India's Manufacturing Scale: A Barrier to Global Competitiveness
India's manufacturing sector faces a significant challenge: its factories are consistently smaller than their international counterparts. This lack of scale directly impacts the nation's productivity, global competitiveness, and overall export potential, according to recent analysis.
Economies of scale are crucial for reducing costs and boosting competitiveness in the global market. Large firms can achieve efficiency levels that smaller enterprises simply cannot match. While government initiatives have long aimed to encourage small enterprises to export, the bulk of industrial exports, outside of niche sectors, consistently comes from larger firms.
The Virtuous Circle of Scale and Productivity
A paper from the Madras Institute for Development Studies by Abhishek Anand, Arvind Subramanian, and Naveen Thomas highlights this issue. Their 2024 study on average wage per worker found that Indian export units are substantially larger than non-exporting units. Critically, plants employing fewer workers are less productive than those with more workers.
The research illustrates a "virtuous circle":
- Larger plant sizes lead to higher productivity per worker.
- Higher productivity enhances competitiveness in the global market.
- More competitive firms are better positioned to pay their workers higher wages.
Data from Gujarat, Maharashtra, and Tamil Nadu further supports this. Districts with the highest average industrial worker wages also exhibit the highest exports per worker. These top districts also host a significantly higher concentration of large manufacturing company plants (36 plants on average compared to just three in lower-ranked districts) and boast a higher average number of workers per factory (98 versus 55).
Concerning Trends in Plant Growth
Despite the clear benefits of scale, the paper presents a worrying finding: "India’s large plants have not grown and may in fact have shrunk…" In the textile industry, for example, the average scale of Indian plants is smaller than those in Bangladesh, a direct competitor.
Interestingly, the authors note that the standard explanation for limited growth—restrictive labor laws disproportionately affecting larger firms—does not hold true in this specific context. The plants under scrutiny are already well above the threshold where labor laws typically apply. In fact, some newer plants in states like Karnataka and Tamil Nadu employ over 10,000 workers in certain sectors, demonstrating that large-scale operations are achievable.
This suggests that the factors hindering the growth of India's large manufacturing plants may lie beyond conventional explanations, demanding a deeper examination of policies and incentives to foster greater industrial scale and unlock the nation's full economic potential.