Context

• There is growing evidence to suggest that the most conspicuous trend in the manufacturing sector in India has been a shift of manufacturing activity and employment from bigger cities to smaller towns and rural areas. This ‘urban-rural manufacturing shift’ has often been interpreted as a mixed bag, as it has its share of advantages that could transform the rural economy, as well as a set of constraints, which could hamper higher growth.

Recent data by Annual Survey of Industries for 2019-20

• In terms of capital: The rural segment is a significant contributor to the manufacturing sector’s output. While 42% of factories are in rural areas, 62% of fixed capital is in the rural side.
• In terms of value addition: In terms of output and value addition, rural factories contributed to exactly half of the total sector.
• In terms of employment: In terms of employment, it accounted for 44%, but had only a 41% share in the total wages of the sector.

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Why is this shift of manufacturing away from urban locations to rural?

• A report on manufacturing shift brought out by World Bank: The movement of manufacturing away from urban locations was brought out by the Work Bank in a report a decade ago, “Is India’s Manufacturing Sector Moving Away from Cities? Policy Research Working Paper, World Bank).
• Higher urban-rural cost caused this shift: This study investigated the urbanisation of the Indian manufacturing sector by “combining enterprise data from formal and informal sectors and found that manufacturing plants in the formal sector are moving away from urban areas and into rural locations, while the informal sector is moving from rural to urban locations”. Their results suggested that higher urban-rural cost ratios caused this shift.
• Steady investment in rural areas: This is the result of a steady stream of investments in rural locations over the last two decades.
• Input costs are relatively less in rural area: Rural areas have generally been more attractive to manufacturing firms because wages, property, and land costs are all lower than in most metropolitan areas.
• Factory floorspace supply constraints: When locations get more urbanised and congested, the greater these space constraints are.
• Increased capital intensity of production: The driving force behind such a shift is the continuing displacement of labour by machinery as a result of the continuous capital investments in new production technologies. In cities, factories just cannot be expanded as opposed to rural areas.

How this trend is a welcome sign?

• Fulfilling the need of balanced development: Given the size of the Indian economy and the need for balanced regional development, the dispersal of manufacturing activities is a welcome sign.
• Created an opportunity for small scale industries to survive after liberalization: In the aftermath of trade liberalisation, import competition intensified for many Indian manufacturers, forcing them to look for cheaper methods and locations of production. One way to cut costs was to move some operations from cities to smaller towns, where labour costs are cheaper.
• Source of livelihood diversification in rural area: The shift in manufacturing activities from urban to rural areas has helped maintain the importance of manufacturing as a source of livelihood diversification in rural India.
• Make up for loss of employment: This trend helped to make up for the loss of employment in some traditional rural industries. The growth of rural manufacturing, by generating new jobs, thus provides an economic base for the transition out of agriculture

What are the challenges ahead and a solution to it?

• While the input cost is less but the cost of capital is high, offsetting the benefits: Though firms reap the benefits of lower costs via lower rents, the cost of capital seems to be higher for firms operating on the rural side. This is evident from the shares in rent and interest paid. The rural segment accounted for only 35% of the total rent paid, while it had 60% of the total interest payments. The benefits reaped from one source seem to be offset by the increased costs on the other front.
• Skill shortages in rural area: There exists an issue of “skills shortage” in rural areas as manufacturing now needs higher skilled workers to compete in the highly technological global ‘new economy’. Manufacturers who need higher skilled labour find that rural areas cannot supply it in adequate quantities. Manufacturers who depend only on low-wage workers simply cannot sustain their competitive edge for longer periods as this cost advantage vanishes over time.
• Solution to this issue lies in skill development: This suggests the need for clear solutions to the problems of rural manufacturing and the most important is the provision of more education and skilling for rural workers. A more educated and skilled rural workforce will establish rural areas’ comparative advantage of low wages, higher reliability and productivity and hasten the process of the movement out of agriculture to higher-earning livelihoods

Conclusion

• Given the size of the Indian economy and the need for balanced regional development, the dispersal of manufacturing activities is a welcome sign. However, the compulsions of global competition often extend beyond the considerations of low-wage production and depend on the virtues of ‘conducive ecosystems’ for firms to grow.

Mains Question

Q. There is growing evidence to suggest that the trend in the manufacturing sector in India has been a shift of manufacturing activity and employment from bigger cities to smaller towns and rural areas. Discuss the reasons for this trend and note down the challenges ahead.

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