Why in the news? 

A recent paper highlighted the rise of Multi-plant phenomena in the Indian manufacturing sector.

About multi-plant phenomena

• The tendency of manufacturing firms to distribute their workforce across multiple factories/plants in the same state, rather than scaling up a single plant is called multi-plant phenomena.
• According to the paper, Indian firms are increasingly opting for multiple plants in a single state. 
  • This phenomenon has been growing over time and accounts for over 25.16% of total employment in all plants and 35.48% of employment in large plants. 
• Issues like missing middle phenomena, dwarfism of firms, that pose barriers to growth of manufacturing sector and job creation in India, have already been documented. 
  • The multi-plant phenomenon further highlights the difficulties that Indian firms encounter when attempting to scale up effectively.

Challenges faced by Indian firms in scaling up

• Regulations: India's labour laws often exempt smaller firms from compliance, promoting size-based incentives and inflexible regulations that encourage firms to remain small for benefits retention.
  • E.g., Industrial Disputes Act (IDA), 1947, requires companies with over 100 employees to obtain government permission before retrenchment.
• Risk management: Firms open multiple small plants to diversify legal, regulatory and political risk.
• Handling Capital-labor relations: E.g., Multi-plants also provide protection in the event of labor-related dispute at one site.
• Flexibility: If the order decreases at one plant, the firm can redeploy workers to another plant without terminating their employment, which is the only option in a single plant establishment.
• Economic and Market Structure: The fragmentation of the market and the prevalence of informal sectors contribute to multi-plants and smaller firms.
• Management: A study highlighted that lack of professional management, due to the tendency to engage family and relatives in management, is keeping Indian businesses small.
• Other challenges:
  • Difficulties in acquiring land in contiguous parcels to sustain large plants.
  • Smaller plants can be closer to geographically dispersed labour pools, especially of women.

Implications of Indians firms and plants remaining small

• Low Productivity: The working paper highlights that single and larger plants are more productive than smaller and multi-plants due to economies of scale.
  • As per Economic Survey 2018-19, despite accounting for more than half of all the organized firms, dwarf firms contribute mere 8% to productivity.
• Impact on Export competitiveness: Lower productivity of small plants and firms impacts competitiveness and export performance.
• Job creation: As per Economic Survey 2018-19, the contribution of dwarf firms to employment is only 14%.
• Employment quality: As per Economic Survey 2018-19, small firms struggle to maintain the jobs they create, while large firms generate more permanent jobs in larger numbers. 

Way Forward

• Sunset clause: The Economic Survey 2018-19 recommended that all size based incentives must have a sunset clause of less than ten years with necessary grand-fathering.
• Management and Skill Development: Encourage professional management and support training programs for entrepreneurial and management skills to boost operational efficiency.
• Access to capital: Direct credit flow to young firms in high employment elastic sectors to accelerate employment generation by re-calibrating Priority Sector Lending (PSL) guidelines.
• Promote more Industrial Clusters: Creating industrial zones can help firms scale up by providing shared infrastructure, market linkages and improved access to technology, finance and talent.