Manufacturing transfer from urban to rural areas: A mixed bag

There is mounting evidence that the most obvious trend in India’s manufacturing industry has been a transfer of jobs and manufacturing activity from larger cities to smaller towns and rural areas. This “urban-rural manufacturing shift” has frequently been seen as a mixed bag, with both benefits that may transform the rural economy and drawbacks that could prevent faster growth.

Recent information from the 2019–20 Annual Survey of Industries

  • Capital-wise, the manufacturing industry’s output is significantly influenced by the rural sector. Although only 42% of factories are located there, 62% of fixed capital does.
  • Value addition: Rural manufacturers made up exactly half of the entire sector in terms of output and value addition.
  • With regard to employment: It contributed 44% to total employment but only 41% to the sector’s total pay.

Why is there a shift in manufacturing from urban to rural areas?

  • A World Bank report on the shift in manufacturing: In a paper titled “Is India’s Manufacturing Sector Moving Away from Cities?,” the Work Bank highlighted the shift in manufacturing away from metropolitan areas a decade ago. World Bank Policy Research Working Paper.
  • This change was a result of higher urban-rural costs: By “combining enterprise data from the formal and informal sectors and finding 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,” this study looked into the urbanisation of the Indian manufacturing sector. Their findings suggested that this trend was brought on by increasing urban-rural cost ratios.
  • Consistent rural investment: Over the past 20 years, there has been a continuous flow of capital invested in rural areas.
  • Rural areas have relatively lower input costs: Because wages, property expenses, and land costs are all lower in rural locations than they are in most metro areas, rural areas have historically attracted more manufacturing companies.
  • Limitations on the supply of factory floorspace These space limitations become more severe as areas get more urbanised and populated.
  • Manufacturing with a higher capital intensity: This transition is being driven by the ongoing replacement of labour by equipment as a result of ongoing capital investments in new production technologies. Contrary to rural areas, manufacturing simply cannot be expanded in cities.

How is this pattern a good sign?

  • The dispersion of manufacturing operations is a positive development given the size of the Indian economy and the necessity for balanced regional development.
  • Gave small businesses a chance to continue operating following liberalisation Following trade liberalisation, import competition increased for many Indian businesses, driving them to explore for more affordable production techniques and locations. Moving certain businesses from larger cities to smaller areas with lower labour costs was one strategy to reduce costs.
  • Manufacturing has continued to be a significant source of livelihood diversification in rural India as a result of the movement of manufacturing operations from urban to rural areas.
  • Compensation for job loss: The decline in employment in several traditional rural industries was partially offset by this trend. By creating new jobs, rural manufacturing is growing, which offers an economic foundation for the move away from agriculture.

Challenges ahead and a solution

  • Despite lower input costs, capital costs are substantial, cancelling out the advantages: Although businesses benefit from lower costs by paying cheaper rent, businesses operating in rural areas appear to face greater capital costs. The proportions of rent and interest paid make this clear. Only 35% of the overall rent was paid in the rural sector, but 60% of the total interest payments were made there. The additional expenses on the other front appear to cancel out the advantages gained from one source.
  • Rural communities face a “skills shortage” problem since manufacturing increasingly requires more highly skilled individuals to compete in the highly technical global “new economy.” Higher trained workers are in short supply in rural areas, which is a problem for manufacturers. Manufacturers who primarily use low-wage labour are simply unable to maintain their competitive edge over the long term since this cost advantage eventually disappears.
  • The best way to address this problem is by providing more education and training for rural employees. This emphasises the need for concrete solutions to the issues facing rural manufacturing. Rural areas’ comparative advantage of low salaries, higher dependability and productivity will be established by a more educated and competent workforce, hastening the transition from agriculture to higher-paying professions.


The spread of manufacturing activities is encouraging given the size of the Indian economy and the need for balanced regional development. However, the demands of global competition frequently go beyond taking into account low-wage production and rely on the benefits of “conducive ecosystems” for businesses to expand.

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