Role of Human Capital on Economic Growth

Human Capital and Economic Growth are two related concepts of Human Capital Formation. A measure of labour’s capabilities, including skills, working capacity, education, health, and intelligence, is referred to as Human Capital. The concept of human capital emphasises the idea that not every resource is created equal, but that this difference may be covered with the right training and funding. 

However, Economic Growth refers to an increase in a country’s real national income. An educated person makes a greater contribution to economic growth than an illiterate person. Similarly, a healthy person contributes to a longer period of uninterrupted labour supply, which supports economic growth. Thus, a person’s ability to generate income can be increased by different factors like education, health, on-the-job training, job market information, and migration.

Human Capital Formation refers to the process that involves the addition of the country’s stock of skilled and capable people over time. It is the process of obtaining and increasing the number of people with the necessary knowledge, training, and experience. Human capital formation is linked with investment in people and their development as productive and creative resources.

Human Capital Formation encourages inventions, innovations, and advancements in technology. 

Human capital formation (HCF) promotes innovation and creates the capacity to absorb new technologies in addition to increasing the productivity of human resources. Education offers information to understand changes in society and advancements in science, which facilitated inventions and innovations. Similarly, access to the educated labour force helps in adaption to new technology.

Challenging to show Cause and Effect Relation between Human Capital and Economic Growth.

It is difficult to prove that rise in human capital causes economic growth due to several measurement issues. For instance, determining the quality of education by considering the number of years of schooling, the teacher-to-student ratio, or enrolment rates may not accurately reflect the quality of education. In the same way, mortality rates, life expectancy, and health services assessed in monetary terms might not accurately depict the real status of health of the people in a country. 

It means that it is difficult to establish a cause-and-effect relationship between growth in human capital (education and health) and economic growth. However, the development of one sector has contributed to the development of all the others. The relationship between human capital and economic growth can flow in either direction:

• High levels of human capital are built as a result of higher income; and
• Income increases with the rise in the level of human capital.

Development Indicators in Education and Health Sectors

Some of the development indicators in the education and health sectors can be examined using the following table:

Indicators of Development in Education and Health Sectors

According to the above-mentioned analysis, human capital growth (shown in development in education and health sectors) has been faster in developing countries, but per capita, real income growth has not been that fast.

Deutsche Bank’s and World Bank’s Report: 

According to two separate reports, India’s economy will expand more quickly because of its strong human capital formation system.

(i) Deutsche Bank’s Report: As per the research on Global Growth Centres by the German bank ‘Deutsche Bank’, India will emerge as one of the four major growth centres in the world by the year 2020. It also claims that human capital is the most significant component of production in today’s economy. Therefore, to increase GDP, it is essential to increase human capital.

The report states that between 2005 and 2020, the average number of years of schooling in India will increase by 40%. 

(ii) World Bank’s Report: World Bank report “India and the Knowledge Economy — Leveraging Strengths and Opportunities” states that India should transition to the knowledge economy. If India’s economy efficiently utilises its knowledge (like Ireland’s), its per capita income will rise from just over US $1,000 in 2002 to US $3,000 in 2020. The findings further state that the Indian economy has all the necessary elements to make this transformation successful. It has an extensive staff of highly skilled employees, a democracy that runs smoothly, and a diverse science and technology infrastructure.

The two assessments thus highlight the fact that India’s economy would transition to a higher growth path through continued human capital formation.

Human Capital Formation: Need of the Hour

According to National Education Policy 2020, the world is changing quickly in terms of the knowledge landscape. Many unskilled jobs may be taken over by machines as a result of many dramatic, scientific, and technological advancements. Thus there is an urgent need and high demand for a skilled workforce, specifically involving mathematics, computer science, and data science, as well as multidisciplinary skills in the sciences, social sciences, and humanities.

In addition, climate change will result in a significant shift in how to meet the world’s energy, water, food, and sanitation needs, which requires the need for new skilled labour, particularly in biology, chemistry, physics, agriculture, climate science, and social science.

The increasing appearance of epidemics and pandemics requires collaborative research in infectious disease management and vaccine development, as well as the resulting socioeconomic issues require the need for multidisciplinary learning. As India moves forward to being a developed country and one of the three greatest economies in the world, there will be a rising demand for humanities and the arts. This policy vision shows how India’s economy will move to a higher growth trajectory based on the knowledge landscape with the formation of human capital.

India has always recognised the significance of human capital in achieving economic growth. Human capital has been assigned a critical role in any development strategy, particularly in a large population country. A well-educated and well-trained population can be an asset in accelerating economic growth and ensuring social change in the desired direction.