes. Both physical and human capital depreciates with ageing.

Role of Human Capital in the Development of the Indian Economy

Education and Economic Growth in India are dependent on each other. Economic growth is the increment in the real national income of a country. The contribution to the economic growth of a country by the educated person is more than that of an uneducated person. If a literate, healthy person could provide an uninterrupted labour supply for a longer period, then health becomes also an important factor for economic growth besides literacy. Thus, all the factors like education, health, on-the-job training, job market information and migration not only increase labour productivity but also stimulate innovations and create an ability to absorb new technologies. Education provides knowledge to understand changes in society and scientific advancements, that facilitate inventions and innovations to bring an increase in human capital. But, empirical evidence of economic growth through increment in human capital is rather unclear.

In India, the ministry of education, several departments of education and various organisations like the National Council of Educational Research and Training (NCERT), University Grants Commission (UGC) and All India Council of Technical Education (AICTE) facilitate institutions under the educational infrastructure. But, a substantial section of India’s population cannot afford both health care services and higher education. Furthermore, when basic education and health care is considered as a right of the citizens, then the government must provide these services free of cost for the deserving citizens. Both, the union and state governments, have been stepping up expenditures in the education sector over the years to attain a cent per cent literacy rate and increase the average educational attendance.

India has been financed by the central government and state governments since the 1950s to develop an educational infrastructure. India has become one of the largest education networks in the world, at present. This infrastructure facilitates a large school-going population. This strong educational infrastructure has provided resources in the developing economy with quality manpower. The Central Government of India realised the significant role of education in the development of human capital in the Indian economy and took necessary action in the Seventh Five Year Plan (1985–1990). At first, public expenditure in the educational sector in 1961-62, was 1.52% of the GDP, which increased to 3.68% in 2004-05. According to the NSSO data published in the year 2011-12, the rate of unemployment among graduate and post-graduate youth males in rural areas was 19 per cent. Their urban counterparts had unemployment at 16 per cent. The young rural female graduates are the most severely affected. About 30 per cent of them are unemployed. In contrast to this, only about 3-6 per cent of primary level educated youth in rural and urban areas were unemployed. In 2020, the Union Government of India has introduced the National Education Policy after 1968 and 1986 to make India a global knowledge superpower. The National Education Policy 2020 states that “India aspires to take its place beside the United States and China as the third-largest economy by 2030-2032… By 2030-2032 we will be the third-largest economy at over ten trillion. Our economy worth ten trillion will not be driven by natural resources, but by knowledge resources. Thus, we need a knowledge society based on a robust education system, with all the requisite attributes and characteristics in the context of changes in knowledge demands, technologies, and the way in which society lives and works”.

Here is an illustration of quality education that drives economic growth at a higher rate.

Role of Human Capital in the Development of the Indian Economy
Role of Human Capital in the Development of the Indian Economy Source: International Monetary Fund

India’s Expenditure on Education

This expenditure by the government is expressed in two ways: as a percentage of ‘total government expenditure’ and as a percentage of Gross Domestic Product (GDP). During 1952-2014, education expenditure has been increased from 7.92 to 15.7 and from 0.64 to 4.13 as a percentage of GDP. According to the Union Budget 2021-22, the total expenditure on the education sector was Rs 93,224 crore, with an allocation of Rs 54,873 crore for school education and literacy and Rs 38,350 crore for higher education.

Human Capital and Human Development

The two terms ‘Human capital’ and ‘human development’ – sound similar but there is a clear distinction between them. Human capital is considered through education and health to increase labour productivity. On the other hand, human development is considered as the ability of reading, writing and leading a long and healthy life through education and healthcare facilities to make valuable choices. In this view, any investment in education and health services can be unproductive if it does not enhance the output of goods and services. So, basic education and basic healthcare are important for the people, irrespective of their contribution to productivity. In such a view, every individual has a right to get basic education and basic health care, that is, every individual has a right to be literate and lead a healthy life.

