The Government Needs to Spend More on Human Capital

January 22, 2025

At the World Economic Forum Annual Meeting 2025, former Reserve Bank of India (RBI) Governor Raghuram Rajan said while the Indian government is investing in infrastructure, it needs to put more resources into developing human capital through better education and healthcare. 

Rajan pointed out that many capable students from poor backgrounds cannot access top institutions, like the Indian Institute of Technology (IIT), and that this limits job creation and economic growth, as reported by Business Today.

Rajan said the government’s focus on infrastructure alone is not enough to spur long-term growth. He wants a greater emphasis on developing people’s skills and well-being through stronger education and healthcare systems. He believes better human capital leads to higher confidence, spending, and ultimately, more robust economic progress.

Government spending on infrastructure can drive GDP growth, but the impact and sustainability depend on various factors. Infrastructure projects like roads, bridges and airports facilitate easier transportation, improve logistics efficiency and can attract domestic and foreign investments by lowering operational costs for businesses. This development can lead to an immediate boost in GDP as construction projects create jobs and increase demand for materials and services.

However, such growth might not be sustainable if human capital is neglected. Infrastructure can get goods to market and people to jobs, but without a well-educated and healthy workforce, the economy may not sustain its growth momentum.

Advanced economies and high-growth sectors increasingly rely on skilled labour. If the workforce lacks the necessary education and health, productivity stalls, and with it, the long-term growth prospects.

Moreover, neglecting human capital may lead to a workforce that is ill-prepared for the evolving demands of a modern economy, thus widening income inequality and potentially leading to social unrest, which can also negatively affect GDP growth.

Rajan also noted that India’s private sector hesitates to invest because business leaders are unsure of future demand and worry about whether economic conditions will remain stable enough to justify long-term commitments. He pointed out that investment involves a degree of confidence—what he calls “animal spirits”—and that many firms hold back when they sense weak consumer spending or a lack of promising growth opportunities. This caution, in turn, delays job creation and dampens broader economic momentum.

Rajan acknowledged India’s 6% growth rate, but he also pointed out the need for the country to improve its per capita income figures.

GDP growth alone isn’t a fully accurate measure of an economy’s strength because it mainly shows the total value of goods and services produced but doesn’t reflect how wealth is distributed among citizens. It doesn’t account for inequalities, such as the rich getting richer while the poor stay poor, nor does it consider whether the economic growth improves people’s quality of life, like better access to healthcare, education or decent working conditions.

Rajan explained that high-quality education and healthcare provide the foundation for a more productive population, ultimately driving stronger employment and higher consumer confidence. In his view, investing in schools, colleges and healthcare services helps people gain skills that match market needs, which then encourages businesses to hire and expand.

Rajan warned that the Indian government needs to be careful with how much money it spends because the country already has a lot of debt and regularly spends more money than it earns. Instead, he suggested, it must carefully direct its limited resources to the most effective programs—those that genuinely upgrade skills, improve overall health and expand job opportunities—rather than simply committing large sums without a clear return in terms of human development.