Suggestions For Treatment Of Human Capital In National Accounts—With Illustrations From Indian Data

After giving a brief discussion of the biases that exist in the conventional estimation procedures followed in the construction of national accounts, this paper argues for restructuring of national accounts so as to treat human capital formation as investment rather than consumption and suggests that a beginning should be made in respect of schooling. The argument is based on the notion that “investment” or “capital” is that which yields future income streams and also on the rather obvious point that treating as consumption large outlays that really constitute investment distorts analyses of resource allocation, growth and income distribution, and obscures intersectoral relations. It is pointed out that the proposed restructuring of national accounts is more relevant and important for developing countries, many of which are embarked on investment planning. Another major point emphasized is that the input of students’time should be properly measured and included in the estimates of capital formation by schooling. To illustrate what these proposals imply, revision has been attempted of the estimates of (a) educational outlay (or activity in the education sector), (b) gross capital formation, and (c) gross national product, pertaining to the national accounts of a major developing country, namely India, for the years 1960–61 through 1965–66. The modified estimates, though first approximations and covering only a part of the human capital formation and having a systematically downward bias, nevertheless indicate an upward revision of the estimate of activity in the education sector by about 200 to 300 percent, of gross capital formation by about 50 percent and of the gross national product by 4 to 7 percent. These magnitudes show the substantial order of distortion involved in the conventional procedures.