Education Sector In India

Educational achievements in a country indicate adult literacy level, primary education completion rate and youth literacy rate. Though, since 2015, government spending on school education has decreased. If the private expenditure incurred by individuals and by philanthropic institutions is included in the total education expenditure, the spending amount should be much higher. Elementary education takes a major share of total education expenditure and higher/tertiary education takes the least. But, this does not mean that financial resources should be transferred from tertiary education to elementary education. As we expand school education, we need more well-trained teachers for higher education.

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The Education Commission under the chairmanship of Daulat Singh Kothari (1964–66) [also known as the Kothari Commission] had recommended that at least 6 per cent of GDP be spent on education to make a noticeable growth in educational achievements. But India has never taken any steps towards this recommendation. The annual public investment in education in India over the last 5 years has been hovering around 3% of GDP. The Tapas Majumdar Committee, appointed by the Government of India in 1999, estimated expenditure of around Rs 1.37 lakh crore over 10 years (1998-99 to 2006-07) to bring all Indian children of 6-14 years age group under the compass of school education. The revenues from education cess have been allocated to spend on elementary education. In addition, the government has sanctioned a large outlay to promote higher education and new loan schemes to students for higher education.

Sustainable Action for Transforming Human Capital

  • NITI Aayog launched the Sustainable Action for Transforming Human Capital in Education (SATH-E) project in 2017 to identify and develop three ‘role model’ States in the school education sector. For this project, Jharkhand, Odisha and Madhya Pradesh: these three states were chosen.
  • A learning enhancement programme/remedial teaching with workbook support for approximately 2.3 crore students has been implemented.
  • Academic monitoring of schools and their students have been streamlined, with nearly 1.5 lakh inspections being carried out every month.
  • Comprehensive rewards and recognition programmes have been initiated with external certifications. Assessment reforms, including spot testing and learning tracking formats, was introduced.
  • Multiple rounds of teacher training were undertaken. In Madhya Pradesh, 30% of the students were moved from lower-level foundational literacy, numeracy learning cohorts to the highest learning level for grades 3–8 under the ‘Dakshta Unnayan’ learning enhancement programme.
  • ‘National Initiative for School Heads and Teachers Holistic Advancement (NISHTHA)’, a national mission was launched by the Govt of India to improve learning outcomes at the elementary level. NISHTHA is the largest teachers’ training programme of its kind in the world.
  • An average improvement of 10–15% was observed in learning outcomes due to the ‘Ujjwal-Utthan’ learning enhancement programme in the state of Odisha. In Jharkhand, 12% improvement across most competencies was recorded through the ‘Gyan Setu’ learning enhancement programme. SATH-E adapted itself as ‘Digi-SATH’ to provide undeterred support via digital mediums due to the Covid-19 pandemic. Under the Digi-SATH initiative, Madhya Pradesh has launched ‘Hamara Ghar Hamara Vidyalaya’ and ‘Digi-LEP’ (or ‘Digital Learning Enhancement Programme’). In Odisha, ‘Shiksha Sanjog’ and ‘Shiksha Sampark’ was initiated under the Digi-SATH initiative. Jharkhand’s ‘Hamara Doordarshan Hamara Vidyalaya’ are providing online education and teacher training under the Digi-SATH initiative.

