BS Number Wise: India's labour, capital paradox

Productivity in agriculture and eight other sectors is increasing but employment is falling and there is no significant capital investment

In 1954, Professor Arthur Lewis presented a model to explain economic development in developing countries. When few cared about them, Lewis posited there was surplus labour in agriculture in developing countries. As these economies shifted gears, labour would move from agriculture to manufacturing. Agriculture labour productivity would improve and eventually, wages would increase in agriculture and fall in manufacturing, bringing parity.

Despite criticisms and unrealistic assumptions, Singapore proved to be a successful example of the Lewis model. India is bolstering Lewis’s argument about labour productivity.

Employment in Indian agriculture is falling, and labour productivity is rising. The improved productivity comes on the back of no significant technological changes. Data from the capital (K), labour (L), energy (E), materials (M) and service (S) inputs (KLEMS) database, released by the Reserve Bank of India, shows that there has been no significant capital investment in agriculture either.

India presents other conundrums. Labour productivity improved across industries between 2008-09 and 2018-19, but data shows that the impact was not even. In nine of 27 sectors, the rise in labour productivity accompanied a fall in employment. The output per worker improved as fewer people were employed. That trend shows sharply in textiles. There, the share of capital income in gross value added—a proxy of rising capital investment or technological upgradation—decreased in this period. That perhaps explains why India lost out to its peers in textile exports.

Capital income share decreased across sectors, barring five, in this period. This indicates that either these sectors were not too dependent on technology or were more reliant on labour. A lower capital share would also suggest a reduction in inequality—lower capital share translates into better remuneration for the labour—but the Gini coefficient, a measure of degree of income/wealth inequality, shows otherwise.

Lewis would be disappointed as wages across sectors are nowhere near parity in India. Improved labour productivity is usually a mark of improving production in a country, but KLEMS data indicates otherwise. In agriculture and eight other sectors, productivity increased due to lower employment and not because of workers improving efficiency.

The other sectors clocked growth without significant improvement in technology, as the government would want it to be. The KLEMS database also shows inadequacy of data. The government needs to rethink both its focus on technology and measuring development.