Has the Lewis Model of growth failed in India?

Has the Lewis Model of growth failed in India?

Subject : Economy

Section: National Income

Concept: Lewis Model of economic growth, developed by economist William Arthur Lewis, proposed that for underdeveloped countries with a surplus of low-wage labour in agriculture, industrialization could lead to economic growth. But this has not happened for a country like India, which still has low employment in the skilled manufacturing sector.

Key Points:

• Economist William Arthur Lewis wrote on the enormous industrialisation possibilities for underdeveloped countries having an unlimited supply of labour available at subsistence wages.
• His theory won him the 1979 Economics Nobel Prize and economic growth was seen as a virtual inevitability for countries with surplus labour populations, such as India.
• Lewis model’s example was the Chinese growth experience. That country, from the late 1970s to the 2000s, leveraged its demographic dividend and large pool of surplus rural labour to become “the world’s factory”

What is the implication of surplus or “unlimited supply” of labour?

• The marginal productivity of such labour, engaged in sectors such agriculture, was “negligible, zero, or even negative”:
• Their withdrawal from farms would, far from reducing agricultural output, make the existing holdings more viable and amenable to productivity-enhancing mechanisation.

The Indian experience:

• In 1979 Lewis specifically mentioned India should experience growth as per his model. And noted that the only bottlenecks to the seamless transfer of labour from farms to factories were “capital and natural resources”, which these countries lacked relative to their populations.

Indian growth has not taken the path Lewis envisaged:

• Agriculture employed about two-thirds of India’s workforce till the early nineties.
• This share fell from 64.6% to 48.9% between 1993-94 and 2011-12.
• But not much of it was courtesy of manufacturing, whose share in employment rose marginally, from 10.4% to 12.6%, during this period.
• Subsequent period has seen the farm sector’s share in the country’s employed labour force first drop somewhat slowly, to a low of 42.5% in 2018-19, and then increase to 45.6% and 46.5% in the following two Covid-impacted years.
• The current 45.8% share, as per the National Sample Survey Office’s Periodic Labour Force Survey report for 2022-23 (July-June), is still higher than the pre-pandemic levels.
• In fact India has seen a dip in manufacturing’s share, from the 2011-12 high of 12.6% to 11.4% in 2022-23.

Manufacturing position within Industry:

• The declining trend of manufacturing employment (11.4%) preceded the pandemic so much so that this sector now employs less than even the workforce in construction (13%) and trade, hotels & restaurants (12.1%).
• Employment in the latter two sectors is pretty much similar to agriculture – low marginal productivity (output per worker), informal and paying just-about subsistence wages.

Can Lewis Model still work in India?

• The relevance or replicability of that model of structural transformation is open to question today.
• India does still have near-unlimited supply of surplus labour working in subsistence sectors and suffering, what is called, “disguised unemployment”.
• It is also experiencing a bulge in the working-age population, like China did till the last decade. But the opportunities for gainful employment through the conventional route aren’t as much as before.
• Manufacturing is turning increasingly capital-intensive, with the deployment of both labour-saving and labour-displacing technologies such as robotics, artificial intelligence and machine learning.
• Thus there is a need to rethink the whole model of labour transition from agriculture to industry

An alternative to the Lewis Model?

• NITI Aayog is working on a “new” economic development model for India, exploring the scope for remunerative job creation “in and around agriculture” itself.
• Such jobs needn’t be on the farm, but outside it, in the aggregation, grading, packaging, transporting, processing, warehousing and retailing of produce or the supply of inputs and services to farmers.