Human capital and economic growth; the knowledge economy

Detail

1. Key terms

• Human capital: the skills, knowledge and health that live inside people and make them productive. It is built through spending on education, health, on-the-job training, migration and job-market information.
• Economic growth: the increase in a country's real national income. "Real" means the effect of rising prices has been removed.
• Labour productivity: the output produced by one worker in a given time.
• Human capital formation: adding to this stock by investing in people. Physical capital formation means adding machines and buildings. Human capital formation means adding skills and health.

2. How human capital raises growth

• Education raises what one worker adds to national income.
• An educated worker contributes more than an illiterate one.

• NCERT compares a factory worker with a software professional. The software professional's output per hour is worth far more because of the skills they carry.

• Health keeps labour supply steady and long.

• A healthy person gives an uninterrupted labour supply for a longer period. They take fewer sick days and have a longer working life.

• Poor health means fewer working years, so the return on money spent educating that person also falls.

• Three channels to growth:

• Labour productivity: a worker produces more output in each hour.
• Innovation: educated people create new products and methods.

• Absorption of technology: skilled workers can use imported or new technology. Unskilled workers often cannot.

• Other sources of human capital:

• On-the-job training: firms train workers, and the workers become more productive.
• Job-market information: knowing where jobs and wages are stops people from staying stuck in low-paid work.
• Migration: moving to places with better-paid work raises earning capacity, even after the cost of moving is counted.

3. The theory behind it (beyond NCERT)

• Endogenous growth theory (Robert Lucas, 1988). Endogenous means "coming from inside the economy".
• In older models, growth slowed and stopped unless technology improved from outside.
• In Lucas's model, human capital has spillovers: one skilled worker makes the workers around them more productive as well.

• So investment in people can keep growth going instead of letting it fade out (see growth-theories-business-cycles).

• Seventh Five Year Plan (1985-90): "Trained and educated on sound lines, a large population can itself become an asset in accelerating economic growth and in ensuring social change in desired directions."

• This is the planning-era idea behind today's demographic dividend argument: a large population is an asset only when it is educated and healthy.

4. Why the evidence is "nebulous" (unclear)

NCERT calls the link between human capital and growth "nebulous" for three reasons.

• (a) Measurement problems. The usual indicators count inputs. They do not measure results.
• Education is measured by years of schooling, teacher-pupil ratio and enrolment. These miss the quality of education, meaning what children actually learn.

• Health is measured by money spent, life expectancy and mortality rates. These miss true health status. For example, a person can live long and still be undernourished.

• (b) Two-way causality. Cause and effect run in both directions.

• Higher income → families and governments can spend more on schools and hospitals → more human capital.
• More human capital → more productive workers → higher income.

• So you cannot easily prove which one comes first.

• (c) Convergence puzzle.

• Convergence means poorer countries catching up with richer ones.
• Developing countries have caught up quickly on literacy, enrolment and life expectancy.
• Their real per capita income has not caught up in the same way.
• So human capital grew faster than income. Human capital alone does not guarantee growth. Jobs, physical capital and institutions are also needed.

5. Table 4.1: the sectors grew together (1951 to 2018-22)

Indicator	1951	1981	1991	2001	2018-22
Real per capita income (₹)	7,651	12,174	15,748	23,095	94,054
Crude death rate (per 1,000)	25.1	12.5	9.8	8.1	6.0
Infant mortality rate (per 1,000 live births)	146	110	80	63	28
Life expectancy, male (years)	37.2	54.1	59.7	63.9	68.6
Life expectancy, female (years)	36.2	54.7	60.9	66.9	71.4
Literacy rate (%)	16.67	43.57	52.21	65.20	78

• Definitions:
• Crude death rate: deaths per 1,000 people in a year.
• Infant mortality rate (IMR): deaths of babies under 1 year per 1,000 live births.

• Life expectancy: the average number of years a newborn is expected to live.

• Worked example: the change from 1951 to 2018-22

• Income: 94,054 ÷ 7,651 ≈ 12.3 times ("about 12 times").
• IMR fall: (146 − 28) ÷ 146 × 100 ≈ 80.8% ("about 80%").
• Literacy: 78 ÷ 16.67 ≈ 4.7 times ("almost 5 times").

• Female life expectancy went from 36.2 to 71.4 years, so it almost doubled. It overtook male life expectancy by 1981 (54.7 vs 54.1).

• NCERT's reading: cause and effect are hard to prove. The sectors grew simultaneously and probably reinforced each other.

6. Measuring human capital today: the World Bank Human Capital Index (HCI)

• HCI: it measures how much human capital a child born today can expect to reach by age 18, compared with a benchmark of complete education and full health. The scale runs from 0 to 1 [2].
• India's HCI = 0.49 (2020). This means a child born in India will be 49% as productive as they could be with full education and health. That is above the South Asia average and the lower-middle-income average. The world average is 56% [2].
• Girls score 0.50 and boys 0.49 (2020) [2].

• The HCI of the richest 20% is 1.39 times that of the poorest 20% (2020). The global average for this ratio is 1.35 [2].

• Components for India (2020 HCI) [2]:

• Probability of survival to age 5: 96 out of 100 children.
• Expected years of school: 11.1 years by age 18.
• Harmonised test scores: 399. On this scale, 625 means advanced attainment and 300 means minimum attainment.
• Learning-adjusted years of school (LAYS): only 7.1 years.
• Adult survival rate (15-year-olds who will survive to age 60): 83%.

• Children under 5 who are stunted (too short for their age): 35 out of 100.

• Worked example: LAYS turns quantity into quality

• Formula: LAYS = Expected years of school × (Harmonised test score ÷ 625).
• India: 11.1 × (399 ÷ 625) = 11.1 × 0.638 ≈ 7.1 years [2].
• So about 4 of 11 school years are "lost" because children do not learn enough in them. This is the "quality missing from enrolment data" problem that NCERT describes, put into a number.

