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Lewis Model for India

  • Category
    Economy
  • Published
    3rd Nov, 2023

Context:

India's labor dynamics are deviating from Lewis' model. Rethinking economic strategies for job creation in and around agriculture is essential.

What is the Lewis Model of Structural Economic Growth and Development?

  • Arthur Lewis put forward a development model of a dualistic economy, consisting of ‘Rural agricultural and urban manufacturing sectors’.
  • Initially, the majority of labour is employed upon the land, which is a fixed resource. Labour is a variable resource and, as more labour is put to work on the land, diminishing marginal returns eventually set in:
  • There may be insufficient tasks for the marginal worker to undertake, resulting in reduced marginal product (output produced by an additional worker) and underemployment.
  • Urban workers, engaged in manufacturing, tend to produce a higher value of output than their agricultural counterparts.
  • The resultant higher urban wages (Lewis stated that a 30% premium was required) might therefore tempt surplus agricultural workers to migrate to cities and engage in manufacturing activity.
  • High urban profits would encourage firms to expand and hence result in further rural-urban migration.
  • The Lewis model is a ‘model of Structural Change’ since it outlines the development from a traditional economy to an industrialized one.

Lewis' Model and India's Reality:

  • William Arthur Lewis' model envisioned surplus farm labor shifting to manufacturing for economic growth.
  • India's experience deviates to agriculture's share fell but manufacturing's rise was marginal from 1993-94 to 2011-12.
  • Recent trends show a return to higher farm employment due to pandemic impacts, while manufacturing's share drops.

Structural Transformation Challenges:

  • Shift from "subsistence" to "capitalist" sectors falters; labor movement mainly within subsistence sectors.
  • New jobs created outside agriculture are often low-paid, in services, and construction, not high-productivity industries.
  • Gujarat stands out, resembling Lewis' model, but still has a significant agricultural workforce.

Emerging Labor Challenges:

  • Traditional manufacturing sees automation, making labor transitions more complex.
  • NITI Aayog proposes a new economic model focusing on job creation related to agriculture.
  • This model involves activities beyond farming, like processing, retailing, and supplying services to farmers.

 

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