The Finance Minister has a challenge now. The growth rate depends on the investment in human capital.

Arindam Banik
Pradip K Bhaumik

We produce enough food but even then a significant number of people in the developing world with particular reference to India go hungry simply because they have no income. In contrast, food price is showing a declining trend as a proportion of industrial price. Yet people are unable to buy food from the market. Short-term solutions, such as cash or food aid, are hardly the answer.

It is time for a rethink based on experience; taxpayers are concerned about the effective utilisation of such aid. They are less concerned with the policy entrepreneurs' advice that is often cited by multilateral agencies.

Consider the statistics. The contribution of agriculture to GDP is about 23 per cent, while that of employment in agriculture to total employment is about 60 per cent. This fact alone reveals the dynamics of poverty, inequity and unemployment. In several States, alternative jobs have not been created for the new generation of farmers. How long will a farmer continue to work on the farm? Such labour constitutes a major share of rural employment in India.

Poor resource allocation

Historically, policy-makers invested huge resources to create advanced institutes of education and research. It is now time to reap the benefits. However, these institutions are all located in urban areas and are likely to benefit the urban population more. The policy entrepreneurs gauge success from the point of view of the producers of goods and services. From that perspective, the buyers who create demand have hardly any role to play. Consequently, the resources devoted to primary education have been pathetically low. The levy of the 2 per cent education cess since April 2004 has been an attempt to correct this, but there are yet to be verifiable results on the ground suggesting an improvement.

Many argue that India should concentrate only on services because the country can not compete with China in manufacturing. And they often cite the theory of core competence. The rural population is at a disadvantage due to the growing need for English language skills in many service sector jobs as well as the emergence of highly skill-intensive employment opportunities. This situation will perpetuate unless Government policy begins to provide education that imparts basic skills. This will create demand for the manufacturing sector.

Effect on economy

One may cite many possible benefits of skill development. The non-availability of skilled manpower may explain the lack of capital flow in spite of the higher marginal return on capital in those countries. The lack of complementary factors, such as quality of education, only adds to the problem of capital flow.

In East Asian context, for example, it is the egalitarian education policies that have played a pivotal role in their economic growth. India, for all the excitement over its high skill intensive development, still falls in the lower half of the league. This may be due to low levels of primary education and inefficient market outcomes. The situation will only aggravate if the distortions are not corrected.

Thus the Finance Minister has a challenge now. The urban markets are getting saturated and demand for many products is slowing down. In certain pockets, the growth potentialities are bleak in the rural areas due to limited job opportunities.

There are many facets to the spill over effects of human capital accumulation. The growth rate thus also depends on the rate of investment in human capital. This has implications for government policies and even subsidies may be necessary to increase the growth rate.

Government subsidy on human capital formation or schooling could potentially result in a substantial increase in the rate of economic growth. This is even more relevant in the context of India.

(The authors are professors at the International Management Institute, New Delhi.)

(This article was published in the Business Line print edition dated February 28, 2006)
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