Effect of Human Capital Investment on Economic Growth in India: A Path Analysis

Seema Joshi

Abstract
This paper investigates the relationship between human capital development/investment (HCD), research and development (RD)/innovation, social security and welfare (SSW) spending and economic growth (EG). We conduct a path analysis using 30 years of annual time series data from India. Secondary data is used to construct an estimated hypothesized model. Then, the maximum likelihood statistical technique in Stata 13 is utilized to identify factors affecting growth. The findings suggest that HCD and SSW affect EG directly and positively, whereas RD has a direct as well as an indirect impact on growth via HCD. A negative and relatively large direct effect of RD outweighs the positive and small indirect effect. Therefore, the overall effect of RD on EG is negative. All path coefficients (or time- varying coefficients) are statistically significant except for RD. The negative sign of the path coefficient of RD clearly shows that in addition to quantity, the quality of RD and presence of “social filter conditions” matter. Therefore, a comprehensive policy focusing on a series of factors like socio-economic conditions is needed to support the overall innovation system to reap the benefits of higher RD expenditure. The positive and significant influence of HCD and SSW on economic growth highlights the much-needed impetus for human development and welfare policies. Although several researchers have written on the relationship between HCD, R&D, and SSW and economic growth separately, as per our knowledge there has been no study that tries to capture the direct and indirect impact of these variables on economic growth, or that has used a path analysis technique to do so.

Keywords
Human Capital Development/Investment (HCD), Research, and Development (RD) and Social Security and Welfare (SSW) and Economic Growth (EG)