Human Capital Formation and Economic Growth in India : A CGE Analysis

In this study, a multisectoral neo-classical type price driven CGE model, with the additional feature that it includes a mechanism by which public education expenditure to build human capital augments the supply of educated/skilled labour, is used to analyse the impact of an increase in the former, financed by an increase in direct tax rates, on economic growth and income distribution in the Indian economy. The simulation results suggest that it is possible to increase investment in human capital in the resource constrained fiscal environment of the Indian economy, and reap the benefits in terms of a faster economic growth and a better income distribution. The results also suggest that secondary education needs to be accorded higher priority, though, not necessarily, at the cost of higher education. Finally, to maximise the benefits in terms of economic growth it is desirable that investment in physical capital be increased simultaneously with investment in human capital. JEL Classification : D58, H5, I2