Why industries locate where they do: the location factors

Detail

1. The basic rule: lowest cost, highest profit

• Industrial location means the place where a factory is set up. Firms choose it to maximise profit.
• Profit rises when production cost falls.

• So a firm settles where the total cost of inputs, power, labour and transport, plus the cost of reaching buyers, is lowest.

• The factors act together. Usually no one factor decides the site. One factor can still dominate for one kind of industry (raw material for steel, energy for aluminium, market for aircraft).

• NCERT lists seven factors for large-scale industries: access to market, access to raw material, labour supply, sources of energy, transport and communication, government policy, and agglomeration economies.

Factor	What pulls the industry	Typical industries
Market	Buyers with demand and money	Consumer goods, aircraft, arms
Raw material	Weight-losing or perishable inputs	Steel, sugar, cement, agro-processing, dairy
Labour	Skilled or cheap workers	Hi-tech, knitwear, handicrafts
Energy	Large, cheap power supply	Aluminium smelting
Transport	Low freight cost, ports, railways	Jute (Hugli), port-based refineries
Government policy	Incentives in chosen regions	SEZs, corridor cities, backward-area units
Agglomeration	Nearness to a leader industry and to related firms	Clusters: Tiruppur, Ludhiana, Moradabad

2. Access to market: the most important factor

• Market (in location theory): people who want the goods (demand) and can pay for them (purchasing power). Many people with no money do not make a market.
• NCERT calls it the most important factor. Goods are made in order to be sold.
• Two kinds of large markets:
• High-income markets. Europe, North America, Japan and Australia. Fewer people, but high purchasing power, so they are global markets.

• Large-population markets. South and Southeast Asia. Incomes are lower, but the population is very large, so total demand is big.

• Global-market goods. Some products have very few buyers in any one country. Aircraft and arms are sold across the world, so their location depends on skills, technology and state support, not on local buyers.

• Market pull grows when:
• the finished product is heavier, bulkier or more fragile than the inputs (bottled drinks, furniture);
• the product spoils quickly or must reach buyers fast (bread, newspapers).

3. Access to raw material

• Inputs should be cheap and easy to transport.
• Weight-losing raw material: a material that loses a large part of its weight during processing. Examples are iron ore, sugarcane and limestone.
• Carrying the waste part is costly → the factory moves close to the source → only the lighter finished product is transported.

• Results: steel, sugar and cement plants sit near their raw material.

• Perishable raw material: an input that spoils fast (cane, milk, fruit).

• It must be processed within hours or days → the plant sits near farms.

• Examples: agro-processing near farms, and dairies near milk-supply areas.

• Indian examples (pointer: manufacturing-industries-india):

• Sugar mills in the cane belts of Uttar Pradesh and Maharashtra. Cane loses sucrose soon after cutting, so it must be crushed quickly.
• Cement plants in limestone areas, such as Madhya Pradesh, Chhattisgarh, Rajasthan and Andhra Pradesh.
• Integrated steel plants on the Chota Nagpur iron–coal belt: Jharkhand, Odisha, Chhattisgarh and West Bengal (Jamshedpur, Bokaro, Rourkela, Durgapur, Bhilai nearby). Iron ore and coking coal both lie close by, which keeps costs low.

4. Access to labour supply

• Industry needs workers. Skilled labour still pulls industry, for example in electronics, software and precision engineering.
• Labour's pull is getting weaker because of:
• mechanisation: machines do work that people once did by hand;
• automation: machines run themselves under computer control;

• flexible industrial processes: production lines that can switch products quickly, so fewer workers are needed.

• Labour still matters a lot for labour-intensive (needing many workers) work such as garments, knitwear, handicrafts and brassware.

5. Access to sources of energy

• Power-hungry industries (those that use a lot of electricity) sit close to cheap, large power supplies.
• Aluminium smelting is the classic case.
• Alumina (from bauxite) is turned into aluminium by electrolysis, which means passing a huge electric current through it.
• Electricity becomes the biggest cost → smelters go where power is cheap → often near large hydroelectric projects.
• World (beyond NCERT): Norway, Iceland and Quebec (Canada) all smelt aluminium on cheap hydropower.

