Human capital formation acts as the essential bedrock upon which sustainable physical capital formation is built.....

 In the traditional view of economics, physical capital formation (investment in machinery, buildings, and infrastructure) was considered the primary driver of economic growth. However, modern economic thought and empirical evidence from India strongly suggest that human capital formation (investment in education, health, and skills) precedes and facilitates physical capital formation. Human capital enhances labor productivity, stimulates innovation, and enables the effective utilization of physical assets, thus creating the conditions necessary for sustainable physical investment and overall economic development. The availability of a skilled workforce attracts investment and determines how efficiently new physical capital can be employed.

How Human Capital Formation Precedes Capital Formation

The causal link is that an educated and healthy populace is better equipped to innovate and use complex physical capital, making investments in machinery and technology more productive and profitable.

Enhanced Productivity of Physical Capital: Skilled workers can handle machines and technology more efficiently than unskilled workers, increasing the overall productivity of physical capital. In India, for example, the impressive growth of the software industry has been driven by a rich stock of scientific and technical manpower, enabling the country to leverage knowledge as a key economic resource.

Innovation and Technological Absorption: Education and training foster creativity and the ability to adapt to new technologies. An educated workforce provides the necessary foundation for research and development, which is essential for modern economic growth. The National Education Policy 2020 recognizes this, highlighting the need for a skilled workforce in areas like data science and AI to meet the demands of a changing global knowledge landscape.

Entrepreneurship and Modern Outlook: Human capital formation brings about a positive and modern outlook in society, encouraging entrepreneurship and a greater rate of participation in the workforce. This shift in mindset from traditional to modern approaches fosters a more dynamic economic environment where physical capital investment is more likely to yield high returns.

Effective Policy Formulation: Societies with higher levels of human capital are better able to make informed decisions regarding investments and resource allocation. Competent professionals (e.g., professors, engineers, doctors) are needed to produce more human capital and design effective development strategies, as recognized in India's Seventh Five Year Plan.

Recent Numbers and Data

Recent data highlights both the progress made and the challenges that underscore the importance of human capital investment in India:

Human Capital Index (HCI): India's score in the World Bank's HCI improved from 0.44 in 2018 to 0.49 in 2020, indicating progress in health and education outcomes. This improvement suggests that investments in human potential are yielding results, which in turn support the environment for future physical capital investment.

Education Expenditure: The government's expenditure on education as a percentage of GDP has historically been inadequate (hovering a little over 4%, compared to the recommended 6%). This gap presents a challenge for fully harnessing the demographic dividend and ensuring a sufficiently skilled workforce to manage advanced physical capital.

Health Indicators: Improvements in health indicators, such as the decline in the Infant Mortality Rate (to 33 per 1000 live births in 2016-17 from 146 in 1951) and increased life expectancy, signify a healthier, more productive workforce capable of sustaining economic activity over a longer period. Recent Economic Surveys (2024-25 highlights) also show government health expenditure increasing (to 48% of total health expenditure), which reduces the financial burden on households and enhances workforce health and productivity.

Skill Gaps and Employment: Despite an increasing workforce, India faces a significant skill gap. Unemployment rates among educated youth (e.g., around 19% for male graduates in rural areas as per 2011-12 data) have been a concern, emphasizing the need to align education and training with industry demands to ensure effective utilization of human capital, which then drives demand for new physical capital.

Human capital formation acts as the essential bedrock upon which sustainable physical capital formation is built. In India's context, the ongoing efforts to enhance education and health, as evidenced by improving HCI scores and health indicators, are critical drivers of the nation's capacity for innovation and efficient production. While physical capital is vital, it is the quality of human capital that ultimately determines how effectively these tangible assets are utilized. Therefore, continued and increased investment in people is not just a social imperative but an essential economic strategy for accelerating India's development and ensuring inclusive, long-term growth.