India’s villages have more capital intensive factories

Agriculture, it is generally believed, is the pre-dominant economic activity in rural India.

True.

According to the 2017-18 Periodic Labour Force Survey (PLFS) conducted by the National Sample Survey Office (NSSO), 55% and 73% of rural workers (male and female) are employed in agriculture.

The share of manufacturing in rural employment was just around 8% for both male and female workers.

This gap is much smaller in terms of output. In 2017-18, Gross Value Added (GVA) at current prices in agriculture, forestry and fishing was Rs 26.7 lakh crore. According to the recently released provisional data for Annual Survey of Industries (ASI), total GVA created in rural factories was Rs 7.6 lakh crore in 2017-18. This is almost 30% of the total value added in agriculture. This share was 15% at the beginning of the century, it climbed up to 36% in 2008-09; the year the financial crisis stuck, and has gone down since.

See Chart 1: GVA in rural factories as percentage of GVA in agriculture, forestry and fishing


To be sure, the statistics quoted above do not capture the entire manufacturing activity in the country. ASI only covers factories which employ 10/20 or more workers with/without use of power. There is a big part of manufacturing which is outside ASI coverage. In 2017-18, GVA in ASI manufacturing at current prices was 58% of total GVA in manufacturing.

Why is the Rs 7.6 lakh crore GVA in manufacturing in rural factories important?

Simple, because it is proof that growing industrialisation in India’s villages has brought them almost on par with towns in terms of industrial output and employment. In 1992-93, rural factories produced only 43% of the gross output produced in urban factories and employed 38% of total persons engaged in urban factories. By 2008-09, this figure had increased to 101% and 89%, respectively. The figures have stagnated since then.

That rural factories generate the same output with fewer employees has an important implication. It means that India’s rural factories are more capita- intensive in nature. A factory is more capital-intensive if it employs more capital per unit of labour. In 1992-93, average fixed capital (value of plants, machinery etc.) invested per factory was Rs 1.6 crore in both rural and urban factories.

By 2017-18, it had become Rs 21.8 crore in rural factories and Rs 8.3 crore in urban factories. Fixed capital invested per person engaged in rural factories in 2017-18 was Rs 30.6 lakh against Rs 13.4 lakh in urban factories.

See Chart 2: Fixed capital invested per factory and per person engaged


This also has an important political economy implication. Resistance to land acquisition for big-ticket industrialisation has emerged as a major faultline in rural India. That India’s rural factories are less labour-intensive than urban ones means that chances of local labour being absorbed in new factories in villages would be lower than their counterparts in cities. Such experiences are likely to increase opposition to land-acquisition for industrialisation in villages.

There is another side to this y capital intensive industrialisation story in rural India as well. A slowdown in manufacturing does not only impact urban areas anymore. It affects rural areas as badly or perhaps more than urban areas. Cities are not entirely dependent on factories, as they also have government establishments, private service providers and other businesses such as retail and wholesale trade. Rural habitations near big factories or a cluster of medium industries could be more dependent on demand generated through them and hence feel greater pain of an industrial slowdown.

An example can make this clear. Agricultural GVA grew at 2% in the quarter ending June 2019. This was an improvement from the -0.1% growth in the March quarter. But manufacturing growth collapsed from 3.1% to 0.6% between the March and June quarter. What would have been the impact on rural incomes? This is not an easy question to answer. It also tells us that India’s political economy is far more complicated than we think it is.