Comprehensive Class 12 Notes on Human Capital Formation in India

If you're a class 12 student studying Indian Economic Development Chapter 4 Human Capital Formation in India, these notes will provide you with a comprehensive understanding of the topic. Whether you're preparing for exams or simply looking to gain in-depth knowledge, these notes will cover all the important aspects of human capital formation in India.

human capital formation in india class 12 notes

BoardCBSE and State Boards
Book NameIndian Economic Development
Chapter No.4
Chapter NameHuman Capital Formation in India

"Failure is Success in Progress."

- Albert Einstein

Human Capital

  • It refers to the induced productive quality of the labor force.
  • We need good human capital to produce other human capital (say, nurses, farmers, teachers, doctors, engineers...). This means that we need investment in human capital to produce more human capital out of human resources.

Sources of Human Capital:

  1. Expenditure on education: spending on education by individuals is similar to spending on capital goods by companies. It is done to increase future income.
  2. Expenditure on health: improvement in the health of the masses increases the productive capacity and leads to qualitative improvement in human capital.
  3. On-the-job training: expenditure regarding on-the-job training is a source of human capital formation as the return of such expenditure, in the form of increased labor productivity, is more than the cost of it.
  4. Expenditure on migration: expenditure on migration may be another source of human capital formation as enhanced earnings in the migrated place is more than the increase in costs due to migration.
  5. Expenditure on acquiring information: Expenditure incurred for acquiring information relating to the labor market and other markets is also a source of human capital formation. This information is necessary to make decisions regarding investments in human capital as well as for the efficient utilization of the acquired human capital stock.
graph LR A[Expenditure on education] --> B[Increase future income] A --> C[Produce more human capital] D[Expenditure on health] --> E[Increase productive capacity] D --> F[Qualitative improvement] G[On-the-job training] --> H[Increased labor productivity] I[Expenditure on migration] --> J[Enhanced earnings] K[Expenditure on acquiring information] --> L[Investments in human capital] K --> M[Efficient utilization]

Physical Capital Vs Human Capital

Physical CapitalHuman Capital
i. Physical capital implies the non-human assets of the company, such as plant and machinery, tools and equipment, office supplies, etc. that help in the process of production.i. Human capital refers to the stock of knowledge, talent, skills, and abilities brought in by the employee to the organization.
ii. Tangibleii. Intangible
iii. It can be traded in the market.iii. Only the services of human capital can be sold.
iv. It is separable from its owner.iv. It is not separable from its owner.
v. Constant use results in depreciation.v. Ageing leads to depreciation, but it can be minimized.
vi. Physical capital creates only private Human capital creates both private and social benefits.

Advantages of Human Capital Formation:

  1. Increases the individual's income-generating capacity.
  2. Stimulates innovation and creates the ability to absorb new technologies.
  3. Education provides knowledge to understand changes in society and scientific advancements, thus, facilitating inventions and innovations.
  4. The availability of an educated labor force facilitates adaptation to new technologies.

Empirical evidence to prove that an increase in human capital causes economic growth is rather nebulous:

This may be because of measurement problems.

For example,

  • education measured in terms of years of schooling, teacher-pupil ratio, and enrolment rates may not reflect the quality of education;
  • health services measured in monetary terms, life expectancy, and mortality rates may not reflect the true health status of the people in a country.

The comparison of developing and developed countries shows that there is convergence in the measures of human capital but no sign of the convergence of per capita real income.

The causality between human capital and economic growth flows in either direction. That is, higher income causes the building of a high level of human capital and a high level of human capital causes the growth of income.

National Education Policy 2020

It states that the world is undergoing rapid changes in the knowledge landscape. With various dramatic scientific and technological advances, such as the rise of big data, machine learning, and artificial intelligence, many unskilled jobs worldwide may be taken over by machines.

The need for a skilled workforce, particularly involving mathematics, computer science, and data science, in combination with multidisciplinary abilities across the sciences and social sciences, and humanities, will be increasingly in greater demand.

Human Capital and Human Development

Human Capital Human Development
1. Human capital considers education and health as a means to increase labor productivity.1. Human development is based on the idea that education and health are integral to human well-being because only when people have the ability to read and write and the ability to lead a long and healthy life, they will be able to make other choices that they value.
2. Human capital treats human beings as a means to an end; the end being the increase in productivity.2. Here human beings are ends in themselves. Human welfare should be increased through investments in education and health even if such investments do not result in higher labor productivity.

State of Human Capital Formation in India

Need for government intervention in education and health sectors:

  • To maintain uniformity in the fee structure.
  • To have accountability in the expenditure incurred.
  • To help poor sections of the society.
  • To encourage human capital formation among all poor and rich alike.
  • To keep a check on the monopoly situation of private sector institutions providing education and health services.

Organizations that facilitate institutions in the education sector:

  • The ministries of education at the union and state levels,
  • Departments of education
  • National Council of Educational Research and Training (NCERT),
  • University Grants Commission (UGC) and
  • All India Council of Technical Education (AICTE)

Organizations that facilitate institutions in the health sector:

  • The ministries of health at the union and state levels,
  • Departments of health
  • National Medical Commission and
  • Indian Council for Medical Research (ICMR)

Education Sector in India:

The expenditure by the government is expressed in two ways:

(i) As a percentage of ‘total government expenditure’

  • This indicates the importance of education in the scheme of things before the government.
  • During 1952-2014, education expenditure as a percentage of total government expenditure increased from 7.92 to 15.7.

(ii) As a percentage of Gross Domestic Product (GDP)

  • This expresses how much of people’s income is being committed to the development of education in the country.
  • During 1952-2014, education expenditure as a percentage of GDP increased from 0.64 to 4.13.

Education Commission (1964–66)

The Education Commission (1964–66) had recommended that at least 6% of GDP be spent on education so as to make a noticeable rate of growth in educational achievements.

Compared to this desired level of education expenditure of around 6% of GDP, the current level of a little over 4% has been quite inadequate.

Tapas Majumdar Committee

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 in the age group of 6-14 years under the purview of school education.

In 2009, the Government of India enacted the Right of Children to Free and Compulsory Education Act to make free education a fundamental right of all children in the age group of 6-14 years.

The government of India has also started levying a 2% ‘education cess’ on all Union taxes. The revenues from the education cess have been earmarked for spending on elementary education. In addition to this, the government sanctions a large outlay for the promotion of higher education and new loan schemes for students to pursue higher education.

Future Prospects

Education for All — Still a Distant Dream: Though literacy rates for both — adults as well as youth — have increased, still the absolute number of illiterates in India is as much as India’s population was at the time of independence.

Gender Equity — Better than Before: The differences in literacy rates between males and females are narrowing signifying a positive development in gender equity.

Need for women's education:

  • Improves economic independence
  • Enhances social status of women
  • Women's education makes a favorable impact on the fertility rate
  • Improves health care of women and children.

Higher Education — a Few Takers:

The Indian education pyramid is steep, indicating a lesser and lesser number of people reaching the higher education level.

As per NSSO data, in the year 2011-12, the rate of unemployment of various segments are as follows:

males who studied graduation and above in rural areas19%
males who studied graduation and above in urban areas16%
females who studied graduation and above in rural areas30%
primary level educated youth in rural and urban areas3-6%
Must See:
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