HUMAN CAPITAL AND ECONOMIC GROWTH 

  • The contribution of an educated person to economic growth is more than that of an illiterate person.
  • Similarly, a healthy person also contributes to economic growth by providing an uninterrupted labor supply for a longer period of time.
  • Thus, both education and health, along with many other factors Scientific and technical like on-the-job training, job market information and migration, manpower: Rich ingredients of human capital increase the income-generating capacity of an individual.

HCF promotes inventions, innovations and technological improvements.

  • Human capital formation (HCF) 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.
  • Similarly, the availability of an educated labor force facilitates adaptation to new technologies.

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 years of schooling, teacher-pupil ratio and enrolment rates may not reflect the quality of education.
  • Similarly, health services measured in monetary terms, life expectancy and mortality rates may not reflect the true health status of the people in a country.
  • It means, it is difficult to establish a relationship between cause and effect from the growth of human capital (education and health) to economic growth. However, growth in each sector has reinforced the growth of every other sector.
  • The relationship between human capital and economic growth flows in either direction.
  • Higher income causes building of high level of human capital; and
  • High level of human capital causes growth of income.

Development Indicators in Education and Health Sectors

The analysis of the indicators mentioned above shows that the human capital growth (as shown by improvement in education and health sectors) in developing countries has been faster but the growth of per capita real income has not been that fast.

Report by Deutsche Bank and World Bank

Two independent reports on the Indian economy have identified that India would grow faster due to its strength in human capital formation.

  1. Report by Deutsche Bank: The Deutsche Bank (a German bank), in its report on "Globe Growth Centres", identified that India will emerge as one of four major growth centers in the world by the year 2020.
    1. It further states that human capital is the most important factor of production in today's economies. An increase in human capital is crucial to achieving an increase in GDP.
    2. With reference to India, it states that between 2005 and 2020, a 40% rise in the average years of education in India is expected.
  2. Report by World Bank: The recent report of World Bank "India and the Knowledge Economy - Leveraging Strengths and Opportunities", states that India should make a transition (changeover) to the knowledge economy.
    1. If the Indian economy uses its knowledge effectively (as used by Ireland), then it is per capita income will increase from a little over US$1,000 in 2002 to US $3,000 in 2020.
    2. The reports further state that the Indian economy has all the key ingredients for making this transition. It has a large number of skilled workers, a well-functioning democracy and a diversified science and technology infrastructure.
  3. Thus, the two reports point out the fact that further human capital formation in India will move its economy to a higher growth path.
  4. India recognized the importance of human capital in economic growth long ago. According to the 7th Five Year Plan, Human capital must be assigned a key role in any development strategy, particularly in a country with a large population. Trained and educated population can become an asset in accelerating economic growth and in ensuring social change in desired directions.

India as a knowledge Economy

  • The Indian software industry has been showing an impressive record over the past decade.
  • Entrepreneurs, bureaucrats and politicians are now advancing views about how India can transform itself into a knowledge-based economy by using information technology (IT). Likewise, e-governance is being projected as the way of the future.
  • The value of IT depends greatly on the existing level of economic development. It can make existing assets and processes more effective and efficient. However, for this, basic infrastructure needs to be developed.