Physical capital: it includes all those inputs which are required for further productio 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 .
- The ownership of physical capital is the outcome of the conscious decision of the owner.
- The entrepreneur possesses knowledge to calculate the expected rates of return to a range of investments and then rationally decides which one of the in,,estments should be made.
Human capital: 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 or human capital o of human resources.
- Societies need sufficient human capital in the form of competent people who have themselves been educated and trained as professor and other professionals.
- In other words, we need good human capital to produce other human capital (say, doctors, engineers, etc…)
COMPARISON BETWEEN PHYSICAL CAPITAL AND HUMAN CAPITAL
| Physical capital | Human capital |
| Physical capital is tangible and can be easily sold in the market. | Human capital is intangible and cannot be sold in the market. |
| Depreciation In human capital can be reduced by making continuous investments in education and health. | If depreciates with the passage of time. |
| It is more mobile between countries. | Human capital is less mobile between countries as compared to physical capital. |
| Physical capital (like machinery) can be separated from its owner. | Human capital (like skills of a person) cannot be separated from the owner. |
| Physical capital is the outcome of conscious of owner and is mainly an economic and technical process. | Formation of human capital is a partly a social process and partly a conscious decision of the possessor of the human capital . |
| It can be built through imports. | Human capital formation is to be done through conscious policy formulation. |
MEANING OF HUMAN CAPITAL FORMATION (HCF)
Human capital formation refers to development of abilities and skills among the population of the country. • It is the process of acquiring and increasing the number of persons, who have the skills, education and experience.
SOURCES OF HUMAN CAPITAL FORMATION
1. Expenditure of education:
proper utility of manpower depends on the system of education and training of people. • Labour skill of an educated person is more than that of an uneducated person , which enables him to go generate more income than that of an uneducated person.
• Spending on education by individual is similar to spending on capital goods by companies. Individuals invest in education to increase their future income and raise the living standard.
• Education contributes to economic growth
(i) Education confers higher earning capacity on people;
(ii) It gives better social standing and pride;
(iii) It enables one to make better choice in life;
(iv) It provides knowledge to understand the changes taking place in society;
(v) It also stimulates innovation;
(vi) It facilities adaptation of new technologies.
2. Expenditure on health:
Health expenditure is a source of human capital formation as it directly increases the supply of health labour 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 and there is los of productivity.
• Therefore, expenditure on health is important to build and maintain productive labour force and to improve quality of life of people in the society.
• Adequate food and proper nourishment to people , along with adequate health and sanitation facilities leads to qualitative improvement in human capital.
• Forms of health expenditure:
The various form of health expenditures include:
(i) Preventive medicine known as vaccination;
(ii) Currative medicine, i.e. medical intervention during illness;
(iii) Social medicine, i.e. spread of health literacy;
(iv) Provision of clean drinking water;
(v) 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.
• It increase the skill and efficiently of the workers and leads to an increase in productivity.
• On-the-job-training may take different forms:
(I) Workers may be trained in the firms itself under the supervision of a skilled worker;
(II) Workers may be sent for of-campus training.
Expenditure on migration:
People migrate from one place to another in search of jobs that fetch them higher salaries.
• Unemployed people from rural areas migrate to urban areas in search jobs.
• Technically qualified persons (like engineers, doctors, etc.) migrate to other countries because higher salaries that they may get in such countries.
• Migration in both these cases involves two kind of cost:
(I) Cost of transportation from one place to another;and
(II) Higher cost of living in the migrated places.
Expenditure on information:
Expenditure is incurred to acquire information relating to labour market and other markets .
• It involves amount spent on seeking information about educational institutions, their educational standards and cost of education.
• For example, people want to know the level of salaries associated with various types of jobs, whether the educational institutions provide the right type of employable skills and at what cost.
• Information is necessary to make decision regarding investments in human capital as well as for efficient utilization of the acquired human capital stock.
HUMAN CAPITAL AND ECONOMIC GROWTH
• Economic growth means increase in real national income of the country.
