Bharat’s model of economic growth cannot blindly copy antiquated Western models

Small farms is the future of farming, small farmers can also drive a developed economy?

Bharat’s model of economic growth cannot be built on Western models of just manufacturing and services providing all the employment.

By K Yatish Rajawat and? Ravi Kambhampati?

Policymaking in agriculture is rife with several myths, misconceptions, and assumptions. Unlike other spaces where lobbyists ensure that their current practices are part of policy thinking, agriculture is dominated by “bad” actors;’ these include research organizations and non-profits that are out of touch with reality, yet dictate policy. This is why antiquated models dominate policymaking and lead to repeated failures. The collateral damage is caused by these models when institutions are designed to reflect these models and they perpetuate this thinking among the private sector.?

?Old mental models are like stereotypes–they force us to retrofit new information into old models. The challenge is that over a period if these models are not updated or these assumptions are not questioned from a public policy point. then it creates more challenges than it solves.? Trying to fit economic road maps followed by other countries decades ago on a populous country like India is one such thinking model.? A vast number of our models for developing policy still believe that the way to a developed economy is to move people out of agriculture into manufacturing and services. The private sector and even the non-profit sector believes that this is the only model of economic development.??

This is the Lewis Model for structural development, developed by economist W Arthur Lewis in the mid-1950s, and it remains central for policy-making model in agriculture till date in India.

?Lewis, a West-Indian economist, sharpened these models for England and believed this could be adopted by any developing country in the world. He won a Nobel prize for it, and the rest of the world continues to follow this model. The model used pre-war data from England to build a model for an economy of around 50 million people where industrial revolution happened and people moved out from agriculture to manufacturing. The shift was on a small population scale, even the shift from manufacturing to services was on a small base. England’s current population is around 67 million.?

?The question is a seventy-year-old model of economic development relevant in a world where automation has changed manufacturing employment, and AI is changing the services sector at an exponential pace. It surely cannot be used to frame policies that calls for moving 400-odd million Indian farmers out of agriculture into manufacturing and services. The best of our policy makers do not believe in the ability of the farmers to create a future from small farms. They believe that the only future is to divest the farmers from their farms, consoldiate farms. Move the divested landless farmers into cities where they will work in manufacturing or services. This is the assumption that underlies policy making in agriculture.

The Lewis model states that the early stages of a country’s development will be employed by the agricultural sector for subsistence. The agri-labor is typically underemployed with marginal productivity declining with time. As manufacturing and services rise, agriculture becomes a smaller part of the national revenue, and the manufacturing/services share rises.

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The GDP shift from agriculture to other sectors also leads to previously underemployed agricultural labor in other sectors. This creates higher wages and is a? sign of economic growth. Its biggest assumption is that as labor moves away from agriculture, those that remain have access to larger landholdings with which they can afford to industrialize and produce at larger scales.?

Let’s understand whether this is happening in India.? Our manufacturing sector has grown but landholding has decreased instead of increasing because of population growth and fragmented landholdings as families grow and divide. Typically, in a farmer's family, the males move out to the city leaving children, wives, parents and siblings behind. The only reason they survive the uncertainty of farming is because of the assured income of the few family members from urban centers. Even in small families, the male members substantiate the family income from seasonal jobs in construction, retail, or the gig economy in the urban sector.

If the Lewis model worked as it was supposed to, we would not see such a large population continuing to survive in rural areas. After all, manufacturing and services have grown enormously--accounting for more than 80% of gross value added to the economy--and they employ 56% of the population.?

?The Lewis Path is the structural path that farmers would find themselves in if Lewis’ predictions for the agricultural sector play out as they should. In the Lewis Path, the total number of farmers decreases leaving the remaining farmers with larger landholdings with which they can produce more as per the Niti Aayog paper written in 2022.?

The share of farmers in the workforce decreases; this raises agricultural productivity at a pace that is faster than overall agricultural output. While each farmer is producing more, collectively they are still farming the same amount of land, so the rate of increase in agricultural output isn’t as high and the prices for agricultural output remain stable.?

In the Farmer Developing Path, the share of the value of agriculture grows larger without much change in the share of the value of the other sectors because of the relatively high growth in demand for agricultural products. On this path, agricultural workers see rates of increase in wages that are higher than in other sectors of the economy. The amount of labor employed in the agricultural sector increases.?

?As wages in the agricultural sector increase, workers move back to this sector. However, because there is not enough land available for everyone who wants to farm their own land, the number of people entering this sector does not increase at a faster rate than the demand for agricultural products and the value that agriculture is adding to the economy.?

The Lewis Trap is almost the exact opposite of the Lewis Path. The agricultural workforce increases without a proportional increase in the amount of land available for cultivation. Labor productivity in agriculture grows at a slower rate than the average labor productivity, which leads to a divergence in agricultural and non-agricultural wages.?

In the Farmer Excluding Path the number of farmers decreases while the incomes between the agricultural and non-agricultural sectors diverge. Farmers are fewer, and they are relatively poorer than workers in other sectors.

