Human Capital and Economic Growth in India: The ARDL Approach

We used time series data on variables, real GDP, physical capital stock and human capital index of India to examine the relationship between these three variables oyer the period 1972-2019. The auto-regressive distributed lag (ARDL) model and the bound test of co-integration reveal that physical capital stock, human capital index and GDP are co-integrated only when GDP is used as the dependent variable. Moreover, the negative and statistically significant value of the coefficient of adjustment in the error correction model further reinforces that there is a long-run relationship between these variables. This long-run relationship also reveals that both physical capital stock and the human capital index positively impact GDP growth in India. Growth in the human capital index is not found to be dependent on either GDP or physical capital stock. Since the human capital index is constructed based on years of schooling and returns to education, we infer from it that education stimulates economic growth in India. Hence, India has reaped the benefits in the form of economic growth by adopting the policy of free and compulsory education for its populace.