India’s Manufacturing Sector 

Syllabus: GS3/Indian Economy

Context

• India’s manufacturing sector has long underperformed relative to its potential, constrained by structural inefficiencies, policy missteps, and a premature leap into services despite several policy pushes.

Background: India’s Manufacturing Sector

• It has evolved from a modest post-independence base to a strategic pillar of economic growth.
  • India adopted a mixed economy model with a strong emphasis on public sector-led industrialization post-independence.
• The Second Five-Year Plan (1956–61) laid the foundation for heavy industries, steel plants, and public enterprises.
  • It contributed around 15–17% to GDP by the 1990s.
• India’s manufacturing sector has lagged behind despite starting from similar economic positions as China and South Korea in the early 20th century.

Current Status

• Manufacturing’s contribution to India’s GDP has broadly hovered in the mid-teens (around 13–17 percent in recent decades), compared to roughly 25–29 percent in China, around 27 percent in South Korea, and about 24–25 percent in Vietnam.
• On employment, over 45 percent of India’s workforce is still in agriculture, while only about 11.4 percent is employed in manufacturing and roughly 29 percent in services.
• A large share of manufacturing employment is informal, which constrains formal training, technology absorption, quality upgradation and stable industrial relations.

Why Manufacturing Has Lagged in India?

• Low Productivity and Fragmented Industry: Most Indian manufacturers are small-scale units with limited automation and poor economies of scale.
  • According to CMIE data, the average productivity per worker in Indian manufacturing is less than 20% of China.
• Infrastructural Deficiencies: Persistent issues in logistics, power reliability, and port connectivity, which increase costs by 14–18% of product value (compared to 8% in East Asia).
  • Even after schemes like PM Gati Shakti, execution delays remain a major barrier.
• Policy Instability and Regulatory Complexity: India’s frequent policy reversals, overlapping compliance from Centre and States, and especially around import tariffs and Production-Linked Incentive (PLI) guidelines.
• Weak Domestic Supply Chains: India imports a large share of intermediate goods stifling the growth of indigenous supply chains.
• Skill Gaps: Only about 5% of India’s workforce is formally skilled, compared to 24% in China and 52% in the USA.
  • Vocational programs like Skill India have limited industry linkage, leading to skill demand mismatches.
• Land and Labour Market Rigidities: Land acquisition remains costly and time-consuming.
  • Setting up an industrial plant can take 3–5 years, versus 18 months in Vietnam.
  • Labour laws still cause hesitation for large-scale manufacturing employment.
• Weak R&D and Innovation Culture: Manufacturing R&D in India is less than 0.7% of GDP, versus 2.1% in China.
  • Indian firms often ‘assemble’ rather than ‘innovate’, relying heavily on foreign designs.
• Domestic Demand Constraints: Income inequality limits domestic demand for manufactured goods beyond basic products.
  • The consumption base for durable goods is still narrow.
• Policy Bias Toward Services: Government incentives, education, and infrastructure have historically favored IT and services over manufacturing.
  • As a result, India ‘skipped industrialization’, jumping from agriculture to services.

Does India Resemble Dutch Disease?

• Dutch Disease describes how the boom of one sector (often resource-based) crowds out others, particularly tradable sectors like manufacturing, through two main channels:
  • Wage Effect: Labour is pulled towards the booming sector, raising overall wages.
  • Exchange Rate Effect: Increased exports appreciate the real exchange rate, making other exports less competitive.
• In India, high government salaries in the public sector acted as the ‘booming sector’, drawing labour away from manufacturing and driving up wages across the economy. It had three major consequences:
  • Manufacturing lost competitiveness because firms couldn’t match government pay scales.
  • Domestic prices rose, making imports cheaper and domestic goods relatively expensive.
  • Real exchange rate appreciation occurred, even without a change in nominal currency value, further hurting exports.
• In essence, India experienced a policy-induced Dutch disease, where the expansion of a high-wage public sector distorted incentives against industrial growth.

Policy Reforms Fueling Growth

• Production-Linked Incentive (PLI) Schemes: Targeting 14 key sectors, including electronics, automotive, and pharmaceuticals, the PLI schemes aim to boost domestic production, attract FDI, and create jobs.
• PM MITRA Parks: These integrated textile parks are designed to enhance scale and efficiency in the textile value chain, promoting exports and employment.
• National Manufacturing Mission: It was announced in the Union Budget 2025–26, as a long-term strategic roadmap that integrates policy, execution, and governance into a single, unified vision.
  • It prioritizes clean-tech manufacturing from solar PV modules and EV batteries to green hydrogen and wind turbines ensuring India’s rise in global supply chains aligns with its net-zero 2070 commitment.

Building Industrial Ecosystems

• Skill India Mission: Trains youth in industry-relevant skills, with a focus on Industry 4.0 technologies like AI, robotics, and additive manufacturing.
• Gati Shakti Master Plan: Integrates transport and logistics infrastructure to reduce costs and improve supply chain efficiency.
• Digital India and Startup India: Encourage innovation and MSME participation in advanced manufacturing.
  • These efforts aim to create industrial clusters that mirror the success of hubs like Tamil Nadu (automobiles), Gujarat (chemicals), and Karnataka (electronics).

Way Forward: Toward Global Manufacturing Leadership

• India’s vision is to become a global manufacturing hub by 2047. The NITI Aayog’s Roadmap to Global Leadership in Advanced Manufacturing outlines key strategies:
  • Digital Transformation: Embracing Industry 4.0 technologies like AI, IoT, and robotics to modernize production.
  • Green Manufacturing: Integrating sustainability and circular economy principles to reduce environmental impact.
  • Cluster Development: Building industrial ecosystems in states like Tamil Nadu, Gujarat, and Maharashtra to foster innovation and scale.
  • R&D Investment: Increasing public-private collaboration in research to drive product innovation and quality.
• The goal is to raise manufacturing’s share in GDP to 25% and generate 100 million jobs (National Manufacturing Policy), positioning India as a resilient and inclusive industrial economy.

Source: TH