The NITI Aayog paper presented data showing that from at least 1993, all but three of the Indian states were on the negative structural paths of the Lewis Trap or Farmer Excluding.?

As a whole, the country was on the Lewis Trap path since at least 1993; in 2010?, however, the country entered the Farmer Excluding path. The agricultural workforce was not falling, but it was actually increasing. The paper says this could be a result of the COVID pandemic which saw massive levels of migration of urban workers back to their rural homes, this shift could be temporary in nature. Although the productivity of land has increased, the falling sizes of landholdings are ensuring that India’s agricultural labor productivity is growing slower than its non-agricultural labor productivity. This is the opposite of what was to happen according to Lewis’ model of structural transformation.?

The Indian agricultural sector employs 44% of the labor force in the country while only contributing 20% to the GDP. According to the Niti Aayog paper ensuring that the labor force employed by the agricultural sector falls in order to approach its contribution to the GDP would go a long way in bridging the income gap between the agricultural sector and non-agricultural sector. But will the manufacturing and service sectors be able to absorb this labor?

The widely accepted path of Economic Development through the Lewis model occurs through the movement of labor from agriculture to manufacturing and later the service sector. As of 2021, the manufacturing sector employed 25% of the country’s workforce. This is around 120 million people, which is a sizable chunk of the workforce, but manufacturing sector employment is showing a worrying trend concerned of manufacturing not able to absorb as many people this is also from a NITI Aayog paper.?

A study from 2014 shows that the average labor intensity in the organized manufacturing sector was falling from the early 1980s, and has continued into the 2000s. At the start of the 1980s, the number of workers per real fixed capital in the labor-intensive manufacturing subsectors was more than 5. This means that there were more than 5 workers for every unit of capital being employed in these sectors. By 2008, this same value had fallen to less than 1. The other less labor-intensive sectors had falling levels of labor intensity as well. Between 1980 and 2010, the manufacturing sector’s labor intensity fell from an average of 1.45 to 0.33. This fall in labor intensity is a result of trade reforms that lead to a decrease in the prices of machinery relative to the price of labor, and this leads to manufacturers increasingly substituting labor for machinery–automation. From this, we know that investments in the manufacturing sector do not produce jobs the way they used to. Between 2011 and 2021, employment in the sector barely grew by 2%. Considering that mechanization is becoming more effective and less expensive with time, it is unlikely that this trend will turn around in the foreseeable future.?

The Indian service sector employs more people and contributes more value to the GDP than the manufacturing sector. As of 2020, it employed 30.8% of the total workforce which amounted to almost 158 million people. The average YoY rate of increase between 2011 and 2019 was nearly 0.55%. India’s service sector is unique compared with major powers. The service sectors in many of these countries employ people at a similar rate as the gross value added by their respective service sectors to their GDP. In the USA, the share of services to GVA was 77% and 81% in 2007 and 2017, respectively, and the service sector employment was at 78% and 79% for 2007 and 2017, respectively. The German service sector’s GVA for 2007 and 2017 was 69% and 68% while the sector itself employed 68% and 72% of the population for the same two years. The trend is similar in many other countries. For India, on the other hand, services’ GVA was 48% and 54% in 2007 and 2017, respectively, but it employed only 26% and 34% of the population, respectively. This feature of the service sector in India results in less labor being absorbed into the service sector than would be otherwise. With the development of AI technologies, it is reasonable to expect that the number of people absorbed by the service sector for each share of the value it adds to the economy would plummet further.?

As the world's most populous nation, India will have to move more workers out of agriculture than other countries on a similar path. Making matters worse is that service industries in India tend to absorb less labor than expected–it’s unrealistic to expect manufacturing to absorb more workers. Manufacturing in India has been seeing reductions in its levels of labor intensity for thirty years now, so it is not likely this trend will change to allow for greater movement of labor into manufacturing.

Hence, India must think beyond the Lewis model of a developed country and think about retaining its agricultural labor in agriculture.? We need to start looking at a public policy that does not displace agricultural workers and look at small farms as a problem. But build models that make them more productive, more sustainable, use less industrial inputs, and provide higher income. Economists need to stop suggesting large farms as a panacea to the agricultural labor problem. NGOs and organizations working to change rural poverty should look at labour-intensive rural areas models. Cities need not be the only drivers of India’s economic engine; distributed models of production in rural areas can also be a growth model for Bharat. We need to start asking questions that are more in line with our own demographic, economic, and geographical realities instead of trying to become another China or Europe.. when neither of them is possible. Let’s start solving for Bharat, instead of cutting and pasting our models and assumptions from the rest of the world to apply to India.?

We should start thinking and doing for Bharat instead of building an Indian version of what the Western world considers as developed. The change starts with questioning and rejecting outdated antiquated models.

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K Yatish Raajwat and Ravi Kambhampati are researchers at the Centre for Innovation in Public Policy, a New Delhi-based think and do tank.