Manufacturing Sector in India

Despite beginning the 20th century with conditions comparable to East Asian economies such as China and South Korea, India’s manufacturing sector has remained stuck at around 17% of GDP, failing to emerge as the primary engine of growth and employment. 

• This underperformance reflects deep structural, institutional, and political-economy constraints, rather than a lack of policy intent.

Manufacturing Sector

• The manufacturing sector refers to the segment of the economy that is engaged in the conversion of raw materials into finished or semi-finished goods through the use of labour, machines, tools, and chemical or biological processes.
• The share of value addition by manufacturing sector is 15.9% in 2023-24 compared to 16.7% of GDP (in constant price) in 2013-14.

Role Manufacturing Sector in Indian Economy

• Contribution to GDP: Manufacturing currently contributes about 17% to India’s GDP, highlighting its critical role in the economy.
  • Through flagship initiatives such as Make in India and Atmanirbhar Bharat, the government aims to raise this share to 25% by 2030
• Manufacturing Output: India’s manufacturing sector demonstrated strong resilience by recording a growth rate of 4.26% in FY 2024–25, reflecting steady industrial recovery.
  • The Index of Industrial Production (IIP) shows that manufacturing contributes nearly 77% of total industrial output, with basic metals, electrical equipment, and machinery emerging as key growth drivers.
• Employment: The manufacturing sector in India employs about 11.4% of the workforce, while  agriculture accounts for nearly 45% of employment and the services sector employs around 29%
• Export Performance: India’s manufacturing exports grew by 2.52% year-on-year, reaching USD 184.13 billion during the first five months of FY 2024–25.
• Foreign Direct Investment: India attracted USD 748.78 billion in FDI between 2014 and 2025, a 143% increase over the previous decade.
  • In FY25, gross FDI inflows reached USD 81.04 billion, while manufacturing FDI grew 18% to USD 19.04 billion.

Policy Catalysts Driving Manufacturing Growth

• National Manufacturing Mission (NMM): Launched in the Union Budget 2025–26, the National Manufacturing Mission integrates policy, governance, and execution across states and ministries.
  • It emphasizes sustainable manufacturing, including solar PV, EV batteries, green hydrogen, and wind energy, aligning with India’s net-zero 2070 commitment.
• GST Reforms and Cost Efficiency: The introduction of GST 2.0 with a simplified two-slab structure has reduced compliance costs and enhanced supply-chain efficiency.
  • Lower GST rates on logistics, auto components, MSME-intensive goods, and exports have boosted affordability, competitiveness, and production.
• Production Linked Incentive (PLI) Scheme: The PLI scheme, with an outlay of ₹1.97 lakh crore, covers 14 strategic sectors and links incentives to incremental production and sales.
  • This has encouraged scale, innovation, and global competitiveness across electronics, pharmaceuticals, textiles, and advanced manufacturing.
• National Logistics Policy (NLP): Launched in 2022, this policy aims to reduce logistics costs and achieve a top-25 global ranking in logistics performance by 2030.
  • Through the Comprehensive Logistics Action Plan (CLAP), it promotes digital integration, multimodal transport, and logistics parks.
• Startup India and Industrial Corridors: The Startup India initiative has helped India become the third-largest startup ecosystem, generating over 17.69 lakh direct jobs.
• SAMARTH Udyog Bharat 4.0: Launched in 2017, SAMARTH Udyog Bharat 4.0 promotes smart manufacturing by facilitating adoption of Industry 4.0 technologies such as IoT, robotics, and AI, especially among MSMEs.
• Research and Development Incentives: The government aims to increase R&D spending to 2% of GDP, supported by IPR simplification under Patent Rules 2024 and digital innovation platforms.

Key Drivers of India’s Manufacturing Momentum

• Electronics Manufacturing: 
  • India’s electronics production has increased sixfold over the last 11 years, while exports have expanded eightfold, indicating rapid sectoral transformation.
  • Value addition in electronics has improved from 30% to 70%, with a target of 90% by FY 2026–27, making India the second-largest mobile phone manufacturer globally.
  • Since FY2020–21, electronics manufacturing has attracted over USD 4 billion in FDI.
• Pharmaceutical Industry Leadership:
  • India has earned the title “Pharmacy of the World”, ranking third globally by volume and fourteenth by value in pharmaceuticals.
  • The country supplies 50% of global vaccine demand and 40% of generic medicines in the US.
  • The sector is projected to grow to USD 130 billion by 2030 and USD 450 billion by 2047.
• Automotive Industry Expansion:
  • The automotive sector contributes 7.1% to India’s GDP and nearly 49% of manufacturing GDP, underlining its economic significance.
  • With a production of 3.10 crore vehicles in FY 2024–25, India has become the fourth-largest automobile producer globally, strengthening its position in global value chains.
• Textiles and Apparel Sector Growth:
  • India’s textile and apparel industry contributes 2.3% to GDP, 13% to industrial output, and 12% to total exports, making it one of the largest globally.
  • The sector is projected to grow to USD 350 billion by 2030 and remains the second-largest employer after agriculture, engaging over 45 million workers.
  • Government support through PM MITRA Parks, backed by ₹4,445 crore, aims to enhance scale and competitiveness.
• Sustainability and Green Manufacturing:
  • Growing regulatory pressure and global demand for eco-friendly products have accelerated investments in renewable energy and waste reduction.
  • The government’s ₹24,000 crore PLI scheme for solar PV modules is expected to add 65 GW of capacity, supporting India’s green manufacturing transition.
• Skill Development and Employment Generation:
• • Large-scale skilling initiatives such as PMKVY (Pradhan Mantri Kaushal Vikas Yojana)  are preparing the workforce for Industry 4.0 roles in AI, IoT, and robotics.
  • Over the last decade, India has generated 17 crore jobs, with recent PLFS data showing improvements in workforce participation, women’s employment, and declining unemployment, including a rise in manufacturing job creation from 6% to 15%.