• The contribution of an educated person on the economic growth is more than that of an illiterate person.
• Similarly , a health person also contributes to economic growth by providing uninterrupted labour supply for a longer period of time.
HCF promotes inventions, innovations and technological improvements.
Difficult to prove cause and effect relation between human capital and economic growth
Due to measurement problems, it is difficult to prove that increase in human capital causes economic growth .
• For example, education measured in terms of year of schooling , teache-pupil ratio and enrollment rates may not reflect the quality of education.
• Similarly , health services measured in monetary terms, life expectancy and morality rates may not reflect the true health status of the people in a country.
The relationship between human capital and economic growth flows in either directions.
• Higher income causes building of high level of human capital; and
• High level of human capital causes growth of income.
IMPORTANCE OF ROLE HUMAN CAPITAL FORMATION
1. Effective Use of physical capital:
The growth and productivity of physical capital depend extensively on the human capital formation.
• The physical capital can be created only by means of hard and intelligent works of human beings in the economy.
• Hence, human skill and their efforts help in effective utilization of physical capital.
2. Higher productivity and production:
Human capital formation raises the production as knowledgeable and skilled worker makes better use of the resources.
• Increase in productivity and quality production depends on technical skill of the people, which can be acquired only by means of education, training and maintaining the health of the people.
• Investment in human capital helps in acquiring new skills and also knowledge relating to management of resources, technology and production.
3. Inventions, innovations and technology improvement:
The human capital formation stimulates innovations and creates ability to absorb new technologies.
• Education provides knowledge to understand changes in society and scientific advancements, which facilitates inventions and innovations.
• Similarly, the availability of educated labour force facilities adaptation to new
technologies.
4. Modernization of attitudes:
The knowledgeable, skilled and physically fit people are useful instrument of changes in the society.
• Economic development of a country depends on the minds of the people and their changing attitudes towards creating a’will’ for development.
• Investment in human capital helps in charging mental outlook and promotes development of the economy.
5. Increase 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 long life. This in turn, adds to the quality of life.
6. Improves quality of life:
The quality of population depends upon the level of education, health of a person and skill formation acquired by the people
• Human capital formation not only makes people productive and creative, but also transform buhuys the lives of the people.
• People start living and enjoying higher incomes and more satisfying life.
7. Control of population growth:
It has been observed that educated persons have families as compared to illiterate families. So, spread of education is necessary to control the population growth rate.
PROBLEMS OF HUMAN CAPITAL FORMATION
1. Insufficient resources :
The resources allocated to the formation of human capital have been much less than the resources required. due to this reason , the facilities for the formation of human capital have remained grossly inadequate.
2. Serious inefficiencies:
there is a lot of wastage of society’s resources as capabilities of educated people are either not made use of (in case of employment ) or are underutilized ( in case of underemployment ) . Massive illiteracy, non-education of many children, poor health facilities are other inefficiencies, which have not been attended to adequately and property.
3. Brain drain:
people migrate from one place to another in search of better job opportunities and handsome salaries. it leads to the loss of quality people like doctors, engineers, etc.. who have high caliber and are rare are developing country . The cost of such loss of quality human capital is very high.
4. High growth of population:
the continues rise in population has adversely affected the quality of human capital. It reduces per head availability of the facilities.
5. Several imbalances:
a greater proportion of resources have been diverted towards higher education, which is meant for few people as compared to primary and secondary education. Due to this reason, general productivity of the economy has remained low.
6. Lack of proper manpower planning:
there is an imbalance between the demand and 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.
7. Weak science and technology:
in respect of education, the performance is particular unsatisfactory in the fields of science and development of modern technology.
HUMAN CAPITAL FORMATION IN INDIA: GREAT PROSPECTS
• We know that ours is a federal country with a union government, state governments and local governments (municipal corporations, municipalities and village panchayats). The constitution of India mentions the functions to be carried out by each level of government.
• Accordingly, expenditure on both education and health are to be carried out simultaneously by all the three tries of the government.
