(a) Explain how the structural transformation, in the economy, takes place with surplus labour as per Lewis theory of economic…

Economic development fundamentally entails structural transformation, shifting resources from low-productivity traditional activities to high-productivity modern sectors.

Lewis Model of Structural Transformation

W. Arthur Lewis conceptualises a dual economy comprising a traditional subsistence sector characterized by disguised unemployment with near-zero marginal productivity of labour, and an expanding modern capitalist sector. Structural transformation begins because modern industry can draw an unlimited supply of rural labour at a constant institutional wage, pegged slightly above the rural subsistence wage to cover migration costs.

As the capitalist sector employs this cheap labour alongside capital, it generates an economic surplus, defined as total product minus wages paid. The causal engine of growth is the reinvestment of this surplus into productive capital. Reinvestment expands capital stock, raising the marginal product of labour and shifting the industrial labour demand curve outward. This absorbs further surplus agricultural labour, driving rapid output growth and widening productivity divergence between sectors. This dynamic persists until rural surplus labour is exhausted at the "Lewis turning point." Beyond this junction, the labour supply curve becomes upward sloping, agricultural wages rise to match marginal productivity, agriculture commercializes, and the economy integrates into a unified modern market.

Public-Private Partnerships: Dynamics and Prerequisites

Public-Private Partnerships (PPPs) advance economic development by bridging public infrastructure deficits without overburdening sovereign fiscal balances, shifting design and operational risks to the private partner, and enhancing project efficiency through superior managerial expertise. Conversely, PPPs risk regulatory capture, involve protracted renegotiation costs, generate fiscal contingent liabilities, and impose high user-fee burdens that threaten equitable access.

As highlighted by the Vijay Kelkar Committee, key prerequisites for PPP success include transparent and competitive bidding, balanced risk-allocation frameworks, independent sector regulators, robust dispute-resolution mechanisms, and viable revenue models supported by Viability Gap Funding. For example, the Delhi International Airport (GMR-DIAL) project demonstrated significant operational efficiency and capital mobilisation, whereas contractual rigidities in the Mumbai Metro Line 1 and fuel-supply misallocations in thermal projects like GMR Kakinada exposed the perils of flawed risk sharing and inadequate regulatory mechanisms.

Import Substitution versus Export Promotion

Import Substitution Industrialisation (ISI) protects domestic infant industries, saves scarce foreign exchange, and nurtures domestic inter-sectoral backward and forward linkages. However, protracted ISI engenders rent-seeking, technological obsolescence, uncompetitive cost structures, and chronic balance of payments distress, as observed during India’s pre-1991 inward-looking planning era. Conversely, Export Promotion (EP) forces domestic producers to achieve scale economies, adhere to global price-quality discipline, and integrate modern foreign technologies, though it leaves domestic output susceptible to external demand shocks and international protectionism.

A policy favoring sequential pragmatism is superior to an absolute choice. Developing countries achieve optimal transformation by employing initial, time-bound domestic capacity building that rapidly transitions into aggressive outward orientation, as demonstrated by the East Asian economies. India's post-1991 growth acceleration confirms this trajectory. A forward-looking approach must synthesize strategic domestic capability building in key sunrise sectors through targeted incentives like the Production Linked Incentive (PLI) scheme with deep integration into Global Value Chains (GVCs).