Manufacturing underperformed amid rise in multi-plants: Arvind Subramanian

Former chief economic advisor (CEA) Arvind Subramanian in his latest paper on Thursday highlighted the underperformance of the Indian manufacturing sector due to the rise in multi-plants, where a firm sets up multiple production facilities within a state.

 

Presenting his findings at a seminar organised by the policy think tank Centre for Social and Economic Progress (CSEP), Subramanian argued that multi-plants have grown dramatically over time. The share of multi-plants increased to 30 per cent in 2022 from 15 per cent in 2001 of the total large plants that employ more than 200 employees.

 

On the employment front, they constituted 43 per cent of total non-managerial employees in 2022, up from 17 per cent in 2001.

 

Critiquing the Annual Survey of Industries (ASI) data, Subramanian said it was susceptible to misrepresenting the size of firms, as ASI allows firms with multiple plants in a state (but not across states) to file joint returns if they have at least two plants, each with 100-plus employees. This leads to an overestimation of the size of plants. As a result, official statistics often suggest that India’s largest manufacturing plants are bigger than they actually are. 

 

He stressed that this was important for three reasons: accounting for multi-plants shows that large plants have not grown in size (and may even have shrunk) over the time period despite increasing recourse to contract labour. For example, he demonstrated that plants above the 90th percentile employed on average 1,108 workers in 2022, compared to 1,121 in 2002, and their share in total employment fell to 45 per cent from 50.4 per cent over the same period.  

 

Second, multi-plant firms have lower productivity than single-plant firms of equivalent size, which potentially impacts competitiveness and export performance. Third, multi-plants shed light on how regulations and labour markets work, as they seem to be another mechanism (along with contractualisation) for large firms to avoid expanding plant size in order to diversify political and regulatory risk.

 

Also speaking at the event, former Planning Commission deputy chairman Montek Singh Ahluwalia said the prevailing labour laws in the country had kept manufacturing scattered and acted as a ‘lawn-mower’, with little incentive for entrepreneurs to scale their operations.

 

 “For example, the upper limit of 100 workers prescribed under the Industrial Disputes Act has been quite detrimental for the growth of firms. These findings on the multi-plant phenomenon also validate these concerns, where these regulations have acted as a lawn-mower and sent the message to entrepreneurs to keep the firm size in check,” he added.

 

On contractualisation as a recourse to smoothen compliance, Subramanian said the use of contractual labour was greater in single plants than in multi-plants, as in multi-plant units, flexibility in hiring and firing labour comes from having many plants. In single plants, however, there is no such flexibility, which makes the use of contract labour more important.