Human capital: Where does India stand?

by Devika Kher and Nidhi Gupta. 

August 4, 2015

The skew in India towards younger generations highlights the disconnect between today’s education system and the skills required in the labour market.

Upon analysis of the Human Capital Report – 2015, released recently by the World Economic Forum (WEF), it is clear that for India to tread on the path of long-term economic success, the nation’s policymakers need to give serious attention to improving its human capital. Out of the 124 countries, studied and ranked in the report on the basis of Human Capital Index (HCI), India gets an overall ranking of #100. This low ranking combined with the fact that the country’s overall HCI ranking in 2015 is down 22 places from its overall ranking of #78 in 2013 is a cause for grave concern. It is thus imperative that over the next few years India invests in building the nation’s human capital endowment — the skills and capacities of people that can be put to productive use.

HCI — the measure that the WEF has used to quantify and track progress of 124 countries in terms of human potential — serves as the tool for capturing the complex dynamics of education and workforce productivity. It is a multi-dimensional index, covering 46 indicators spread across two horizontal themes — Learning and Employment — running across five vertical age group pillars of the Index (Under 15; 15–24; 25–54; 55–64; and 65 and Over). HCI thus enables an assessment of countries’ success in developing human capital through education, skills, and employment of different age groups. According to the 2015 HCI report, “the final scores can be roughly interpreted as a percentage, reflecting the degree to which human capital has been optimised in a given country”

With 1.252 billion inhabitants, India has the second largest population in the world and the country has the seventh largest GDP with $1.877 trillion. Within Asia Pacific, India has the third largest economy after China and Japan. Going by these facts, it is evident that India is an important player in the global set-up. However, the HCI report shows that the human capital formation within the country needs to be drastically improved. India’s overall HCI score of 57.62 (with 100 being the best) places the country at a ranking of 100 out of the 124 countries that were ranked in the report. India’s ranking is below countries like Ghana, Honduras and Moldova, who have attained a higher rank even though their GDP per capita is lower than India. Within Asia Pacific the country is ranked in the bottom 5 out of the 22 countries ranked in the region. Furthermore, even in the lower-middle income category, India is placed in the bottom 10 among the 31 countries that were ranked.

In the under-15 age group, which represents nearly a third of India’s population, the country is ranked #67 overall with a score of 82.03. This is the only group for which India is above the worldwide average for its income group (lower-middle). As per the report, educational attainment in India is improving since the primary enrolment rate in the under 15 age group has a score of 98.87 which is much higher than 41.58, the education attainment rate for the population above 65. As regards the overall human capital performance, India shows a downward trend for each successive higher age group, with the scores in 15–24, 25–54, 55–64 and 65 and over age group pillars being 57.50, 49.34, 46.42 and 33.47 respectively.

It is important to note that the inclusion of various age group pillars in the calculation of HCI is a departure from the 2013 index, which relied on the four pillars of Education, Employment, Health and Enabling Environment for its calculation. Given this adjusted methodology, a year-on-year comparison across various pillars is rendered impossible, with the only meaningful year-on-year comparison being the overall HCI ranking. However, it is interesting to compare India’s performance in 2015 with countries that bear some similarity to India. We do this comparison at three levels: One, with India’s neighbouring countries, Two, countries that have a similar HCI score and Three, countries which have similar GDP per capita (at Purchasing Power Parity).

India and its Neighbours

India has the lowest median age and the second largest working population among its neighbours. However, the Labour Force Participation Rate (LFPR) — percentage of the country’s population that engages actively in the labour market, either by working or looking for work — within India is 54.2 percent as compared to 71.3 percent of China. The primary reason for India’s low LFPR as mentioned in the report is the large informal sector. Additionally, India has the fourth largest share of low-skilled employment after Bangladesh, Vietnam and Philippines. When compared to China, the only other country with population larger than India, employment-population ratio falls short by 15.8 percent.

This combination of large share employment in the low skilled jobs and a large informal sector indicates India’s inability to improve its human capital formation. Amongst its other neighbours, India is placed just above Pakistan and Nepal, whereas Bhutan and Sri Lanka have fared better being 40 and 13 positions higher respectively in the overall HCI ranking. Bangladesh, which has the same overall score as India (57.62), is ranked one place higher than India at #99. A possible explanation of this difference in the ranks is the high score obtained by Bangladesh in 55-64 years age group pillar, which is indicative that the Bangladeshi population in this age group is more economically productive than the corresponding population in India. As per the report, this shows that “the country is leveraging its core working age population’s skills and learning in its economic activity”.

Countries with similar HCI scores

Countries that have an overall HCI score close to India are Kenya, Tanzania, Madagascar, Cambodia and Uganda. India outperforms these countries in all the age group pillars except the 55-64 age group, which again hints at a similar situation as in Bangladesh with the population in this age group engaging more in productive activities than in India. The report shows that the primary education attainment rate within the 15-24 age group pillar is lower in India than in Kenya signifying Kenya’s edge over India in terms of elementary schooling. India also has a higher LFPR than Kenya for the same age group, which indicates that the younger population in the country is forced to work from a younger age when compared. Similar traits can be seen in other countries like Madagascar.

Countries with similar GDP (PPP)

There is a striking difference between India’s rankings and other countries with the same GDP (PPP) per capita. Zambia, Bolivia and Vietnam are amongst the closest to India’ s GDP per capita in PPP terms. However, in terms of overall HCI scores, all of these countries rank higher than India with Vietnam being #59, Zambia #83 and Bolivia #73. This can again be attributed to India’s lower LFPR compared to the rest of the countries.

Among the four countries, Vietnam’s GDP is closest to India and it has the highest ranking. It also has the highest life expectancy at birth amongst the 55-64 age group pillar, highlighting an efficient health care system within the country. In comparison, India scores better on the business perception, which includes, quality of education, and capacity to attract and retain talent. Even though, Vietnam’s ranking might show lower standard of primary education, the score for 25-54 age group pillar indicates better optimistaion of the human capital. The LFPR for the age group 25-54 in Vietnam is 11th best amongst all the countries in the list while India stands at 112th position. Table: Human Capital Index 2015 ranking

Like Vietnam, the indicators for both Zambia and Bolivia show a higher LFPR and a lower score for the population below 15 years of age. This is an important factor, especially in the case of Zambia, as it has a high child dependency ratio and closer to 40 percent of the population below 15 years of age is actively employed, as opposed to around 25 percent in India. This is supported by the fact that India is at least 24 positions higher than both the countries with regard to the 25-54 age group pillar. To add to this, with regard to the health indicator for the aged population, Bolivia has a score close to India and Zimbabwe is much worse.

In conclusion, it can be said that the skew in India towards younger generations highlights the disconnect between today’s education system and the skills required in the labour market. In order to be globally competitive, India must realise this untapped potential and convert its educated population into skilled labour by focusing on creating right mix of workers whose skills are not outdated and match the needs of the market. What is more, India would have to work on its social welfare schemes for the aged, in order to see a holistic improvement in the score.