The rise of rural manufacturing
GS Paper 3: Growth
Important for
Prelims exam: About Manufacturing Sector
Mains exam: Reasons of Shifting manufacturing away from urban locations
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.
Key Points
- ‘Urban rural manufacturing shift’ has often been interpreted as a mixed bag.
- It has its share of advantages that could transform the rural economy, as well as a set of constraints, which could hamper higher growth.
- The need for balanced regional development, the dispersal of manufacturing activities is a welcome sign.
- 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.
Reports on movement of manufacturing away from urban locations
- Work Bank in a report a decade ago (Ghani, Ejaz et al (2012) “Is India’s Manufacturing Sector Moving Away from Cities? Policy Research Working Paper, World Bank).
- 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.
- Recent data from the Annual Survey of Industries for 2019-20, shows that 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.
- This is the result of a steady stream of investments in rural locations over the last two decades.
- In terms of output and value addition, rural factories contributed to exactly half of the total sector.
- In terms of employment, it accounted for 44%, but had only a 41% share in the total wages of the sector.
Significance of Manufacturing Sector
- Manufacturing industries not only contribute to the modernisation of agriculture, which is the backbone of our economy, but they also help to minimise people’s heavy reliance on agricultural income by creating jobs in secondary and tertiary sectors.
- Industrial development is a prerequisite for our country’s unemployment and poverty to be eradicated. In India, public sector industries and joint ventures were founded on this principle.
- It also attempted to reduce regional inequities by building industries in tribal and underdeveloped areas.
- Exporting manufactured items boosts trade and commerce while also providing much-needed foreign currency.
- Countries that convert their basic materials into a diverse range of higher-value finished items are affluent. India’s prosperity depends on rapidly expanding and diversifying its manufacturing industries.
- Agriculture and industry are not mutually exclusive. They’re walking hand in hand. In India, for example, agro-industries have provided agriculture with a substantial boost by increasing productivity.
- They buy their raw materials from the latter and offer their products to the farmers, such as irrigation pumps, fertilisers, insecticides, pesticides, plastic and PVC pipes, machinery and tools, and so on.
- As a result, the manufacturing industry’s growth and competition have not only aided agriculturists in boosting their output but also made production procedures more efficient.
Three explanations for this shift of manufacturing away from urban locations
- First is the factory floor space supply constraints. When locations get more urbanised and congested, the greater these space constraints are.
- However, 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. Thus, increased capital intensity of production is one reason for this trend.
- The second explanation hinges on the production cost differentials.
- Many firms experience substantially higher operating costs in cities than in rural areas, with inevitable consequences for the firm’s profitability and competitiveness.
- The third is the possibility of capital restructuring an approach advocated by radical and Marxist geographers.
- According to this view, there is a tendency for growing capital accumulation and centralisation by large multiplant corporations.
- Big firms deliberately shift production from cities to take advantage of the availability of less skilled, less unionised and less costly rural labour.
Challenges ahead
- First, 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.
- Second, 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 depend only on low¬ wage workers simply cannot sustain their competitive edge for longer periods as this cost advantage vanishes over time. Manufacturers who need higher skilled labour find that rural areas cannot supply it in adequate quantities.
Conclusion
The manufacturing sector contributes a significant chunk to the Indian economy. It is a labour-intensive sector that has been greatly impacted amidst the pandemic. Therefore, it is essential that since the higher growth rates have not translated into more jobs, the government should formulate policies that help resolve such issues. Expansion of public employment and a national skilling programme could boost employment.