The rise of rural manufacturing
The urban-rural manufacturing shift:
- A steady stream of investments in rural locations over the last two decades has ensured that 42% of factories and 62% of fixed capital is in the rural side
- This is evidence of a conspicuous trend in India of a shift in manufacturing activity and employment from bigger cities to smaller towns and rural areas.
- 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.
The cause of this shift:
- Work Bank in its 2012 report titled “Is India’s Manufacturing Sector Moving Away from Cities?” suggested that higher urban-rural cost ratios caused this shift.
- They mainly observed 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.
- However, it is now believed that there could be three explanations for this shift of manufacturing away from urban locations.
- First is the factory floorspace supply constraints.
- When locations get more urbanised and congested, the greater these space constraints are.
- 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.
- This means that big firms deliberately shift production from cities to take advantage of the availability of less skilled, less unionised and less costly rural labour.
The need of this shift:
- 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
- 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.
- 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.
- The shift towards rural manufacturing faces two major challenges.
- 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.
- The rural segment accounted for only 35% of the total rent paid, while it had 60% of the total interest payments.
- 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.