Context: With manufacturing turning increasingly capital-intensive, India may have to replace the old farm-to-factory with a new farm-as-factory labour model.

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

About Lewis Model

• In 1954, Economist William Arthur Lewis highlighted the significant industrialization potential for underdeveloped countries that had access to an abundant labor force willing to work for subsistence wages.

• He argued that the marginal productivity of labor in sectors like agriculture was often negligible, zero, or even negative.

• He further contended that withdrawing this labor force from farms could actually lead to an increase in agricultural output, as it would make existing holdings more economically viable and open opportunities for productivity-enhancing mechanization.

• Lewis’ influential essay (Economic Development with Unlimited Supplies of Labour) argued that an expanding manufacturing (capitalist) sector could absorb much of the surplus labour in agriculture and other subsistence sectors.

• He suggested that to achieve this, the manufacturing sector needed to offer wages that were just high enough to incentivize individuals to leave their family farms and join the industrial workforce.

• As long as the subsistence wage levels paid by factories matched the value of the additional output that the laborers produced, the manufacturing sector could continue to hire more workers.

• In such a scenario, it was possible to create new industries or expand existing ones without any inherent limits, contributing to the economic development of a country.

• William Arthur Lewis, who was awarded the Nobel Prize in Economics in 1979, believed that industrialization was nearly inevitable for countries with surplus labor populations.

• The only bottlenecks to this seamless transfer of labour from farms to factories were “capital and natural resources”, which these countries lacked relative to their populations.

Why does this model work in China but not in India?

• The Lewis Model worked in China but has faced challenges in India due to differences in industrialization, technological advancement, and labour transitions.

• In China, the model was successful because of its ability to absorb a massive surplus rural labour force, turning China into the “world’s factory.”

• In contrast, India faces hurdles in implementing the Lewis Model because manufacturing is becoming more capital-intensive and reliant on labor-displacing technologies like robotics and artificial intelligence. This shift limits the ability of labour-intensive industries to absorb surplus agricultural labour.

• Additionally, India is experiencing disguised unemployment in the agricultural sector, which complicates labour transitions.

• As a result, Niti Aayog is exploring new models for job creation in and around agriculture, focusing on value addition and agribusiness as potential sources of employment. Bio-fuels, bio-based products, and sustainable agriculture practices are seen as potential areas for employment generation, offering alternatives to traditional farm-based jobs.

How has the model panned out in India?

• The transformation in India's employment structure didn't align entirely with Lewis's vision.

Shifts in Agricultural Employment

• While agriculture employed about two-thirds of India's workforce until the early 1990s, the share of agricultural employment gradually declined from 64.6% to 48.9% between 1993-94 and 2011-12.

• However, the shift wasn't predominantly due to manufacturing, as its share in employment only saw a marginal increase, rising from 10.4% to 12.6% during this period.

• In the subsequent years, the share of the farm sector in India's employed labor force decreased gradually, reaching a low of 42.5% in 2018-19.

• However, it then experienced an increase to 45.6% and 46.5% in the two subsequent years, which were impacted by the COVID-19 pandemic.

• As of the latest available data from the National Sample Survey Office's Periodic Labor Force Survey report for 2022-23 (July-June), the farm sector's share stands at 45.8%.

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.

Changes in Manufacturing Sector Employment

• The decline in the share of the manufacturing sector is indeed noteworthy, with its share decreasing from the high of 12.6% in 2011-12 to 11.4% in 2022-23.

• The declining trend preceded the pandemic.

• As a result, the manufacturing sector employs fewer people than both the construction sector (at 13%) and the trade, hotels & restaurants sector (at 12.1%).

• Employment in the latter two sectors is pretty much similar to agriculture: low marginal productivity (output per worker), informal and wages that are barely at subsistence levels.

Limited Structural Transformation

• In simple terms, the virtuous structural transformation, as described by Lewis, involving the movement of surplus labor from "subsistence" to "capitalist" sectors, hasn't unfolded as expected.

• In fact, it appears to have stalled or even reversed in recent times.

• The movement of labour has been largely happening within the subsistence sectors.

• The jobs being generated outside agriculture are mostly in low-paid services and construction, not in manufacturing and high-productivity services.

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.

Case of China

• The Lewis model found its prime example in China.

• From the late 1970s to the 2000s, China capitalized on its demographic dividend and substantial surplus rural labor force to emerge as the world's factory, much like Gujarat's role in India.

Future prospects for India

• However, the relevance or replicability of Lewis model of structural transformation is open to question in present times.

• India still possesses an almost boundless supply of surplus labor engaged in subsistence sectors and suffering from a situation often referred to as disguised unemployment.

• India is also witnessing a surge in its working-age population, similar to what China experienced until the last decade.

• However, the prospects for securing gainful employment through traditional means are not as abundant as they were in the past.

• 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.

• There is a need to rethink the whole model of labour transition from agriculture to industry.