• India (beyond NCERT): Hirakud (Sambalpur, Odisha, on the Mahanadi) and Renukoot (Sonbhadra, Uttar Pradesh, near the Rihand dam).

• Coal's pull has weakened (NCERT exercise 1(i)(c)).

• In the Industrial Revolution, coal was the main energy source and was costly to move → industry grew on coalfields (the Ruhr in Germany, the British Midlands, Pittsburgh in the USA).
• Hydroelectricity and petroleum can be moved by wires and pipelines → industry is no longer tied to the coalfields.

6. Access to transport and communication

• Fast, efficient transport is needed for inputs coming in and finished goods going out.
• Transport costs (freight costs) strongly decide the location.
• Western Europe and eastern North America built dense railway, canal and road networks early → industry gathered there.
• Better transport leads to regional specialisation, which means each region makes what it is best at and trades for the rest.

• Cheap haulage → a region can sell far away → it focuses on a few products.

• Exam examples (NCERT exercise):

• Jute mills along the Hugli.
  • The Hugli is a distributary of the Ganga in West Bengal. It flows past Kolkata into the Bay of Bengal.
  • Jute came from the Ganga–Brahmaputra delta. Cheap water transport on the river, the port of Kolkata, coal from Raniganj and a labour supply → a mill belt grew on both banks.

• Port towns draw industries that import inputs or export goods, such as refineries, fertiliser plants and shipbuilding (Mumbai, Kandla, Visakhapatnam, Chennai).

• Communication (telegraph, telephone, internet) lets firms manage scattered units and reach buyers. It matters most for services and hi-tech industry.

7. Government policy: regional policy

• Regional policy: the state uses incentives, controls or its own investment to place industries in chosen areas, aiming at balanced regional development. This means reducing gaps between rich and backward regions.

• It can override pure cost logic. A plant may be put in a backward area even if a richer region would be cheaper.

• Indian tools (beyond NCERT):

• Backward-area incentives: tax breaks, cheap land and capital subsidies for units in less-developed districts.
• Freight equalisation policy (1952–1993).
  • The Centre made the transport cost of key inputs like coal and steel the same everywhere in India.
  • The aim was to spread industry evenly.
  • Result: the cost advantage of mineral-rich eastern states (Jharkhand, Odisha, West Bengal, Chhattisgarh) was wiped out. Industry moved towards coastal and market states such as Maharashtra, Gujarat and Tamil Nadu.
• Special Economic Zones (SEZs).
  • Export Processing Zone (EPZ): an area with special customs rules for export production. Asia's first EPZ was set up at Kandla (Gujarat) in 1965 [2].
  • The SEZ Policy was announced in April 2000 [2].
  • The SEZ Act, 2005 was passed by Parliament in May 2005. It got Presidential assent on 23 June 2005. The SEZ Rules came into force on 10 February 2006 [2].
  • An SEZ is a duty-free enclave. It is treated as outside India's customs territory for its approved operations. Units must earn positive net foreign exchange over five years [2].
  • Approval is through a single window: a 19-member inter-ministerial Board of Approval [2].
  • Scale: 425 SEZ proposals approved (as on 30 November 2021). 376 notified, 268 operational. About 25.60 lakh jobs and ₹6,28,565.89 crore invested (as on 30 September 2021) [2].

• Industrial corridors: belts of planned industrial towns along major freight routes.

