There is growing evidence that there has been a shift of manufacturing activity and employment from bigger cities to smaller towns and rural areas.
Evidence:
- 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. 42% of factories and 62% of fixed capital exists in the rural side. In terms of employment, it accounted for 44%.
- In terms of output and value addition, rural factories contributed to exactly half of the total sector.
Why is manufacturing shifting to rural areas?
- Factory floor space supply constraints: When locations get more urbanized and congested, the greater these space constraints are.
- Continuing displacement of labor by machinery as a result of the continuous capital investments in new production technologies.
- Production cost differentials: Many firms experience substantially higher operating costs in cities than in rural areas.
- Possibility of capital restructuring (approach advocated by radical and Marxist geographers):
Big firms deliberately shift production from cities because: Availability of less skilled, Less unionized and Less costly rural labor.
- Expansion of factories: In cities, factories just cannot be expanded as opposed to rural areas. Thus, increased capital intensity of production is one reason for this trend.
What are the challenges faced by rural manufacturing?
- 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.
- 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.
- Inadequate supply: Manufacturers who need higher skilled labor find that rural areas cannot supply it in adequate quantities.
Way Forward
- Balanced regional development: Given the size of the Indian economy and the need for balanced regional development, the dispersal of manufacturing activities is a welcome sign.
- The shift in manufacturing activities from urban to rural areas: It has helped maintain the importance of manufacturing as a source of livelihood diversification in rural India.
- A more educated and skilled rural workforce: It 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.
