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The ‘Missing Middle’ Problem in Indian Manufacturing
The Indian manufacturing sector, with few mid-size firms, has the problem of the “missing middle.” The critical constraint is imposed by “predatory institutions” and their corruption that mid-size firms face in their day-to-day interactions with the state. The current policy approach towards improving the ease of doing business by reforming regulatory institutions is not enough in this case. To solve the missing middle problem, lower-level bureaucrats engaged in petty corruption need to be disciplined, and government procedures should be made transparent and accountable to reduce the scope for such corruption.
The authors gratefully acknowledge the comments from the anonymous reviewer.
Few firms are to be found in the mid-size category of the firms in the Indian manufacturing sector. This “missing middle” is related to the wider problem of dualism—small, unproductive firms co-exist with large, productive ones. The problem of dualism has negative implications for pro-poor growth, as most of the working poor in urban areas are employed in the smaller firms, which do not tend to grow over time (Raj and Sen 2016). However, research, exploring the lack of mid-size manufacturing firms in India, is limited,1 while there is much emphasis in the current government policy along with a great deal of interest among the policy practitioners to ease the constraints of doing business in India.
Institutional constraints take many forms—from the lack of property rights to regulatory impediments to the presence of corruption. From a policy perspective, it is important to know which institutions disincentivise small firms from growing and entrepreneurs from setting up mid-size firms. The literature on Indian manufacturing recognises the problem of the missing middle, and it suggests that the number of mid-size firms is constrained by infrastructural deficiencies (such as lack of reliable electricity), labour regulations, credit constraints, and (the absence of) the ease of doing business (Mazumdar and Sarkar 2013; Ramaswamy 2013). But these explanations are mostly suggestive and lack empirical evidence, and do not explain which factors are of utmost importance.
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