7. The learning gap: quantity has not become quality

• Learning poverty means the share of 10-year-olds who cannot read and understand a simple text. It was 55% in India (2017), slightly below the South Asia average of 59% [2].
• ASER surveys (by the NGO Pratham) have shown the same pattern for many years: enrolment is high, but reading and arithmetic are weak.
• PARAKH (Performance Assessment, Review, and Analysis of Knowledge for Holistic Development):
• Set up under NCERT by the Ministry of Education. It ran the next round of the National Achievement Survey (NAS), called PARAKH Rashtriya Sarvekshan 2024 [3].
• Held on 4 December 2024. It tested students of Grades 3, 6 and 9, which are the ends of the foundational, preparatory and middle stages [3].
• Subjects tested: Language, Mathematics, The World Around Us, Science and Social Science [3].

• Scale: about 23 lakh students from about 88,000 schools in 782 districts [3].

• Link to spending:

• Public health spending was only 1.0% of GDP (2017). The South Asia average was 2.0%, and 17% of people (2011) faced catastrophic out-of-pocket health spending [2].
• Government education spending was 4.4% of GDP (2018) [2]. NEP 2020 wants the Centre and states together to raise it to 6% of GDP "at the earliest" [4].

8. The knowledge economy

• Knowledge economy: an economy where growth comes mainly from creating, spreading and using knowledge and information technology (IT), more than from land, raw materials or unskilled labour.
• India's software industry is the clearest example.

• NEP 2020's aim of skilled, multidisciplinary human capital points toward it.

• NEP 2020 targets that build human capital [4]:

• Gross Enrolment Ratio (GER) in higher education (including vocational education) to rise from 26.3% (2018) to 50% by 2035, adding 3.5 crore seats.
• GER from pre-school to secondary level to reach 100% by 2030.

• GER means total enrolment at a level divided by the population of the official age group for that level, × 100.

• The four shifts in NEP 2020, as quoted in Class 11:

• Automation: big data, machine learning and AI will take over many unskilled jobs. Demand will rise for mathematics, computer science and data science, combined with multidisciplinary abilities across the sciences, social sciences and humanities.
• Climate change, pollution and resource depletion will change how energy, water, food and sanitation needs are met. This needs skilled people in biology, chemistry, physics, agriculture, climate science and social science.
• Epidemics and pandemics need research on infectious diseases and vaccines, and multidisciplinary learning to handle their social effects.
• Humanities and art will be in growing demand as India becomes a developed country and one of the three largest economies.

9. Box 4.2: IT, e-governance and the digital divide

• What NCERT credits:
• The software industry has a strong record.
• Some villagers now use e-mail.

• E-governance is called "the way of the future".

• NCERT's warning: the value of IT depends on the existing level of economic development.

• Without literacy, electricity and connectivity, IT helps those who are already better off.
• This widens the digital divide, which is the gap between people who can use digital technology and people who cannot.

• Evidence: only 20% of Indians used the internet (2018). The South Asia average was 28% and the lower-middle-income average was 34% [2].

• E-governance: delivering government services and information through IT. Examples are online certificates, payments and records.

• Timeline: National e-Governance Plan (NeGP, 2006) → Digital India (2015).
• Services include DigiLocker (digital storage of documents), UMANG (one app for many government services) and Common Service Centres (CSCs) (village-level centres that deliver digital services to people without their own access).
• Infrastructure details are in the infrastructure topic.

Prelims Hooks

• NCERT defines economic growth as an increase in real national income, not nominal income.
• Endogenous growth theory and the human capital spillover model: Robert Lucas, 1988.
• The quote "a large population can itself become an asset in accelerating economic growth" comes from the Seventh Five Year Plan (1985-90).
• Table 4.1 trap: female life expectancy (71.4) is higher than male (68.6) in 2018-22. It was already higher in 1981 (54.7 vs 54.1).
• IMR fell from 146 (1951) to 28 (2018-22). Literacy rose from 16.67% (1951) to 78%.
• The World Bank Human Capital Index measures the human capital a child can expect by age 18. India scored 0.49 (2020) [2].
• Learning-adjusted years of school = expected years × (test score ÷ 625). For India this is 7.1 against 11.1 expected years (2020) [2].
• PARAKH was set up under NCERT and replaced the NAS. The PARAKH Rashtriya Sarvekshan was held on 4 Dec 2024 for Grades 3, 6 and 9 [3].
• NEP 2020 targets: public education spending of 6% of GDP, and a higher-education GER of 50% by 2035 [4].
• E-governance sequence: NeGP (2006) came before Digital India (2015).

Mains Points

• Quantity vs quality:
• Enrolment and literacy have risen close to 5 times, but LAYS is only 7.1 out of 11.1 expected years, and learning poverty is 55% [2].

• Growth dividends need a policy shift from counting inputs (schools, enrolment) to measuring outcomes. This is the purpose of PARAKH and foundational literacy missions.

• Two-way causality as a policy argument:

• Income and human capital reinforce each other (Table 4.1). So public spending on health (1.0% of GDP, 2017) and education (4.4% of GDP, 2018) is an investment, not consumption [2].

• NEP 2020's 6% of GDP target puts this into practice [4].

• Demographic dividend depends on conditions:

• The convergence puzzle shows human capital without jobs, capital and institutions does not raise per capita income.

• A low female labour force participation rate (23%, 2017) wastes a large part of the human capital already built [2].

• Knowledge economy vs digital divide:

• IT and e-governance (NeGP to Digital India) can leapfrog service delivery.
• But the benefits follow existing development: internet use was 20% in 2018 [2]. Literacy, power and connectivity have to come first.