IAS Gyan

Daily News Analysis


30th October, 2023 Economy

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Picture Courtesy: www.iisd.org

Context: India should focus on transforming its agricultural sector through technology and value addition to create jobs and economic growth, rather than solely relying on traditional labour-intensive manufacturing.


  • Sir W. Arthur Lewis, a Saint Lucian economist, was influential in the field of development economics. His essay titled 'Economic Development with Unlimited Supplies of Labor' made significant contributions to our understanding of the development process in underdeveloped countries.
  • Lewis argued that countries with a surplus of labour in agriculture and other subsistence sectors could achieve industrialization by absorbing this labour into the expanding manufacturing sector.

Key points from the Lewis Model

Surplus Labor in Agriculture

Lewis observed that in many underdeveloped countries, a significant portion of the population was engaged in low-productivity agriculture, where the marginal productivity of labour was negligible, zero, or even negative. This meant that withdrawing labour from agriculture would not lead to a reduction in agricultural output but, on the contrary, could potentially make the remaining holdings more productive through mechanization.

Industrialization as a Solution

Lewis proposed that the solution to the surplus labour problem was the growth of the manufacturing (capitalist) sector. If factories could pay wages just slightly higher than subsistence wages, workers would have an incentive to leave agriculture and work in the manufacturing sector. This would create a self-sustaining process of industrialization.

Inevitability of Industrialization

Lewis believed that industrialization was virtually inevitable for countries with surplus labour populations. He specifically mentioned India as an example. As long as the subsistence wage levels in manufacturing matched the value of the additional output produced, factories would continue to hire more workers.


The main bottlenecks to this transition from agriculture to manufacturing were identified as the availability of capital and natural resources. Many underdeveloped countries lacked the capital needed to establish and expand manufacturing industries, and they also faced constraints related to natural resources.

Application of the Lewis model in India

Shift from Agriculture

  • The Lewis model explains that as an economy grows, there should be a significant movement of the labour force from the agricultural sector to the industrial sector. In India, this shift has occurred to some extent.
  • The share of employment in agriculture has declined over the years from about 64.6% in 1993-94 to 45.8% in 2022-23.

Manufacturing Growth

  • The Lewis model assumes that manufacturing would absorb a substantial portion of this labour, leading to industrialization. However, in India, the transition to manufacturing employment has been slower and less pronounced than expected.
  • Manufacturing's share in total employment has increased only marginally, from 10.4% to 12.6% during the same period.

Service Sector Dominance

  • Instead of manufacturing, the service sector has emerged as a dominant employer in India.
  • The growth of jobs in services, including low-paid services and construction, has outpaced the growth in manufacturing employment.

State-Level Variations

  • India's employment trends vary significantly among states. Some states, like Gujarat, have witnessed a more manufacturing-oriented shift, while others continue to rely heavily on agriculture and low-productivity services.

Changing Economic Landscape

  • The inability of manufacturing to absorb the surplus labour from agriculture can be attributed to various factors, including increased capital-intensive manufacturing processes and the adoption of automation and technology. These trends have limited the labour-absorbing capacity of the industrial sector.

New Economic Development Models

  • In response to the changing landscape, policymakers and economists in India, including NITI Aayog, are considering new economic development models that focus on job creation within and around agriculture.
  • These models explore opportunities in activities like processing, supply chain management, and bio-based industries that can create employment while still being linked to agriculture.

The model has worked differently in India compared to China for several reasons:

Differences in Industrialization

In China, the Lewis Model was more successful because it leveraged its demographic dividend and surplus rural labour to become the "world's factory."

China rapidly industrialized by attracting labour-intensive industries and export-oriented manufacturing. In contrast, India's industrialization process has been slower and less labour-intensive. Manufacturing in India didn't grow at the same pace as in China.

Capital-Intensive Manufacturing

Manufacturing in both India and China has been shifting towards capital-intensive methods, such as automation and technology adoption. This shift has reduced the labour intensity of the manufacturing sector, making it less effective in absorbing surplus agricultural labour.

Economic Structure

India's economic structure is diverse, with a significant emphasis on the services sector, which has absorbed a considerable portion of the labour force that moved away from agriculture. In contrast, China's economic structure was more manufacturing-oriented during its rapid industrialization phase.

Challenges in the Manufacturing Sector

India faces challenges in its manufacturing sector, such as inadequate infrastructure, complex regulations, and labour market rigidities, which have hindered the growth of labour-intensive manufacturing.

State-Level Disparities

State-level disparities in India play a crucial role. States like Gujarat have been more successful in attracting manufacturing due to their business-friendly policies, while other states have been less successful in replicating the Lewis Model.

Changing Dynamics

The global economic landscape and the nature of manufacturing are evolving. Labor-intensive industries are being replaced by technology-intensive and capital-intensive sectors. India needs to adapt to these changes and find new models for economic development.


  • The Lewis model's application in India has not played out as anticipated, with manufacturing employment growth remaining limited. The dominance of the service sector, coupled with the changing nature of manufacturing, has led to a different employment landscape. India is now exploring alternative economic models to address its employment challenges and leverage its agricultural and demographic strengths.


Q. How can the Indian government and private sector work together to promote and facilitate the generation of more jobs in the agriculture sector to address unemployment and promote rural development?