Just as a country can turn physical resources like land into physical capital like factories, similarly, it can also turn human resources like nurses, farmers, teachers, students into human capital like engineers and doctors. Societies need sufficient human capital in the first place—in the form of competent people who have themselves been educated and trained as professors and other professionals. In other words, we need good human capital to produce other human capital (say, nurses, farmers, teachers, doctors, engineers etc). This means that we need investment in human capital to produce more human capital out of human resources.

Investment in education is considered as one of the main sources of human capital. There are several other sources as well. Investments in health, on- the job training, migration and information are the other sources of human capital formation. This enhanced productivity of human beings or human capital contributes substantially not only towards increasing labour productivity but also stimulates innovations and creates ability to absorb new technologies. Education provides knowledge to understand changes in society and scientific advancements, thus, facilitate inventions and innovations. Similarly, the availability of educated labour force facilitates adaptation to new technologies.

India recognised the importance of human capital in economic growth long ago. The Seventh Five Year Plan says, "Human resources development (read human capital) has necessarily to be assigned a key role in any development strategy, particularly in a country with a large population. Trained and educated on sound lines, a large population can itself become an asset in accelerating economic growth and in ensuring social change in desired directions."