  • On 28 August 2024, the Cabinet Committee on Economic Affairs approved 12 new industrial nodes/cities under the National Industrial Corridor Development Programme (NICDP). The estimated investment is ₹28,602 crore. They are spread across 10 states along 6 corridors [3].
  • Locations: Khurpia (Uttarakhand), Rajpura-Patiala (Punjab), Dighi (Maharashtra), Palakkad (Kerala), Agra and Prayagraj (Uttar Pradesh), Gaya (Bihar), Zaheerabad (Telangana), Orvakal and Kopparthy (Andhra Pradesh), Jodhpur-Pali (Rajasthan) [3].
  • Expected jobs: about 1 million direct and up to 3 million indirect [3].
  • Cities are built "ahead of demand" with 'plug-n-play' (ready-to-use plots) and 'walk-to-work' design. They are linked to the PM GatiShakti National Master Plan [3].
  • Already developed: Dholera SIR (Gujarat, about 100 km south-west of Ahmedabad, India's first platinum-rated industrial smart city), AURIC (Shendra–Bidkin, Maharashtra, on the Delhi–Mumbai Industrial Corridor, 10,000 acres), Greater Noida (UP) and Vikram Udyogpuri near Ujjain (MP) [3].

• World example: the EU cohesion funds send money to poorer member regions to reduce regional gaps.

8. Agglomeration economies

• Agglomeration economies: the cost savings firms get by being close to a leader industry and to one another.
• How the savings arise:
• Linkages: one firm's output is another's input, so transport and delay costs fall.
• Shared suppliers of parts, machines and repair work.
• A ready skilled labour pool that firms can draw from.

• Shared services such as banking, insurance, transport and marketing.

• Result: new firms keep joining old centres. That is why industrial regions persist long after the first cause (for example a coalfield) has lost importance.

• Beyond NCERT: Alfred Marshall's "industrial districts" are places where many small specialised firms in one trade cluster together and share skills and know-how.
• Indian clusters:
• Tiruppur (Tamil Nadu): cotton knitwear.
• Ludhiana (Punjab): hosiery and woollens.
• Moradabad (Uttar Pradesh): brassware.
  • It has a sector-specific handicrafts SEZ, set up in 2003 by the UP Government and working since April 2007. It had 58 operational units as on 30 June 2021 [2].

Prelims Hooks

• NCERT names access to market as the most important industrial location factor.
• Weight-losing raw material → location at the source: iron ore (steel), sugarcane (sugar), limestone (cement).
• Aluminium smelting is tied to cheap power. Hirakud (Odisha, Mahanadi) and Renukoot (UP, Rihand) in India; Norway, Iceland and Quebec abroad.
• Coal's hold on industrial location was reduced by hydroelectricity and petroleum, not by nuclear power or solar energy.
• Jute mills along the Hugli grew mainly on cheap water transport.
• Asia's first EPZ: Kandla, 1965 [2]. SEZ Act 2005 got assent on 23 June 2005. SEZ Rules came into force on 10 February 2006 [2].
• An SEZ is treated as outside India's customs territory for authorised operations [2].
• NICDP (August 2024): 12 industrial cities, 10 states, 6 corridors, ₹28,602 crore [3]. Dholera (Gujarat) is the first platinum-rated industrial smart city [3].
• Cluster–product pairs: Tiruppur–knitwear, Ludhiana–hosiery, Moradabad–brassware.
• Freight equalisation (1952–1993) hurt mineral-rich eastern states. It did not help them. This is a common trap.

Mains Points

• Changing weight of location factors. Raw-material and coal-based location (Chota Nagpur steel, the Ruhr) dominated the Industrial Revolution. Today market access, transport and agglomeration matter more, because of hydropower and petroleum, mechanisation, and containerised ports.
• Regional policy versus efficiency. Freight equalisation removed eastern India's mineral advantage and shifted industry to the west and south coasts. Today's SEZs [2] and NICDP corridor cities [3] try to create growth centres through infrastructure, not through freight subsidies. Their success depends on linkages, not only on tax breaks (only 268 of 376 notified SEZs were operational in 2021 [2]).
• Agglomeration and clusters. Tiruppur, Ludhiana and Moradabad show how shared labour, suppliers and services keep industrial regions alive. Cluster policy (common facilities, sector SEZs like Moradabad [2]) is a cheap way to boost MSME exports.
• Energy and environment (GS-III). Power-hungry industries like aluminium follow cheap energy. India's coal-based captive power for smelters, unlike the hydro-based smelting of Norway and Iceland, raises emission concerns as the world moves to green industry.