India’s manufacturing firms appear to be growing larger. Average employment per firm in the registered manufacturing sector increased from 181 workers in 2001 to 268 workers in 2023.
Yet a closer look at the production units inside those firms reveals a different pattern. After accounting for multiple plants and focusing on regular workers, average factory size declined from 100 workers to 96 over the same period.
The contrast raises an important question. If firms are becoming larger, why are factories not?
Much of India’s manufacturing debate continues to be framed around the idea that firms remain trapped at small sizes. Yet the evidence suggests a different possibility. Firms are growing, but not necessarily through larger factories. Understanding how that growth is occurring may be as important as measuring its extent.
Rethinking the Missing Middle
For decades, the dominant explanation for India’s manufacturing structure has been the missing-middle hypothesis. According to this view, firms remain small because regulatory thresholds raise the cost of expansion, particularly once employment crosses certain levels.
Yet evidence from the Annual Survey of Industries (ASI), which tracks India’s registered manufacturing sector, sits uneasily with that interpretation. Firm-size distributions show little sign of systematic clustering around the 100-worker threshold, and firms continue to expand beyond it. The missing-middle pattern itself also becomes less pronounced when firms are examined using finer size categories and alternative definitions of employment. For example, when firms are grouped into broad size bands, their distribution appears to show a pronounced gap in the middle. But this apparent absence of medium-sized firms becomes harder to identify when employment is measured more granularly.
These patterns suggest that the central question may not be why firms fail to grow, but how they choose to organise growth.
How Firms are Expanding
One answer lies in the changing composition of the workforce. Because several labour regulations apply specifically to permanent workers, firms can expand production without proportionately increasing regular employment. The share of contract workers in manufacturing employment has more than doubled, rising from around 15 percent in 2001 to more than 33 percent in 2023.
A second change is organisational. Instead of concentrating expansion within a single factory, firms are increasingly operating through multiple establishments. The share of firms using multi-plant structures rose from around 11 percent in 2001 to almost 30 percent in 2023.
Firms adopting contractualisation, multi-plant structures, or both, increased to 56 percent in the same year.
These developments are visible across the size distribution, suggesting that they are not confined to a narrow group of firms. More importantly, they point to a shift in how manufacturing expansion occurs. Firms can increase output, diversify operations, and expand geographically without concentrating growth within a single production unit. As a result, firm growth and factory growth no longer move together as closely as they once did.
When Firms and Factories Diverge
The consequences become visible in the aggregate data. Average employment per firm increased from 181 workers in 2001 to 268 workers in 2023. Yet once employment is adjusted for multiple plants and measured in terms of regular workers, average factory size declines from 100 workers to 96.
The divergence is even starker among larger firms. Among firms employing 100 or more workers, average firm size increased from 387 workers to 427, while the corresponding plant-adjusted average declined from 269 to 180 workers. The same pattern is evident among firms employing 1,000 or more workers, where average firm size increased marginally from 2,024 to 2,045 workers, but the plant-adjusted average fell sharply from 1,188 to 644 workers.
That divergence matters because many of the mechanisms associated with industrial upgrading operate at the level of production units rather than firms. Economies of scale, workforce specialisation, technological upgrading, managerial improvements, and process innovation occur inside factories. Firm growth may create the conditions for these gains, but it does not automatically imply that they are being realised.
A firm operating three factories of 100 workers each may appear larger than a firm operating a single factory of 250 workers. Yet the two organisational models can generate very different outcomes for productivity, coordination, skill formation, and competitiveness. Looking only at firm size risks overlooking those differences.
Designing for Productive Scale
Manufacturing policy has often treated firm growth as a proxy for industrial transformation. That assumption becomes less straightforward when firms expand through contractualisation and multi-plant structures rather than larger production units.
If productive capabilities are built inside factories, measures of firm growth alone may no longer provide a sufficient guide to industrial transformation. Policymakers may need to pay greater attention to whether production units themselves are becoming larger, more specialised, and technologically more capable. Doing so would provide a clearer picture of whether manufacturing growth is translating into productive scale.
The challenge is not simply to help firms grow. It is to ensure that growth translates into production structures capable of delivering the scale, productivity, and competitiveness that India’s manufacturing ambitions require.