Problems of Human Capital Formation in India

  • Education for All: Literacy rates for both adults as well as minors have increased, but have not reached a 100% target. In 1950, when the Constitution of India was passed, it was noted that the government of India promised to provide free and compulsory education to all children up to 14 years of age, within 10 years from the commencement of the Constitution. But we have not fulfilled the target till today.
  • Gender Inequity: After 74 years of the independence of India, there is still a difference in literacy rates between males and females signifying gender equity. Girls are vulnerable from school education and higher education due to handling domestic responsibilities, till the 21st century. Therefore, people are not satisfied with the hike in literacy rates. In addition, we have miles to go to achieve cent per cent adult literacy.
  • Higher Education: The All India Survey on Higher Education (AISHE) expressed India’s Gross Enrollment Report (GER) at 27.4 per cent for 2017-18, calculated in people of 18-23 age group enrolled in higher education. This is a severe issue towards the human capital formation in India. A group of researchers, including University Grants Commission (UGC) Vice-Chairman Bhushan Patwardhan, has suggested a change in the enrollment in higher education in India.
  • Digital Literacy: Only 4% of households in rural India can own a computer, where 23.4% of households own a computer in urban India. In rural India, less than 15% of households have internet access, where 42% of urban Indian households have internet access. This scenario poses an obstacle towards human capital formation in today’s context.

World Bank’s Human Capital Index

World Bank releases the Human Capital Index (HCI) report. It is an index that benchmarks key components of human capital across countries. It covers 98% of the world’s population. India has been ranked at the 116th position in the HCI 2020 out of 174 countries.

The World Bank’s Human Capital Index has three components:

  • Survival: as measured by under-5 mortality rates
  • Expected years of Quality-Adjusted School: which combines information on the quantity and quality of education
  • Health environment: Using two proxies of (a) adult survival rates and (b) the rate of stunting for children under age 5.
Human Capital Index
Human Capital Index

Human Development Index of UNDP

India ranked 131 among 189 countries on the Human Development Index (HDI) for 2019, slipping two places from the previous year, according to the Human Development Report (HDR) 2020 released by the United Nations Development Program (UNDP).

The 2020 Report has introduced the planetary pressures-adjusted Human Development Index, which adjusts the standard Human Development Index (HDI) by a country’s per capita carbon dioxide emissions and material footprint.
The other indices that form the part of the Report are:

  • Inequality-adjusted Human Development Index (IHDI),
  • Gender Development Index (GDI),
  • Gender Inequality Index (GII) and
  • Multidimensional Poverty Index (MPI).
Human Development Index
Human Development Index Source

Recent Educational Reforms in India:

To curb the above-mentioned problems, the Central Government has taken some vital steps to reform the educational sector towards human capital formation in India project work through the enactment of the Right of Children to Free and Compulsory Education Act in 2009 to make free education a fundamental right of all children in the age group of 6-14 years, levying a 2 per cent ‘education cess’ on all Union taxes, the launch of Beti Bachao Beti Padhao scheme in 2015, the launch of Digital India initiative in 2015 to connect rural India with high-speed Internet networks and improving digital literacy, the launch of New Education Policy 2020, etc. 

Conclusion: What is the role of education in human capital formation?

Education is critical for sustainable growth. Education is an essential tool in Human capital formation, which is eventually inherent for the development of a country like India. The union government and the state governments are maintaining substantial financial outlays for sustainable development. The spread of education and health services across different sectors of society should be ensured and simultaneously attain economic growth and equity. Now, India is the third-largest reservoir of science and technology manpower in the world. Decentralized strategic planning, optimum capacity utilization in the education sector, strong and transparent local governance is the need of the hour to ensure sustainable human capital formation in India.

Frequently Asked Questions

  • Explain the role of education in human capital formation

The role of education in human capital formation is significant, as the education improves productivity and prosperity of a society. Education enables a person in developing human capital i.e., skill, knowledge, wisdom. Thus an educated person contributes more efficiently towards the development of a country.

  • The education which helps in formation of life who said this

Gandhiji was the proponent of the concept of Basic Education and envisaged education as a tool of formation of life. He was a great revolutionary person. He had immensely devoted himself exploring the ways of relating to life. 

  • What is education?

Education is an act of teaching or a way to share knowledge. Education can also be referred to the knowledge received through the various institutions.

  • What is the role of education in development?

Development refers to growth and growth comes from skill. The skill is only acquired through quality education. Hence education is an essential tool for development.

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