Human Capital Formation


Human capital formation is the process of aspiring knowledge and increasing the number .of persons who have the skills, education and experience which are crucial for the economic and political development of a country.  It includes investment in education, improvement of health and the training of the workers in specialized skills.

Definition of human capital–Human capital means the stock of skills, knowledge and expertice in the nation at a point of time.


  • Investment in education – Individuals invests in education with the objective of increasing the future income. It is similar to that of investing in capital goods by companies to generate future profits. Educated person becomes more efficient and productive. Education improves mental faculties of the people. It is important because
  1. It generates creative and technical manpower.
  2. It brings the birth rate down and ore resources are available per person.
  • Health – A sick person is considered as absent from work which is a loss of productivity. Hence it is an important source of Human Capital formation.  Health expenditure directly increases the supply of healthy labor force. A good health increases the physical capacity of human being. Provision of clean drinking water and sanitation are the health expenditure.
  • On the job training – Firms spend on giving on the job training. The return of such expenditure in the form of educated labor productivity is more than the cost on it. The skills may be improved by regular training or learning the process of new technologies on the job. Technical training adds to ability of the people to produce more. The workers may be trained in the firm under the assistance of senior worker.
  • Migration – Expenditure on migration is also a source of human capital formation .Migration involves cost of transport, higher cost of living in the migrated places. The estimated earning in the new place outweighs the cost of migration. It involves migration from rural area to urban area in the country or in between the country.
  • Information – Expenditure incurred for acquiring information relating to the labour and other market is a source of human capital formation. The information is necessary to make decisions regarding investment in human capital as well as for efficient utilization of acquired human capital stock. People would like to know about the educational institutions, their educational standards and cost of education.


DIFFERENCES between human and physical capital

  • Human capital benefits both owner and society in general which is known as external benefit where as physical capital provides the private benefits.
  • Physical capital is completely mobile b/w the two countries except for some trade restrictions. Human capital is not perfectly mobile b/w countries as movement is restricted by nationality and culture.
  • Physical capital is tangible and can be easily sold in the market but human capital is intangible and cannot be sold in the market only the services are sold.
  • Human capital is non-separable from its owner but physical capital is separable from its owner.


Physical and Human Capital


  • Both the forms of capital formation are outcomes of the continuous investment decisions.
  • Both forms of capital formation depreciate with time.



Economic Growth means increase in net national income of a country.  The contribution of educated person to the economic growth is more than that of illiterate person.

Education and health along with other factors like on the job training information and migration increase the individual’s income generating capacity.

  • Raises production– human capital will increase the productivity in the economy. Trained person can apply his knowledge, skills in the farm, factory and office to increase the production. Healthy person can contribute more to the production than an unhealthy person. It reduces the loss of output which would have resulted from the illness of the workers.
  • Raises efficiency and productivity– Investment in human capital yields higher income to the people. The enhanced productivity of the human capital contributes not only towards increasing productivity but also stimulates innovations and creates ability to absorb new techniques.
  • Improves quality of life-  Quality of life is indicated by income and health which in turn depends upon the level of education, health and skill formation acquired by a person. Literate, trained and educated persons are asset for an economy. Better quality of population means more economics growth.
  • Raises life expectancy- Human capital formation raises the life expectancy and longevity of the people. This includes both long and healthy life.
  • Brings positive change in outlook and attitude- Attitude of trained and educated person is not traditional and custom bound. They make rational choice in respect of place and jobs This makes the mobility of the labor easy. All these changes lead to economic development.




Human Capital Human Development
1) It consider education and health as a means to increase lab our productivity 1) It consider education and health as anintegral to human well being
2) It considers human being as a means to increase the productivity 2) It consider human being as an endHuman welfare should be increasedthrough investment in health and education
3) It is a narrower concept. 3) It is a border concept


Human capital formation in India

(i)         The seventh five year plan stressed upon the importance of humancapital.

(ii)        In India, ministry of education at the centre and state level NCERT,

(National Council of Educational Research and Training), UGC

(University Grants commission) , AICTE (All India Council ofTechnical Education) Regulate the education sector.

(iii)       In India, Ministry of Health at the union and the State level and ICMR(Indian Council of Medical Research) regulate the health sector.

(iv)       World Bank states that India will become the knowledge economy.

Also if India uses its knowledge as much as Ireland does, than theper capita income will rise by
$ 3000 by the year 2020.



