Villages now lead India's manufacturing output, urban share falls below 50%

A majority of the total output from India’s formal manufacturing sector comes from rural areas, marking a continuing shift away from cities.

 

The total output is broadly a measure of manufactured products and byproducts coming out of a factory. It also includes money earned through manufacturing for others, as well as from non-industrial sources such as rent or the sale of electricity. The urban share of total output was 50.5 per cent in 2018-19. It slipped below the halfway mark in subsequent pandemic years.

 

The latest Annual Survey of Industries 2023-24 shows that it was at 49.5 per cent, the fourth year in a row that urban areas have been a minority contributor to manufacturing output, though there has been some improvement from the low of 48.7 per cent in 2021-22.

 

 

Many other indicators also show a similar rural shift. The urban share of factories, persons engaged in manufacturing, wages to workers, and net value added are all lower in 2023-24 than they were in 2018-19.

 

Urbanisation is typically seen to lead to higher growth since the concentration of activities allows for better matching of labour markets and skills, sharing of costs, and opportunities for learning from others, resulting in the urban workforce being more productive than their rural counterparts, observed a 2016 Asian Development Bank Institute study, Costs and Benefits of Urbanization: The Indian Case, by author Kala Seetharam Sridhar. The study noted a positive relationship between urbanisation and per capita as well as national income.

 

“It is not surprising,” said P C Mohanan, former acting chairman of the National Statistical Commission, of the trends in reducing urban industry. Factors such as the cost of land and environmental concerns have caused factories to be set up on the outskirts of cities, and the trend of dropping urban share is unlikely to reverse, according to Mohanan.

 

“In fact, it will further come down,” he said.

 

Changes in rural and urban classifications after the next census could shed more light on the evolution of these trends, Mohanan added.

 

“The same trend applies to the unorganised sector as well,” said Santosh Mehrotra, visiting professor at the UK’s University of Bath.

 

The surge in urban land prices and land scarcity have been key factors in factories locating themselves in rural areas, he noted, adding that there is very little land and existing units are also often pushed out by authorities.

 

Cities are increasingly becoming service hubs while industrial activity often happens outside urban areas, Mehrotra added. Services often require fewer resources and are less likely to face issues such as pollution norms. The trend is likely to continue, according to Mehrotra.

 

The impact on migration and employment is likely to be overshadowed by the overall slowdown in manufacturing, which has faced issues following demonetisation, the goods and services tax that affected informal enterprises, and the impact of the Covid-19 pandemic.

 

A larger share of people are employed in agriculture now than before the pandemic due to this industrial slowdown, he pointed out.

 

The trend has been noted previously, such as in the 2012 National Bureau of Economic Research study Is India’s Manufacturing Sector Moving Away From Cities? by authors Ejaz Ghani, Arti Grover Goswami, and William R Kerr.

 

“…the movement of organised manufacturing sector plants to rural areas is surprising, given the relative youth of India’s manufacturing sector. Perceived wisdom is that this sluggishness is in part due to the limits imposed by India’s poor infrastructure and weaker education levels, among other factors like strict building regulations,” it said.