India needs to bolster investment in human capital

Political parties have started releasing their economic manifestos, highlighting the areas in which they would be focussing if elected to power. As expected, there are talks about agrarian reforms, loan waivers, universal basic income, employment generation. Among other things, one segment that has been crying for government attention is social sector investment, including health and education. In India, the government’s expenditure on social sector (primarily health and education) is at 7.5 per cent of GDP. This is quite low compared to many of the European countries that spend more than one-fifth of their GDP on social sector.

Given that India is a developing country with huge income disparity, it is difficult to ensure equitable provision of health and education services under market mechanism. This would explain as to why even with growing private sector participation, in health and education, a large chunk of India’s population still relies on government for these services. Around 45 per cent of India’s population uses public sector healthcare.

In the education sector, the data is more stark with government schools accounting for 76 per cent of the total schools in the country. Private sector, guided by profit motive, is unable to cater to the requirements of the lower income category. Moreover, basic health and education can be considered as a public good that has positive externalities for the entire society. This would further justify higher participation by the government in these sectors.

Social sector spending

In most countries, the government takes the lead in social sector expenditure. For instance, in China, of the total expenditure on healthcare, 55 per cent is spent by the government. In the UK and Europe, government expenditure on healthcare is even higher at 75-80 per cent, whereas in India it is at a low of 31 per cent. This has resulted in poor state of India’s healthcare sector.

In India, the number of doctors per thousand people is 0.6 versus 1.8 in China. India has a high infant mortality of 32 (per 1,000 births) as against China’s eight, and even smaller Asian countries like Sri Lanka and Thailand have an infant mortality rate of eight.

The condition is similarly dire in the education sector. India has a literacy rate of 76 per cent as against world average of 86 per cent. According to the UNESCO, 35 per cent of the illiterate population globally resides in India. Even more concerning is that a large chunk of the population that is getting educated is still not sufficiently equipped/skilled to be absorbed productively in the workforce.

According to the India Skills Report 2018 (Wheebox), the employability score of India is 45 per cent. Only around 4.7 per cent of India’s workforce is formally trained compared with Germany’s 75 per cent and Korea’s 96 per cent.

Acknowledging the huge requirement for reforms in the social sector, the government has been announcing several schemes. In this regard, the government’s Ayushman Bharat is a step in the right direction for the healthcare sector. With this scheme, the government will be taking care of the health financing requirement of the poor. But for the scheme to succeed there needs to be a big jump in the supply of hospitals, doctors and other medical staff to take care of India’s huge healthcare requirement. This is where increased expenditure by the government in healthcare sector becomes critical (currently at a low of 1.15 per cent of GDP).

For the education sector the government last year came up with the Samagra Shiksha scheme, with outlay of ₹75,000 crore in two years. However, overall education expenditure by the government (Centre + State) has reduced from 4 per cent of GDP in FY12 to less than 3 per cent. This is not to deny that the government’s effort in the last few years has resulted in improvement in the school enrolment data and also in terms of physical infrastructure. But the quality of education imparted through government schools remains a concern. As per the Annual Status of Education Report 2018, for rural schools only about 50 per cent of children in Standard V can read a Standard II level text.

Similarly, the government’s Skill India scheme has been very slow in meeting the target. According to the MSDE (Ministry of Skill Development and Entrepreneurship), more than one crore youth are getting skilled every year under various schemes launched in 2015. However, the number seems measly given that the government’s target is to skill/re-skill 40 crore people by 2022.

States must do more

About 80 per cent of the combined government expenditure on the social sector is incurred by the States. With increase in the Centre’s tax devolution to States from 32 per cent to 42 per cent and decrease in grants from the Centre, the role of States in social sector expenditure should increase further.

According to an RBI report, States’ total social sector expenditure has risen to 6.6 per cent of GDP in the last decade from 5.4 per cent (2000-2010). However, further probe into the data shows that social sector expenditure as percentage of GSDP has risen for only nine States in the last decade compared to the 1990s. This highlights the disparity in social sector expenditure within States. State governments need to gear up for further investment in the social sector.

India has largest population, of 44 per cent, below 24 years of age. If we do not educate/train them adequately, we will waste the demographic dividend. We also need to be alert to the growing share of the ageing population in India (7 per cent of the total population is above 65 years), implying even greater demand for the healthcare sector, going forward.

Health, education and labour skilling are soft infrastructure, that will yield benefit in the long-run. Investment in social sector is necessary for reaping the benefits of demographic dividend, reducing income inequality and ensuring sustainable long-term economic growth.

The writer is a senior economist with a corporate house

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