Sources of human capital formation: education, health, training, information

Detail

What "human capital formation" means

• Human capital is the stock of skill, knowledge and health in a country's people. These are the things that make a worker productive.
• Human capital formation means adding to this stock over time. It happens through investment in:
• education
• health
• on-the-job training
• migration

• information

• Class 11 NCERT names these five sources. Education and health are the two major ones.

• Class 8 NCERT treats labour as human capital. A worker is not just "hands". A worker is a resource whose value grows when we invest in their skills and health.
• Physical vs human capital: a machine is physical capital and can be sold apart from its owner. Human capital lives inside a person and cannot be separated from them.

1. Education, the main source

Education works like investment in capital goods

• A firm buys machines (capital goods) today to earn higher profits later.
• In the same way, individuals and parents spend on education today to earn a higher future income.
• So education spending is an investment, not just consumption.

Returns to schooling

• Returns to schooling = the extra earnings a person gets from each additional year of schooling.
• Formula (percentage return from one extra year):

• Return (%) = [(Earnings with the extra year − Earnings without it) ÷ Earnings without it] × 100

• Worked example:

• Worker A has 12 years of schooling and earns ₹2,00,000 a year.
• Worker B has 13 years of schooling and earns ₹2,20,000 a year.

• Return = (2,20,000 − 2,00,000) ÷ 2,00,000 × 100 = 10% for that extra year.

• If this return is higher than the cost of the extra year (fees plus the wages given up while studying), the extra year is worth it.

Government spending on education (data)

• Education spending by the Centre and States together rose from 2.8% of GDP (2014-15) to 3.0% of GDP (2018-19 BE) [4]. BE means Budget Estimates (planned amounts, not final spending).
• Social services spending (education, health, housing, welfare and so on) rose from 6.7% of GDP (2017-18) to 7.8% of GDP (2023-24) [3].
• NEP 2020 target: public investment in education by the Centre and all States together should reach 6% of GDP [8].
• The gap between 3% (2018-19 BE) and 6% (target) is a common Mains point.

2. Health

Why health is a source of human capital

• Health spending directly increases the supply of healthy labour.
• A sick labourer who gets no medical care has to stay away from work. So output is lost.
• A healthy worker works more days and works better. So the return on education also rises, because an educated but sick worker cannot use their skills.

The four forms of health expenditure

Form	Meaning (simple words)	Example	Indian programme (external)
Preventive medicine	Stops disease before it starts	Vaccination	Mission Indradhanush (2015) [7]
Curative medicine	Treatment during illness	Hospital treatment	—
Social medicine	Spreading health literacy (knowing how to stay healthy)	Awareness campaigns	—
Water and sanitation	Clean drinking water, good sanitation	Piped water, toilets	Jal Jeevan Mission (2019) [6]

Preventive medicine: Mission Indradhanush

• Launched in 2015 to raise full immunisation under the Universal Immunisation Programme (UIP) to over 90% [7].
• It was followed by Intensified Mission Indradhanush (IMI), which focuses more on urban areas and hard-to-reach groups [7].
• 12 phases had been held by 2023. They vaccinated 5.46 crore infants and 1.32 crore pregnant women across 765 districts [7].
• IMI 5.0 (2023) gave special focus to measles and rubella vaccination [7].

Water and sanitation: Jal Jeevan Mission (JJM)

• Launched on 15 August 2019 to give a tap water connection to every rural home [6].
• As of 1 February 2025:
• 12.20 crore extra rural households got tap connections under JJM [6].
• Total coverage reached 15.44 crore households, which is 79.74% of rural households [6].

How much India spends on health (data)

• Total Health Expenditure (THE) means all health spending by the government, households and others. In FY22 it was ₹9,04,461 crore, which is 3.8% of GDP and ₹6,602 per person [2].
• The government's share in THE rose from 29.0% (FY15) to 48.0% (FY22) [2].

• What this means: the government pays a bigger share → families pay less from their own pocket → poor families are less likely to fall into debt because of illness.

• Government health spending rose from 1.4% of GDP (2017-18) to 1.9% of GDP (2023-24) [3].

• Economic Survey 2020-21 recommended raising public health spending from 1% to 2.5–3% of GDP [5].

3. On-the-job training

Meaning

• On-the-job training is skill training that a firm gives to its own workers after hiring them.

Two ways firms give it

• In-house: the worker learns at the workplace under the supervision of a skilled worker.
• Off-campus: the firm sends the worker to an outside course.

Why firms insist on a service period (a "bond")

• The firm pays for the training.
• So the firm asks the worker to stay for a fixed period after training.
• During that period the worker is more productive, and the firm recovers its cost from the extra output.

Why it counts as human capital formation

• Because the return (higher labour productivity) is more than the cost.
• Worked example:
• Training cost to the firm = ₹50,000.
• Extra output from the trained worker = ₹2,000 a month.
• Service bond = 36 months → gain = 36 × ₹2,000 = ₹72,000.
• Net gain = ₹72,000 − ₹50,000 = ₹22,000 > 0 → worth doing.
• If the worker left after 12 months (gain ₹24,000), the firm would lose ₹26,000. This is why the bond exists.

