What does India’s manufacturing sector actually look like?

India’s manufacturing sector employs over 6 crore (60 million) workers and accounts for around 11% of India’s workforce, yet generates 13% of India’s GDP. That gap between workforce share and output share suggests that manufacturing is unusually productive. The comparison, however, is misleading. India’s workforce remains heavily concentrated in agriculture, which employs about 46% of workers but generates a much smaller share of output (17%). Any sector that draws workers out of agriculture will therefore appear more productive by comparison. Services, on the other hand, employs 30% of the workforce and generates over 55% of GDP. In reality, India’s manufacturing sector runs on small firms, limited productivity, and informal jobs. 

India’s manufacturing firms are extremely small. Only 5% of Indian factories employ more than ten workers. Even among registered factories, that is, those above the threshold for coverage under the Factories Act, four out of five have fewer than 100 employees. Countries that industrialised successfully, such as South Korea, Germany, and China, built their manufacturing bases on medium- and large-sized firms employing hundreds or thousands of workers. In India, this tier is conspicuously thin, a pattern economists call the “missing middle.” 

Small factories have limited scope to exploit economies of scale and, on average, exhibit lower productivity than larger ones. Small firms account for 67% of operational factories but only 10% of total output. The largest firms, employing 5,000 or more workers, account for less than 0.5% of all factories and produce 19% of total output. Workers concentrated in small firms operate with very little machinery and capital, which keeps their output low and their wages lower still.

Factories increasingly opt for informal or contract workers instead of hiring regular staff. The share of contract workers rose from 23% to 40% between 2001 and 2022. These contract workers often perform the same tasks as permanent workers but are employed on different terms. They typically receive lower wages, have less job security, and may not receive the same social security benefits. Beyond contract labour, a large share of manufacturing employment remains outside formal arrangements altogether.

Manufacturing in India is dominated by small, low-productivity firms that rely on limited capital and informal labour. The large manufacturing units that tend to make headlines are aberrations and not the norm.