Why the Lewis Model has worked in China, not in India

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Last Updated31/10/2023

In 1954, the renowned economist William Arthur Lewis introduced a model that suggested industrialization could absorb surplus labour from agriculture in underdeveloped countries, such as India.
He argued that the productivity of labour in agriculture was negligible, zero, or even negative.
Moving labour from the farms to factories could enhance productivity and economic growth.

India's labour transition has not unfolded as Lewis envisioned.
The share of the workforce engaged in agriculture declined from 64.6% to 48.9% between 1993-94 and 2011-12.
However, the shift hasn't largely been toward manufacturing.
The share of employment in manufacturing increased marginally from 10.4% to 12.6% during this period.
The subsequent years have seen a dip in manufacturing's share, falling from 12.6% in 2011-12 to 11.4% in 2022-23.

The movement of labour has primarily occurred within "subsistence" sectors rather than from "subsistence" to "capitalist" sectors as per the Lewis model.
Employment growth is observed in low-paid services and construction, rather than in manufacturing and high-productivity services.

The picture is consistent at the state level.
States with a high percentage of the workforce engaged in agriculture have manufacturing shares in employment below construction and services.
Even states with a lower dependence on agriculture still have more labour in services than in manufacturing.

Unlike China, which leveraged surplus rural labour for manufacturing and became "the world's factory," India's structural transformation has not followed a similar path.
NITI Aayog, is exploring new economic development models for India.
This model seeks to create remunerative job opportunities related to agriculture but outside traditional farming activities.
These jobs can be found in activities such as aggregation, grading, packaging, transportation, processing, warehousing, retailing of produce and the supply of inputs and services to farmers.

NITI Aayog suggests that opportunities lie in bio-fuel production, utilisation of crop stubble and residues, and the development of bio-based products, including cosmetics, medicines, building materials, polymers, specialty chemicals, insecticides, and fertilisers.
These activities can create employment opportunities linked to agriculture, enabling a more balanced transition for India's labour force.