The small and concentrated Manufacturing sector

One of the first things that strikes us when we think of manufacturing in India is how little of it is there. As per the latest Annual Survey of Industries, India had just 242,000 factories in 2018-19, the latest year for which data is available. A country with almost 1.4 billion people, almost US$3 trillion of GDP, 5th largest economy in the world, and not even 250,000 factories. What is worse is that 20% of these factors (~45k) are defunct. Thus, there were just ~195,000 factories active during the year 2018-19.

Another thing that strikes us is how geographically concentrated the factories are. Economic activity in India is in any case concentrated in the top few states. The top 3 states (Maharashtra, Tamil Nadu, and Uttar Pradesh) account for 30% of India’s GDP. But manufacturing activity in the country is even more top-heavy.

The top 3 states (Maharashtra, Tamil Nadu, and Gujarat) account for almost 38% of the number of factories in the country. And just over 40% of the output (Gross Value Added) comes from just the top 3 states. A state like Madhya Pradesh with over 80 million people has less than 5000 factories. And a city-state like Delhi has almost the same number of factories as Bihar.

Seen in this context, conceptually the Make in India program makes a lot of sense. While we can debate the specifics of the policy and the nature of incentives, it is clear to us that the Manufacturing sector in India, as it stands currently, is out of sync with the scale of India’s economy and its potential. Manufacturing activity needs to get larger and more geographically distributed in the years ahead.