The rise of rural manufacturing

Source– The post is based on the article “The rise of rural manufacturing” published in The Hindu on 14th December 2022.

Syllabus: GS3- Changes in industrial policy and their effects on industrial growth

Relevance– Issues related to manufacturing sector

News– The article explains the issue of manufacturing shift to rural areas.

Is manufacturing shifting to rural areas?

The movement of manufacturing away from urban locations was brought out by the Work Bank in a report a decade ago. It 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”.

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%.

Why is manufacturing shifting to rural areas?

Rural areas have generally been more attractive to manufacturing firms because wages, property, and land costs are all lower than in most metropolitan areas.

There exist floor space supply constraints in urban areas. However, the driving force behind such a shift is the continuing displacement of labour by machinery as a result of the capital investments in new production technologies. In cities, factories just cannot be expanded as opposed to rural areas.

There exist production cost differentials. Many firms experience substantially higher operating costs in cities than in rural areas. It has inevitable consequences for the firm’s profitability and competitiveness.

Another reason is the possibility of capital restructuring. Big firms deliberately shift production from cities to take advantage of the availability of less skilled, less unionised and less costly rural labour.

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.

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