Human capital refers to stock of ‘skill and expertise’ embodied in humans. Human capital is as important as physical capital for economic development. Human capital formation is the process of adding to stock of human capital over time. Human capital can be developed through creation of skilled, trained and efficient labour force by providing better education, health care facilities, etc. Highly skilled people can create new ideas and methods of production. Thus, expenditure on education, on health and on on-job-training are key instruments of human capital formation.Expenditure on education is one of the most important way of enhancing and enlarging a productive workforce in the country. An educated individual has more knowledge and skills than an uneducated person. Hence, education imparts the necessary attitude and aptitude for adopting new technologies and efficient management practices which help in raising productivity. Education is an important factor in human capital formation which leads to higher efficiency and productivity in human beings and thus higher income and standard of living which again facilitates further investment in education and health.\xa0