Major Challenges Facing India’s Manufacturing Sector

• Infrastructure Gaps
  • India’s manufacturing sector faces significant infrastructure constraints, encompassing not only physical infrastructure such as roads, ports, and power supply, but also digital infrastructure. 
  • Poor connectivity and unreliable electricity increase operational costs, disrupt production, and reduce overall efficiency.
• Regulatory Complexity
  • Multiple approvals, slow land acquisition, heavy compliance burdens, rigid labour regulations, and stringent environmental clearances  raise transaction costs, especially for MSMEs.
  • For Instance, India’s manufacturing MSMEs grapple with over 1,450 annual regulatory compliances spanning labour, environmental, tax, and corporate laws, making compliance highly complex and time-intensive.
• Skill Shortages
  • Only 4.7% of India’s workforce has formal skill training, compared to 96% in South Korea, leading to productivity constraints and slow adoption of advanced technologies.
  • This gap is largely due to inadequacies in vocational training and education systems, which have not kept pace with evolving industrial requirements.
  • Excessive Focus on Theory over Practice: 
    • Engineering education in India places disproportionate emphasis on academic performance rather than hands-on skills and innovation. 
    • As a result, graduates often lack problem-solving abilities and real-world industrial exposure.
  • Curriculum Design: Until recently, training standards and curricula were largely government-driven, with limited industry participation. 
• Global Competition and Innovation Deficit
  • Indian manufacturers face intense competition from low-cost producers such as China and Vietnam, compounded by low R&D investment and dependence on imported technologies.
  • India contributes merely 2.8% of global manufacturing output, compared to China’s dominant 28.8% share, underscoring India’s limited presence in global manufacturing.
• Slow Technology Adoption
  • Indian manufacturing firms often rely on abundant low-cost labour, which reduces the immediate pressure to invest in productivity-enhancing technologies.
  • Lack of Induced Innovation: Unlike high-wage economies, India has not experienced sufficient wage-driven incentives to shift towards capital-intensive or technology-led manufacturing.
• Role of Public Sector Wages
  • High public sector salaries set wage benchmarks across the economy that often exceed productivity levels achievable in manufacturing, especially in labour-intensive industries.
  • Attractive public sector compensation draws skilled and semi-skilled workers away from manufacturing jobs, reducing labour availability for industrial enterprises, a distortion similar to the Dutch Disease phenomenon ..
• Others: 
  • Access to Finance for MSMEs: Limited access to affordable credit and dependence on informal borrowing restrict expansion and modernization.
  • Low R&D Investment: India spends only 0.65% of GDP on research and development, far below innovation-driven economies such as the United States (over 2.5%).
  • Import Dependence in Strategic Sectors: India remains heavily dependent on imports for capital goods and petrochemical intermediates, with nearly 45% of petrochemical intermediates imported.
  • Trade Barriers and Market Access: Non-tariff barriers, carbon taxes, and new tariff measures such as the recent 50% US tariff on Indian goods in 2025 pose serious risks to exports worth USD 87 billion.

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Way Forward

• Scaling Up R&D and Innovation Capacity: 
  • India must raise R&D expenditure from 0.65% to 2% of GDP to strengthen innovation and technological self-reliance. 
  • Establishing advanced labs, tool rooms, and testing centres in industrial clusters is critical.
• Reforming Technical Education and Skill Training:
  • India must reform technical education by making engineering and ITI curricula industry-oriented, with at least 50% emphasis on hands-on training through assembly lines, tool rooms, and product labs
  • Simultaneously, strengthening core engineering disciplines and domestic manufacturing of machinery and equipment is essential to reduce import dependence in capital goods and build long-term industrial capability.
• Building State-Specific Manufacturing Ecosystems:
  • States should develop plug-and-play industrial parks with shared design, testing, and certification facilities, while incentivising in-house prototyping and academia–industry collaboration.
• Reducing Infrastructure and Logistics Constraints:
  • Logistics efficiency must be improved under the National Logistics Policy, with focused investments in power, transport, storage, and supply-chain resilience to lower manufacturing costs.
• Advancing Sustainable and Green Manufacturing:
  • India should accelerate adoption of green steel, green cement, scrap recycling, and energy-efficient processes, aligning domestic manufacturing with global climate and sustainability standards.
• Expanding Credit Access to MSMEs:
  • Strengthening manufacturing supply chains necessitates improved credit flow to MSMEs and startups. 
  • This can be achieved through specialised financing schemes and an expanded Credit Guarantee Fund mechanism
•  Promoting Export Competitiveness:
  • India must enhance export competitiveness by reducing logistics costs, negotiating favourable trade agreements, and supporting global standards certification. 
  • The Districts as Export Hubs initiative should be implemented swiftly by identifying district-specific export products and providing design, packaging, marketing, and certification support.

Conclusion

India’s manufacturing underperformance is fundamentally structural rather than cyclical. Infrastructure gaps, regulatory complexity, labour informality, weak innovation ecosystems. While recent reforms signal a strategic shift, sustained manufacturing transformation will require deep institutional reform, skill-intensive growth, innovation-led upgrading, and stronger global value chain integration, rather than incentive-driven expansion alone.

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