Need for balanced regional development

(MainsGS3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.)

Context:

• The recent manufacturing sector trend in India shows a shift of manufacturing activity and employment from bigger cities to smaller towns and rural areas.

Urban-rural manufacturing shift:

• The ‘urban-rural manufacturing shift’ has often been interpreted as a mixed bag, as it has its share of advantages that could transform the rural economy, as well as a set of constraints, which could hamper higher growth.
• 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 which resulted from 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 and in terms of employment, it accounted for 44%, but had only a 41% share in the total wages of the sector.

Steady rise of rural manufacturing:

• Rural areas have generally been more attractive to manufacturing firms because wages, property, and land costs are all lower than in most metropolitan areas.
• When locations get more urbanised and congested the space constraints become more visible. 
• 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.

Other factors:

• Many firms experience substantially higher operating costs in cities than in rural areas, with inevitable consequences for the firm’s profitability and competitiveness.
• There is a tendency for growing capital accumulation and centralisation by large multi-plant corporations. 
• Big firms deliberately shift production from cities to take advantage of the availability of less skilled, less unionised and less costly rural labour.

Livelihood diversification:

• 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 India. 
• 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 and 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.

Major challenges

• 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 and 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. 
• Manufacturers who need higher skilled labour find that rural areas cannot supply it in adequate quantities. 
• This suggests the need for clear solutions to the problems of rural manufacturing and the most important is the provision of more education and skilling for rural workers.

Conclusion:

• A more educated and skilled rural workforce 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.