Investment in education is a primary source of human capital formation. It converts human beings into human capital, which represents enhanced labour productivity. This is an acquired ability and an outcome of deliberate investment decisions with an expectation that it will increase future income sources.

The labour skill of an educated person is significantly more than that of an uneducated person. Consequently, an educated individual is able to generate more income than an uneducated one. Since economic growth means the increase in real national income of a country, the contribution of the educated person to economic growth is naturally more than that of an illiterate person.

Furthermore, education is sought not only as it confers higher earning capacity but also for its other highly valued benefits. It gives one a better social standing and pride, enables one to make better choices in life, and provides knowledge to understand the changes taking place in society. It also stimulates innovations.

Additionally, the availability of an educated labour force facilitates the adaptation of new technologies. A large population, when trained and educated on sound lines, can itself become an asset in accelerating economic growth and ensuring social change in desired directions. Thus, investment in human capital formation is considered efficient and growth enhancing.