Government support for training (external)

• National Apprenticeship Promotion Scheme (NAPS) replaced the older Apprentice Protsahan Yojana (APY) [10].
• An apprenticeship is training by working inside a real firm while learning.

• The NAPS portal handles the full process online. Employers register, post vacancies and submit claims. Apprentices register and accept offer letters [10].

• PMKVY (Pradhan Mantri Kaushal Vikas Yojana) and NAPS are run by the Ministry of Skill Development and Entrepreneurship (MSDE) under the Skill India Mission [11].

• NEP 2020 target: at least 50% of learners in school and higher education should get exposure to vocational education (training for a specific trade or job) by 2025 [9].
• NEP says vocational education is seen as "inferior" to mainstream education. So it must be merged into mainstream education in all institutions, in phases [9].

4. Information

Meaning

• Labour market information is spending to learn about:
• salaries in different jobs
• education markets: do institutions teach skills that get people jobs, and at what cost?
• health markets: where to get care, and at what cost

Why it is needed: two decisions

• Whether and where to invest in human capital. Example: which course to take, and at which college.
• How to use the human capital already acquired efficiently. Example: which job fits my skills best.
• Without this information, people may spend on courses that do not lead to jobs. That investment is wasted.

Government channel (external)

• National Career Service (NCS) Portal (www.ncs.gov.in) gives job search and matching, career counselling, vocational guidance, and information on skill courses [11].
• It brings jobseekers and employers onto one platform [11].
• The portal crossed 2 million (20 lakh) active vacancies (2024) [12].
• This is a clear example of the "information" source. It cuts the cost of finding out about jobs and skills.

5. Migration

• People move from low-wage places to high-wage places, for example from villages to cities or from India to other countries.
• The cost includes travel and a higher cost of living. It is still worth it if the extra earnings are greater than these costs.
• Covered in full in section 4 of the topic note.

Human capital formation is partly social (Box 4.1)

• Much human capital is formed when a person is too young to judge what will maximise their future earnings.

• Parents and society choose the child's schooling and health care.

• Even at college (tertiary) level, the choice is shaped by peers, educators and society.

• College-level human capital builds on school-level human capital. Weak schooling limits what college can add.
• Conclusion: human capital formation is partly a social process and partly a conscious decision of the person who owns it.
• Policy meaning: the market alone will under-invest in children's education and health → the state must step in (free schooling, immunisation, water supply).

Timeline: 1951 → NEP 2020 (anchors from this section)

• 1951 onwards: Five-Year Plans treat education and health as social sectors run mainly by the state [1].
• 2015: Mission Indradhanush (preventive health) [7].
• 2019: Jal Jeevan Mission (water and sanitation) [6].
• 2020: NEP 2020 sets the 6%-of-GDP education target and the 50% vocational exposure target [8][9].
• 2025: tap water reaches 79.74% of rural homes (1 February 2025) [6].

Prelims Hooks

• The five sources of human capital formation (NCERT Class 11) are education, health, on-the-job training, migration and information. The two major ones are education and health.
• Returns to schooling = the extra earnings from each additional year of schooling.
• Four forms of health expenditure: preventive, curative, social medicine and water & sanitation. Trap: vaccination = preventive, not curative. Awareness campaigns = social medicine.
• On-the-job training counts as human capital formation because return (higher productivity) > cost. Firms recover this through a fixed service period.
• Labour market information helps decide (a) whether and where to invest in human capital and (b) how to use existing human capital efficiently.
• Government share of Total Health Expenditure rose from 29.0% (FY15) to 48.0% (FY22). THE in FY22 was 3.8% of GDP [2].
• NEP 2020: public education spending target of 6% of GDP (Centre + States) [8]. Vocational exposure for at least 50% of learners by 2025 [9].
• NAPS replaced the Apprentice Protsahan Yojana [10]. NCS Portal = the government's job-matching and career-information platform [11].
• Mission Indradhanush (2015) targets over 90% full immunisation under UIP [7]. Jal Jeevan Mission was launched on 15 August 2019 [6].
• "Human capital formation is purely an individual choice." False. NCERT says it is partly a social process (Box 4.1).

Mains Points

• Under-investment gap: education is about 3% of GDP (2018-19 BE) against the 6% NEP 2020 target [4][8]. Public health spending is 1.9% of GDP (2023-24) against the 2.5–3% recommended by Economic Survey 2020-21 [3][5].

• A low stock of human capital means the demographic dividend (the growth boost from a large working-age population) may not be realised.

• Why the state must lead: children cannot choose their own schooling or health care (Box 4.1). Health and education also benefit society beyond the individual (positive externalities).

• So private markets under-supply them. Public provision is needed: immunisation, water, free schooling.

• The rising government share of THE (29% → 48%, FY15–FY22) cuts out-of-pocket spending by families [2].

• Training and information gap: firms fear trained workers will leave, so they train less. Bonds, apprenticeships (NAPS) and cost-sharing fix this [10].

• Poor labour market information leads to wrong course choices. Platforms like the NCS Portal reduce this "mismatch" [11][12].

• Preventive beats curative: vaccination (Mission Indradhanush) and piped water (JJM, 79.74% rural coverage by February 2025) are cheaper ways to protect labour supply than hospital care later. Every sick day avoided is output saved [6][7].