Recent evidences suggest that India is witnessing a shift of manufacturing activity and employment from bigger cities to smaller towns and rural areas.
What is the current scenario in India?
According to a recent World Bank study, the formal sector is moving away from urban to rural locations whereas the informal sector is moving from rural to urban locations.
According to the Annual Survey of Industries for 2019-20, 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 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.
Though this ‘urban-rural manufacturing shift’ could transform the rural economy, but can also hamper higher growth.
What is driving this shift?
There are several causes for the relatively steady rise and presence of rural manufacturing.
Rural areas are more attractive because of its wages, property, and land costs which are lower than in most metropolitan areas.
Factory floor space - When locations get more urbanised and congested, these spaces become more limited.
Displacement of labour - The continuing displacement of labour by machinery due to continuous capital investments in new production technologies.
Production cost differentials - Firms experience substantially higher operating costs in cities than in rural areas.
Capital restructuring - Big firms deliberately shift production to villages to take advantage of the availability of less skilled, less unionised and less costly rural labour.
What are the advantages of this shift?
Manufacturing - The shift has helped maintain the importance of manufacturing as a source of livelihood diversification in rural India.
Employment - This trend helped to make up for the loss of employment in some traditional rural industries.
Transition - The growth of rural manufacturing provides an economic base for the transition out of agriculture.
What are the challenges ahead?
Higher cost of capital - 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.
Shortage of skills – Manufacturing in its current form requires high skilled workers to compete in the highly technological global ‘new economy’.
But 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.
Education and skilling of rural workers is the need of the hour to establish rural areas with comparative advantage of low wages, higher reliability and productivity.
