BS Number Wise: India’s labour, capital paradox

News: Many sectors in India are showing improvements in labor productivity. On the other hand, employing a lesser number of laborers with no improvement in capital investment. This article shows how India is reinforcing Lewis’s argument about labor productivity.

What was Arthur Lewis model of development?

In 1954, Arthur Lewis presented a model to explain economic development in developing countries.

Stage 1: There is surplus labour in agriculture in developing countries.

Stage 2: Due to the transformation of economies, labour would move from agriculture to manufacturing. Hence, Agriculture labour productivity would improve.

Stage 3: Finally, wages would increase in agriculture and fall in manufacturing, which will bring parity.

Singapore proved to be a successful example of the Lewis model.

How India is reinforcing Lewis’s argument about labour productivity?

First, employment in Indian agriculture is falling, and labour productivity is rising. However, the improved productivity is not the result of technological changes.

Second, data from the capital (K), labour (L), energy (E), materials (M), and service (S) inputs (KLEMS) released by the Reserve Bank of India, shows that there has been no significant capital investment in agriculture either.

Third, In India, Labour productivity improved between 2008-09 and 2018-19, but the impact was not even.

Fourth, nine sectors saw a fall in employment. The output per worker improved because fewer people were employed.

For example, textiles. The share of capital income in gross value added decreased. That is why India lost out to its peers in textile exports.

Fifth, a decrease in capital income share indicates that either these sectors were not too dependent on technology or were more reliant on labor. It also suggests a reduction in inequality, but the Gini coefficient shows otherwise.

Sixth, wages across sectors are nowhere near parity in India because improved labour productivity is not due to improved production in India.

For example, in agriculture, productivity increased due to lower employment and not because of workers improving efficiency.

What is the way forward?

First, there is a need for significant improvement in technology.

Second, the government needs to focus on measuring development. The KLEMS database also shows the inadequacy of data.

Source: This post is based on the article “BS Number Wise: India’s labour, capital paradox” published in Business Standard on 19^th Jan 2022.