Central Idea

In 1954, the renowned Saint Lucian economist, Sir William Arthur Lewis, presented a groundbreaking theory that suggested developing countries with a surplus labor force could achieve significant industrialization.
He envisioned a shift of labor from subsistence agriculture to the expanding manufacturing sector.
However, the Indian experience over the years has shown that this model has not unfolded exactly as Lewis had anticipated.

What is the Lewis Model?

Lewis’s Theory: Sir William Arthur Lewis’s influential essay, ‘Economic Development with Unlimited Supplies of Labor,’ proposed that countries with surplus labor could industrialize by paying wages just high enough to attract workers away from family farms.
Key Assumptions: The model assumed that higher wages in the manufacturing sector would match the additional output produced, leading to the creation and expansion of industries without limits.
Bottlenecks: The primary constraints to this labor transfer were the availability of capital and natural resources, which these countries often lacked relative to their population.

Historical Perspective: In the early 1990s, agriculture employed about two-thirds of India’s workforce.
Limited Impact of Manufacturing: While the share of agriculture in employment declined to 48.9% by 2011-12, manufacturing’s share only marginally increased from 10.4% to 12.6% during the same period.
Recent Trends: The farm sector’s share increased temporarily due to the Covid-19 pandemic, reaching 46.5% in 2022-23.
Manufacturing’s Decline: Conversely, manufacturing’s share dropped to 11.4% in 2022-23.
Shift within Subsistence Sectors: Labor movement primarily occurs within subsistence sectors, such as low-paid services and construction, rather than towards manufacturing or high-productivity services.

lewis model

Gujarat’s Exception: Gujarat stands out with nearly 24% of its workforce employed in manufacturing, mirroring Lewis’s model.
Industry and Agriculture: Gujarat’s workforce in agriculture remains relatively high compared to other states.

China’s Success: China leveraged surplus rural labor to become “the world’s factory” during the late 20th century.
India’s Challenges: India still has surplus labor working in subsistence sectors, but the path to conventional employment opportunities is narrowing.
Technological Disruption: Manufacturing is increasingly capital-intensive, incorporating labor-saving and labor-displacing technologies.
New Economic Development Model: NITI Aayog is exploring alternative avenues for job creation, emphasizing activities related to agriculture, such as aggregation, processing, transportation, and bio-based industries.
Bio-Based Opportunities: Crop residues, bio-fuels, bio-based products, and supply chain services offer potential employment options linked to agriculture.

India’s journey towards economic transformation has deviated from the classic Lewis model.
The changing nature of manufacturing and the need for a reimagined labour transition call for innovative approaches that recognize the country’s unique circumstances and opportunities in sectors beyond traditional agriculture.
NITI Aayog’s exploration of alternative development models signifies a shift toward addressing contemporary challenges and fostering sustainable economic growth.