• Education and health care services create both private and social benefits. As a result, both private and public institutions exist in the education and health service markets.
NEED FOR GOVERNMENT INTERVENTION
1. The expenditure on education and health make substantially long —term impact and they cannot be easily reversed. For example, if a child is admitted to a school or health care centre and required services are not provided positive results . to ensure favorable benefits , government intervention because of following reasons.
2. Individual consumers of these services do not have complete information about the quality of services and their costs.
3. The providers of education and health services may acquire monopoly power and may get involved in exploitation.
EDUCATIONAL SECTOR IN INDIA
Growth in government expenditure on education
1. As a percentage of total government expenditure:
It indicates the importance of education in the scheme of things before the government . during 1952-2014,; it increased from 7.92 to 15.7
2. As a percentage of gross domestic product(GDP):
It expresses the proportion of income spent on development of education in the country. During 1952-2014, it increased from 0.64 to 4.13.
IMPORTANT POINTS ABOUT GOVERNMENT EXPENDITURE
Government spends more on elementary education:
Elementary education (primary and middle school education) takes a major share of total education expenditure. Share of higher or tertiary education(institutions of higher learning like, college , polytechnics and universities) is the least.
Expenditure on tertiary education is important:
On an average, government spends less on tertiary education. However, expenditure per student ‘ in tertiary education is higher than that of elementary education. But, it does not mean that financial resources should be transfer from tertiary to elementary education.
• Difference in educational opportunities across states:
The per capital education expenditure differs considerably across states from as high as Rs 34,651 in Himachal Pradesh to as low as Rs 4,088 in Bihar. This leads to differences in educational opportunities and attainments across states.
INADEQUATE EXPENDITURE OR EDUCATION
• The expenditure on education is very less as compared to the desired level of education expenditure recommended by the various commissions. More than 40 years ago, the education commission (1964-66) had recommended that at least 6% of GDP should be spent on education. However, the current level expenditure is little over 4%, which is quite inadequate.
• Tapas majumdar committee recommended that government should spend 1.37 lakh crores in year 1998-99 — 2006-07 to bring all the children of age group between 6- 14 years under Schooling
PROVISION OF FREE AND COMPULSORY EDUCATION
In 2009, the Government of India enacted the Right of Education Act to make free education a fundamental right of all children in the age group of 6-14 years
• To achieve this aim , government needed an estimated expenditure of around Rs 1 lakh crore over 10 years (1998-199 to 2006-07)
• In the union budget 2000-05, the government of India levied a 2% ‘education cess’ on all union taxes.And 1% higher ‘education cess’.
• The government estimated to get revenue of Rs 4000-5000 crore and the entire amount was allocated for spending on elementary education.
• In addition of this amount, the government sanctioned a large outlay for the promotion of higher education and loan schemes for students to pursuer higher education.
EDUCATIONAL ACHIEVEMENTS IN INDIA
Generally, educational achievement in a country are indicated in terms of adult literacy level, primary education completion rate and youth literacy
FUTURE PROSPECTS IN EDUCATIONAL SECTOR
EDUCATION FOR ALL: Still a distant dream
• The literacy rate for both adults as well as youth have increased. However, the absolute number of illiterate is still as much as India’s Population was at the time of independence.
• In 1950, it was noted in the directive of the constitution that the government should provide free and compulsory education for all children up to the age of 14 years. Had we done this, we would have achieved 100% literacy by now.
Gender equity: Better than before
The different in literacy rates between males and female are narrowing. It indicates a positive development in gender equity. However, women education needs to be promoted:
• To improve economic independence and social status of women ; and
• Women education makes a favorable impact on fertility rate and health care of women and children.
HIGHER EDUCATION: A FEW TAKERS
• The Indian education pyramid is steep indicating lesser and lesser number of people reaching the higher education level.
• Moreover, the level of unemployment among educated youth is the highest. As per NSSO date, in 2011-12 the rate of educated youth ( studied graduation in rural areas) female 30% and male 19% One with primary education unemployment 3-6%.