‘Midgets making widgets’: New paper says Indian factories are smaller than estimated, less productive

New working paper authored by former CEA Arvind Subramanian and others finds Indian firms increasingly prefer multiple plants in a single state rather than scaling up single plants.

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New Delhi: Indian manufacturing firms are increasingly choosing to distribute their workforce across multiple factories in the same state—or ‘multi-plants’—rather than scale up a single plant, new research has found. 

This strategic shift has meant that Indian manufacturing has not been able to leverage efficiencies that arise out of increasing scale, which implies it has lost out to much smaller economies such as Bangladesh in labour-intensive sectors such as apparel. 

These findings are part of a working paper published by the Madras Institute of Development Studies (MIDS) and authored by Abhishek Anand, visiting fellow at MIDS; Arvind Subramanian, former chief economic advisor to the Government of India and senior fellow at the Peterson Institute for International Economics in Washington, D.C.; and Naveen Thomas, associate professor at the O.P. Jindal University in Haryana.

According to the paper, the phenomenon of firms choosing the multi-plant model has become significantly more pronounced over the past two decades, something the paper refers to as “midgets making widgets”.  

The share of multi-plants in none-managerial employment was 25.2 percent in 2022, up from 9.8 percent in 2000. In labour-intensive industries, this grew to 32.6 percent from 9.4 percent over the same period.

This has several ramifications and insights, according to the paper’s authors. First, it shows that, contrary to the trend highlighted by official data, large plants have not actually grown in size over the past two decades and might have even shrunk. Second, multi-plant firms have lower productivity than single-plant firms of comparable size, potentially impacting India’s competitiveness and export performance. 

Finally, the authors argue that this multi-plant phenomenon brings to light the impact regulations have on discouraging firms from scaling up single plants, leading to them setting up several smaller ones in the same state instead.  

“It is popularly believed that Indian plants have become larger, but we show that that is not the case, and on some metrics, large plants may have even become smaller,” the authors wrote in the paper. “This is striking if account is taken of the fact that this period was one of remarkable economic dynamism and of the incontrovertible fact that recourse to contract labour increased sharply.”

Counting ‘midgets’ as giants 

The authors noted that the Annual Survey of Industries (ASI), the government’s official database on the manufacturing sector, allows firms with multiple plants in a single state to file joint returns for them.

The official data, they added, would suggest that such a firm had one plant that had grown over time.

“This would speak well of India’s labour and broader industrial environment to have allowed/facilitated a plant to grow so big (to near Foxconn proportions),” the paper said. 

However, this inference would be mistaken, the authors argued. 

“Plant size, especially of large plants, would be exaggerated by the official data,” they wrote. “Even one of the most successful exporting plants is a relative midget by international standards.”

In 2000, the ASI data showed that there were 92,732 plants in India, which increased to 1,36,096 plants by 2022, a growth of 47 percent. But once the authors disaggregated the multi-plants from those classified as single plants, they found that the “true” number of plants increased to 1,45,308 from 94,382, an increase of 54 percent.

However, since the overall employment and output across all plants—whether counted as single or multiples—were not mismeasured, the error in estimating the number of plants “would translate into errors in average size of employment and output per plant, and more importantly into errors in measuring the size distribution”.

That is, the official data would likely be overestimating the number of employees per factory, and the output per factory. 

“Relatively large Indian plants did not become larger and did not account for a larger share of employment over two decades despite this being a period of dynamism over two decades (oughties and teens) and a veritable boom in the first decade,” the paper said.

Smaller factories means losing out to Bangladesh

The paper compared the relative performance of India and Bangladesh in the apparel sector over the past 20 years to illustrate the impact the multi-plant model was having on India’s export competitiveness.

To start off, the paper noted that over the past 20 years, Bangladesh’s market share in apparel exports grew to 8 percent from 2.5 percent while India’s “has languished” at 3 percent.

“It is striking how if we ignored multi-plants we would think that Indian plants were larger, we would then be left with the puzzle of why Bangladesh is a more successful and competitive exporter and why Bangladeshi plants export on average 95 percent of their output compared to 37 percent for India,” the paper said.

However, the authors went on to say that there is in fact no puzzle to this if multi-plants are incorporated into the calculations. Once this is done, it shows that Bangladeshi plant sizes are consistently bigger at every threshold. For example, the 95th percentile firm in Bangladesh is about 40 percent larger than its Indian counterpart, whereas the ‘uncorrected’ data would make it look as if the Indian firm was larger. 

“There is no longer any puzzle because Bangladeshi plants are bigger and hence probably more efficient, exporting substantially more than Indian plants,” the paper said.

This official overestimation of India’s average plant size is made clear in the employment numbers as well, the paper shows.

According to the paper, plants employing more than 200 workers account for about 85 percent of all employment in Bangladesh, whereas this number is 50 percent in India. In other words, a much larger share of Bangladeshi workers are in large plants as compared to India. 

In fact, plants employing more than 1,000 workers account for roughly 41 percent of all employment of Bangladeshi plants, compared with just 15 percent in India.

Costs of preferring smaller factories

The authors noted that these findings provide an important insight into the nature of the labour market in India and how companies deal with economic and political risk. 

“Specifically, it seems that having multiple plants (with fewer workers) is a mechanism—along with recourse to contract labour—for firms to endow themselves with greater flexibility either in response to economic or political shocks,” they said.

However, this strategy of mitigating risks comes at a cost. Using statistical analysis, the authors showed that the labour product—after controlling for variables such as location and industry—was “significantly lower” in multi-plants than in single plants of comparable size. 

The authors, though, were careful to explain that this is more a commentary on the misestimation of the size of plants than on productivity, since established research has already shown that “plants with smaller employment size are less productive than those with more workers”.

That said, all the findings lead to a grim conclusion, the authors noted.

“For the last two decades, however, these outcomes—midgets making widgets despite overall dynamism—have been grim, a grimness obscured by incomplete and even faulty understanding of the data,” they concluded.

(Edited by Radifah Kabir)