Human capital is believed to be positively related to economic growth though, it is difficult to establish a relation of cause and effect from the growth of human capital to economic growth, but we can see that human capital formation is related to economic growth in the following manner :
(i) Increase in Labour Productivity : Investment , in human capital through expenditure on education, health, etc enhances the productivity of labour as they become physically fit and skilled in their jobs. It leads to efficient utilisa¬tion of the material inputs and capital. With increase in productivity output increases at an increasing rate and hence, economic growth decelerates. The population itself become an asset in accelerating economic growth, if it is trained and educated on sound lines.
(ii) Innovations : Research and development is necessary for innovations in an economy which lead to advancement in technology and creation of new products. Human capital formation helps in preparing learned scien¬tists and researchers in various subjects who bring out innovative products, technologies and processes and thus, add to the economic growth.
(iii) Absorptive Capacity : Advanced technology can be adopted only if the skills and knowledge required for using that technology is present in the country. Investment in education and on-the-job training help to create these skills and knowledge base and thus, helps in ab¬sorption of new technologies which lead to higher production and thus, economic growth.
(iv) Participation Rate : Human capital formation makes a greater proportion of population capable of participating in the economic, social and political activities of a nation. Thus, raising the participation of people in the process of economic growth.