India's manufacturing under-performance: A new clue from 'multi-plants'

Perhaps the biggest failure of India's development and an equally big puzzle is why India has under-performed in labour-intensive manufacturing whether measured in terms of output, exports or employment.

- ABHISHEK ANAND, ARVIND SUBRAMANIAN & NAVEEN THOMAS

For example, India's share of global apparel exports was 3 per cent in 2005 and almost two decades later, despite China's vacating its export space, it remained at 3percent.

Explanations abound on this under-performance. One of the prominent ones relates to plant size, in particular that Indian plants are kept too small by regulations, especially labour laws. In our latest research, we discover a new clue that speaks to this aspect of plant size but focusing not on why plants are small but why they are not large, very large.

One of the most intriguing and relatively undocumented developments of the last 20 years has been "multiplants," whereby a single firm operates not one but multiple production facilities within a state. Last week's Economist magazine PAR spotlighted Shahi Exports, India's largest garment exporters whose CEO Harish Ahuja spoke of the compulsion to "split big investments across a number of factories".

The multi-plant phenomenon has expanded over the last two decades and today they account for a large share of non-managerial employment and output of private manufacturing plants.

Focusing on labourintensive industries and large plants (defined as those employing more than 200 workers), the share of multiplants rose from 15 per cent in 2001 to 30 per cent of total plants in 2022, and from 17 per cent to 43 per RT-I cent in terms of total non-managerial employment.

Why is the phenomenon of multi-plants significant? For three reasons: They change our understanding of firm size and its evolution; they are associated with lower productivity; and they shed light on how regulations and labour markets work.