Abstract
This study revisits the ‘missing middle’ phenomenon of the Indian manufacturing sector. Though ‘missing middle’ has been described and analyzed by many studies, a key gap in the literature that we note is that the phenomenon of ‘missing middle’ has been taken as an accepted artifact of the Indian manufacturing sector. We look into the size-structure relation based on the argument that ‘class interval based’ and ‘aggregate level’ analyses of the industrial sector may be misleading. We use the firm level data available for Annual Survey of Industries (ASI) to check for the ‘missing middle’. We look for the trend both at the aggregate and disaggregate levels. We are unable to find a ‘missing middle’, either at the aggregate or disaggregate level, once we drop the classification of data based on apriori class intervals. We find that most firms in India are small firms and there is no evidence of a clustering of firms at higher size categories.
This is a preview of subscription content, log in via an institution to check access.
Notes
Small scale industries play two basic roles in structural transformation. Firstly, the rural and semi-urban small scale industries act as a bridge between the agriculture sector and urban industrial sector. For example, the agro-based industries cater to local food consumption needs on the one hand, and on the other hand, provide agro-based inputs to the large industries in the urban sector. Secondly, they also have a higher labour-capital ratio than large industries, thus absorbing relatively more of the surplus labour in the agriculture sector.
Establishments in the unorganised sector are identified as those which are not registered under The Factories Act of 1948. The Factories Act is applicable to establishments which use electricity and has ten or more workers; or establishments which does not use electricity and has twenty or more workers.
The Industrial Disputes Act 1947 lays down the procedure for firing of permanent workers, among other aspects. The rigid regulations around firing of workers in the establishments that are registered under the Industrial Disputes Act 1947 are considered as a key factor for the lack of growth of the establishments beyond 100 worker size class.
Results of joint distribution analysies can be shared if required.
ASI unit level data comprise of both census and sample firms. For sample firms, ASI provide weights.
Kernel density estimation is a non-parametric smoothing technique for estimating the probability density function of a random variable (see Härdle 1990 for a detailed exposition). Using “kdens” package of STATA-13, the optimal bandwidth was determined at 77.2112495 for year 1998–99, 57.282263 for 2004–05 and 57.8213905 for 2012–13.
8,513 firms were dropped as they reported average person engaged (avgprsn) = 0. Out of these 8513 firms with avgprsn = 0, 8480 have reported 0 output.If we consider all the firms, the mode comes at 0.
10,689 firms were dropped as they reported avgprsn = 0. If we consider all the firms, the mode comes at 0. Out of these 10,689 firms with avgprsn = 0, 10,488 have not reported any output data and out of the rest 201 firms who have reported output, 94 have reported 0 output. Moreover, out of these 10,689 firms with avgprsn = 0, 8519 have not reported any nest investment in plant and machinery (nipm), and 1309 have reported nipm = 0.
See Lopes (2011) for a detailed exposition.
Using “ksmirnov2” package of STATA-13 one can allow for analytical weights.
One can use Silverman’s Test for Multimodality (silvtest) to find out all the local maxima of the distribution. However, silvtest uses bootstrapping and the results depend significantly on the size of the sample and number of iterations which one chooses exogenously. Hence, we refrained from using silvtest.
Detailed results for the years 2004–05 and 2012–13 are available if required.
We also checked the joint distributions plotting employment and output; and employment and labour productivity. The three dimensional kernel density plots exhibit a sharp peak of concentration of small firms in both the cases. These evidences further reiterate our argument that there exist only small sized firms and hence, there is no ‘missing middle’ in Indian manufacturing.
Detailed industry-wise summary statistics for the years 1998–99, 2004–05 and 2012–13 are available upon request.
References
Alfaro, L., and A. Chari. 2014. Deregulation, Misallocation, and Size: Evidence from India. Journal of Law and Economics 57 (4): 897–936.
Amirapu, A., and M. Gechter. 2014. Indian Labor Regulations and the Cost of Corruption: Evidence from the Firm Size Distribution. IED Working Paper # 266. Massachusetts: Boston University.
Bertrand, M., C.-T. Hsieh, and N. Tsivanidis. 2017. Contract Labor and Firm Growth in India. Mimeo: University of Chicagobooth.
Dasgupta, K. 2016. The Missing Middle in Developing Countries Revisited. Indian Growth and Development Review 9 (1): 32–52.
Härdle, W. 1990. Applied Nonparametric Regression. Cambridge: Cambridge University Press.
Hartigan, J.A., and P.M. Hartigan. 1985. The Dip Test of Unimodality. Annuls of Statistics 13 (1): 70–84.
Hasan, R., and K.R.L. Jandoc. 2013. Labor Regulations and the Firm Size Distribution in Indian Manufacturing. In Reforms and Economic Transformation in India, ed. J. Bhagwati and A. Panagariya. New York: Oxford University Press.
Hsieh, C.-T., and P.J. Klenow. 2014. The Life Cycle of Plants in India and Mexico. The Quarterly Journal of Economics 129 (3): 1035–1084.
Hsieh, C.-T., and B.A. Olken. 2014. The Missing “Missing Middle.” The Journal of Economic Perspectives 28 (3): 89–108.
Ishikawa, S. 1962. A Comparison of Size Structure of Indian and Japanese Manufacturing Industries. Hitotsubashi Journal of Economics 2 (2): 50–80.
Krueger, A.O. 2013. The Missing Middle. In Economic Reform in India: Challenges, Prospects, and Lessons, ed. N.C. Hope, A. Kochar, R. Noll, and T.N. Srinivasan. New York: Cambridge University Press.
Little, I.M.D. 1987. Small Manufacturing Enterprises in Developing Countries. World Bank Economic Review 1 (2): 203–235.
Lopes, R.H.C. 2011. Kolmogorov-Smirnov Test, 718–720. International Encyclopedia of Statistical Science. Berlin, Heidelberg: Springer.
Mazumdar, D., and S. Sarkar. 2009. The Employment Problem in India and the Phenomenon of the ‘Missing Middle.’ The Indian Journal of Labour Economics 52 (1): 43–55.
Nagaraj, R. 1985. Trends in Factory Size in Indian Industry, 1950 to 1980: Some Tentative Inferences. Economic and Political Weekly 20 (8): M26-M27+M29-M32.
Nagaraj, R (2018). Of “Missing Middle” and Size-based Regulation: A New Frontier in the Labour Market Flexibility Debate. CSE Working Paper # 2018-7.
Tybout, J. 2000. Manufacturing Firms in Developing Countries. How well do they do and why? Journal of Economic Literature 38 (1): 11–44.
Acknowledgements
The authors acknowledge the inputs and suggestions from Dr. Srikanta Kundu and Dr. Ritika Jain, Centre for Development Studies. The authors are grateful for comments on an earlier draft received at seminar presentations at Centre for Development Studies (Thiruvananthapuram), 55th Annual Conference of The Indian Econometric Society (NISM, Maharashtra) and 60th Annual Conference of The Indian Society of Labour Economics (IGIDR, Mumbai). The authors sincerely acknowledge the comments and suggestions by an anonymous referee. The usual disclaimer applies.
Author information
Authors and Affiliations
Corresponding author
Ethics declarations
Conflict of Interest
The authors declare that they have no conflict of interest.
Additional information
Publisher's Note
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
Appendix
Rights and permissions
About this article
Cite this article
Ghosh, S., Abraham, V. The Case of the ‘Missing Middle’ in the Indian Manufacturing Sector: A Firm Level Analysis. J. Quant. Econ. 19, 161–179 (2021). https://doi.org/10.1007/s40953-020-00222-y
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s40953-020-00222-y