The last chapter of our forthcoming book, ‘Behold the Leviathan: The Unusual Rise of Modern India’ (to be published by Penguin on 21st Oct) uses data from the Government of India to dwell on why the vast majority of India’s smaller companies not only struggle to grow their profits, they also struggle to generate meaningful profits in the first place. Whilst we cite our reasons for why this is happening, this piece by Sharad Raghavan cites research conducted by “by former CEA Arvind Subramanian and others” and “finds Indian firms increasingly prefer multiple plants in a single state rather than scaling up single plants.”
Mr Sharad Raghavan elaborates that “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…
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…
…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.”
So, why is this significant? The article in The Print makes multiple points in this regard: “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….
…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.”
Most damningly for India, the paper published by Arvind Subaramanian & friends conducts a case study of India vs Bangladesh in the textile sector. The findings are sobering. Basically, in contrast to what we see on the cricket field, Bangladeshi textile plants are bigger and more competitive in the international market than Indian textile firms: “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.”
So why do Indian entrepreneurs favour smaller factories? Answer: this is how they deal with political and economic 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(ivity) —after controlling for variables such as location and industry—was “significantly lower” in multi-plants than in single plants of comparable size.” (Note: the insertion in brackets are ours.)
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