  • Rapidly Rising Population – It reduces the per head availability of the existing facilities like employment, drainage, housing, hospitals and thus reduces the capacity of countries for building human capital.
  • Migration – Another problem is the migration of educated and trained persons from underdeveloped to developed countries. This adversely affects the economic development of the under developed and developing countries. This is known as brain drain.
  • Less development inagriculture – Less attention is paid on agriculture development in India and there is no provision of “on the job training” in India. The insufficient supply of Qualified and trained agricultural technologists is responsible for less human capital formation in India.
  • Lower Academic Standards – Mass failures and the general lowering of academic standards leads to lowering of the efficiency of graduates and post graduates employed in different sectors.
  • Investment in education – Mostly in underdeveloped countries a high priority to primary education is given which is free and compulsory. On the other hand, secondary education receives low priority in these countries.  However secondary education is necessary for human capital formation.
  • Long term process– The process of human capital formation is a long term process because skill formation takes time. The process which produces skill manpower is slow.
  • High poverty levels– A large proportion of the population lives below the poverty line and do not have access to basic health and education facilities. A large section of population cannot afford to get higher education and expansive medicine for major medical treatments.



Education implies the process of teaching, training and learning in schools and colleges to improve knowledge and develop skills.

  1. Education provides Good citizen
  2. It develops science and technology.
  3. It develops human personality
  4. It facilitates the use of national and human resource of a country.
  5. It expands modernization of a people.



  1. Education prepare for the changing situations of life by developing approximate values aptitudes, knowledge and skills.
  2. It enables the people to contribute to the economic development of the country by providing capacity and flexibility.
  3. It generates consciousness towards nation, society and development
  4. It promotes rational and scientific outlook for solution of the problem faced by the country
  5. Education stimulates cultural and creative facilities.
  6. It helps in the development of human resource.



Following data shows the growth of education sector in India

  1. Elementary education :
  2. a) In 2009-10 primary and middle school were 11.9 lakhs and Gross

Enrolment ratio in class I to VIII increased to 100.3 percent in 2007-08

  1. b) Various policies such as SarvaShikshaAbhiyan, Mid day meal scheme, district Primary Education programme of recently right to  Education have been playing major role in    enhancing Primary
  2. c) In 2001, the percentage of literates increased to 70.04 percent which was merely
    16 percent in 1951.

National policy on education was started before 21st century to provide free and compulsory education to all children upto the age of 14 years.Overthe period of time, drop out rates have come down and the level of achievement in the school education was made compulsory under right of children to free and compulsory educationMid day meal scheme started on 15th August 1995.

Elementary guarantee scheme and alternative and innovative education (EGS and AIE)

  1. ii) Secondary Education

(a)        RashtriyaMadhyamikShikshaAbhiyan (RMSA). The main objective is to enhance the secondary educationwas also started.

(b)        National Open School (NOS) :NOS was started in November 1989. The aim was to produce education to school drop-outs and those who cannot attend regular classes.

(c)        NavodayaVidyalaya :Under National policy, a new scheme was started one in each district. These are fully residential and co-educational institutions covering VI to XII.

(d)        KendriyaVidyalaya :It was approved in 1962. The primary objective, of the scheme was to fulfill the education need to the children of the transferable central government employees by providing them common programme of education. All KendriyaVidyalaya follow the uniform syllabus.

(e)        National Council for Educational Research and Training :It was set up in 1981. The main objective to establish is to assist and advice the ministry in implementing policy and new programme relating to schools education. NCERT has five regional institutes and eight field offices in major states all over the country.

Literacy rate

            The literacy rate in India has increased from 18.33% in 1950-51 to 70.4% in 2010-11. There is a sharp decline in the rural urban literacy gap.

But literacy rate in males is higher than the females.

iii)        Higher Education

  1. a) In 2011-12,690 universities (including deemed), 13,381 colleges and enrolment of student 130 lakhs.
  2. b) UGC regulates and guides higher educations as India Gandhi National Open Universities provides distant learning for Higher education. It was started in 1985.
  3. iv) Expansion of Technical Education :
  4. a) The All India Council for Technical Education is the apex body in the field of technical
  5. b) Presently 3,400 engineering colleges, 289 medical colleges, 282 dental colleges, 617 polytechnics, and 38 agricultural universities are spreading technical education.
  6. v) Development of Research Facilities :There are four permanent research organizations

(i)         Indian Council for Historical Research.

(ii)        Indian Institute of Advanced Study (IIAS).

(iii)       Indian Council of Philosophical Research (ICPR).

(iv)       Indian Council for Social Science Research (ICSSR).

Besides this, National Council of Rural Institute was set up by central government to promote

Rural higher education.

  1. vi) National Knowledge Commission (NKC)

It was set up in 2005 as a high level advisory body to the prime minister of India. It has submitted

its two reports. It has identified five key areas of knowledge.


(a)        Access to the knowledge.

(b)        Knowledge concepts

(c)        Creation of knowledge

(d)        Knowledge application

(e)        Delivery of services