The Pace of Human Capital Depreciation and Economic Growth in India.....

 The Pace of Human Capital Depreciation and Economic Growth in India

Human capital, encompassing the skills, knowledge, education, and health of a population, is a fundamental driver of long-term economic growth and innovation. In India, with its significant "demographic dividend" of a large youth population, the effective development and preservation of human capital are crucial for transforming this potential into sustained economic prosperity. While human capital generally appreciates with continuous investment in education and health, it is also subject to depreciation through mechanisms like aging, illness, long-term unemployment, and, critically, skill obsolescence due to rapid technological change. The pace of this depreciation and the effectiveness of mitigation strategies directly influence India's overall economic trajectory.

Pace of Human Capital Depreciation in India

Quantifying human capital depreciation is challenging, but several indicators and data points illustrate its pace and impact in India.

Skill Obsolescence: Rapid technological advancements in a globalized economy mean skills can quickly become outdated. A significant challenge in India is aligning skill development with market needs, as skill mismatches can effectively depreciate the value of existing education. This is particularly evident in sectors where advanced education does not guarantee employment; for instance, as of some reports, highly educated females face high unemployment rates, suggesting a mismatch or underutilization of existing capital.

Unemployment and Underutilization: Long periods of unemployment lead to a decline in skills and productivity. While the general unemployment rate in India has shown improvement, declining to 3.2% in 2022-23, youth unemployment remains a concern, which indicates an underutilization of a crucial part of the workforce. A study using a production model estimated a general skill depreciation rate of 4.3% per year, while the returns on experience were 6.8%, highlighting the need for continuous skill upgrades to counter this depreciation.

Health Disparities: Poor health outcomes also contribute to the depreciation of human capital by reducing an individual's capacity to work and learn. Data shows that around 35.5% of children in India under five are stunted, which risks cognitive and physical limitations and an estimated 1.4% loss in economic productivity per 1% of adult height loss due to stunting.

Educational Quality Gaps: The quality of education and the actual learning outcomes (learning-adjusted years of schooling) are vital. The World Bank's Human Capital Index (HCI) for India indicated a learning-adjusted expected 5.8 years of schooling, despite an expected 10.2 total years, suggesting a significant gap between enrollment and effective learning, which is a form of potential human capital loss.

Human Capital and Economic Growth in India: Data & Relationship

The relationship between human capital and economic growth in India is well-established in theory and supported by various empirical studies.

Positive Correlation: Studies consistently find a strong positive relationship between investments in education and health and GDP growth. For example, studies found that a rise in average years of schooling and GDP growth rates increased simultaneously between 1981 and 2016.

The Human Capital Index (HCI): India's HCI score improved from 0.44 in 2018 to 0.49 in 2020. This score means a child born in India today will be 49% as productive in adulthood as they could be with complete education and full health. This score is better than the South Asian average, but highlights the significant potential yet to be fully realized. The Utilization-adjusted HCI for India, which also accounts for non-employment, is even lower at 0.24, underscoring the challenge of utilizing the existing human capital effectively in the workforce.

Sectoral Growth: The slow pace of structural economic change, particularly the slow shift of the workforce out of low-productivity agriculture, has hindered the full realization of human capital benefits.

The pace of human capital depreciation in India is closely linked to issues of skill mismatch, health deficiencies, and the underutilization of the educated workforce. While India has made progress in improving its Human Capital Index and economic growth is robust, the existing gaps in health and the quality/relevance of education present a substantial risk to maximizing its demographic dividend. To ensure sustained and inclusive economic growth, India must prioritize continuous and targeted investments in skill development, quality education, and healthcare to effectively mitigate human capital depreciation and harness the full potential of its large population.