By : Shaurya Pandey, Research Analyst, GSDN
India stands at a defining moment in its economic journey. Having grown into the world’s fourth-largest economy, valued at approximately US$ 4 trillion as of July 28, 2025, the country now aspires to become a developed nation by 2047, the centenary year of its independence, with an economy targeted at US$ 35 trillion. Achieving this scale of growth cannot rest on services alone. For decades, India took an unusual development path, moving directly from an agrarian base to a services-led economy while skipping the industrial phase that transformed nations such as South Korea, Japan, and, more recently, Vietnam. That gap is now widely recognised as a strategic vulnerability. A stronger, deeper, and more technologically advanced manufacturing base is essential if India is to create jobs at scale, reduce its dependence on imports, strengthen its supply chains, and secure a durable place in global trade. This article examines why India must ramp up manufacturing, the initiatives already underway, the obstacles that remain, and the road ahead.
The Current State of India’s Manufacturing Sector
Despite years of policy attention, the manufacturing sector’s contribution to India’s Gross Value Added has remained largely static at around 17 to 18 percent for a considerable period. This is well short of the 25 percent target that successive policies, from the National Manufacturing Policy of 2011 to the Make in India campaign launched by Prime Minister Narendra Modi on September 25, 2014, have set for the sector. The comparison with regional peers is telling manufacturing constitutes close to 24 percent of Gross Domestic Product in Vietnam and roughly 23 percent in Malaysia, both economies with far smaller populations and resource bases than India. In other words, India continues to under-perform relative to its own economic potential and workforce size. This stagnation persists even though India has become the world’s second-largest mobile phone manufacturer and has seen electronics production expand rapidly in hubs such as Pune, Bengaluru, Chennai, and Noida.
Why Manufacturing Matters for India’s Economic Future
Manufacturing occupies a unique position in the growth story of any large economy because of its capacity to absorb labour at scale while simultaneously generating higher productivity than agriculture. India adds close to a million people to its workforce every month, and the services sector, however dynamic, cannot absorb this demographic wave on its own since it tends to reward specialised, higher-education skills rather than the broad base of semi-skilled labour that India possesses. A robust manufacturing sector, by contrast, can create large numbers of factory-floor jobs, assembly-line roles, and associated logistics and ancillary employment, thereby converting India’s demographic dividend into an economic asset rather than a social liability.
Beyond employment, manufacturing is central to reducing India’s reliance on imports for everything from heavy machinery to electronic components and specialised chemicals. Every unit of import substitution achieved through domestic production improves the country’s balance of payments and cushions against currency volatility and external shocks. The Coronavirus pandemic exposed just how fragile globally dispersed supply chains can be, and it pushed multinational companies worldwide to reconsider their dependence on any single manufacturing base. This reordering of global value chains created what many analysts describe as a once-in-a-generation opportunity for India to capture manufacturing capacity that might otherwise have stayed concentrated elsewhere.
A larger manufacturing base also drives innovation and technology absorption. Modern manufacturing, especially in sectors such as semiconductors, electric vehicles, and green hydrogen, tends to pull in complementary investment in research, design, and skilled engineering talent. In this sense, ramping manufacturing is not merely about producing more goods domestically; it is about building the technological depth that allows an economy to move the value chain rather than remaining a hub for low-margin assembly work.
Government Initiatives Driving the Manufacturing Push
Recognizing these imperatives, the Government of India has rolled out a series of reforms and schemes over the past three decades, each responding to the constraints of its time. The foundational liberalization of the early 1990s abolished industrial licensing for most sectors and opened the economy to foreign investment, effectively ending what was known as the License, Permit, and Quota Raj. This was followed by infrastructure and systemic reforms through the 2010s, including the introduction of the Goods and Services Tax in 2017, which replaced a fragmented indirect tax structure with a unified national market and significantly reduced logisticsfriction for manufacturers.
The Make in India campaign, launched in 2014, remains the most recognisable brand associated with this push. It rests on four pillars: streamlining regulatory processes, building modern infrastructure such as industrial corridors and the PM GatiShakti multi-modal logistics network, opening new sectors to foreign direct investment, and fostering a mindset shift in which the government positions itself as a facilitator rather than a regulator. Between the financial year 2014 and the financial year 2025, India received manufacturing-related foreign direct investment worth approximately US$ 184.2 billion, a clear sign of growing investor confidence. In sectors such as defence manufacturing, the government raised the automatic route limit for foreign direct investment from 49 percent to 74 percent in May 2020, opening the door to greater capital inflows into a traditionally protected sector.
The Production-Linked Incentive scheme, introduced from 2020 onward, marked a shift toward targeted, outcome-based support, offering financial incentives across fourteen key sectors including electronics, pharmaceuticals, telecom equipment, and textiles, based on incremental sales rather than one-time capital subsidies. This was complemented by the National Logistics Policy of 2022 and the expansion of the campaign into what is now termed Make in India 2.0, which spans twenty-seven sectors and places a much sharper focus on frontier technologies such as artificial intelligence, robotics, digital twins, and advanced materials.
The Union Budget for 2026-27 has taken this step further by shifting from episodic, scheme-based incentives toward what officials describe as ecosystem-driven capacity creation. It earmarks substantial new outlays for strategic and frontier sectors: a scheme named Biopharma SHAKTI with an outlay of approximately US$ 1.2 billion over five years to build a domestic ecosystem for biologics and biosimilars, an expanded India Semiconductor Mission focused on indigenous chip design and equipment manufacturing, and a near doubling of support for electronics components manufacturing to roughly US$ 4.7 billion. The budget also introduces a Small and Medium Enterprise Growth Fund worth about US$ 1.2 billion, alongside a top-up of nearly US$ 235 million to the Self-Reliant India Fund, both aimed at helping small manufacturers scale into larger, competitive enterprises. Recognizing that small and medium manufacturers form the backbone of industrial supply chains, the government has also made the Trade Receivables Discounting System, a platform that allows businesses to convert unpaid invoices into immediate cash, mandatory for all public sector purchases from such enterprises.
On the infrastructure side, the budget prioritizes new dedicated freight corridors, the operationalization of twenty additional National Waterways over five years, and the revival of two hundred legacy industrial clusters to spread manufacturing growth beyond metropolitan corridors into smaller towns. Overall capital expenditure has been raised to roughly US$ 143 billion from about US$ 131 billion in the previous year, underlining the state’s commitment to building the physical backbone that private manufacturing investment requires.
Key Challenges Holding Back Manufacturing Growth
Despite this policy’s momentum, several structural constraints continue to hold the sector back. Logistics costs remain comparatively high; while some government assessments suggest costs have eased toward roughly 8 percent of Gross Domestic Product, other official estimates place the figure closer to 12 percent, both well above the levels seen in competing manufacturing economies. Either way, the gap continues to erode the price competitiveness of Indian-made goods in export markets.
Research and development spending is another weak link. India invests only about 0.7 percent of its Gross Domestic Product in research and development, compared with roughly 2.4 percent in China and 3.5 percent in the United States. This shortfall limits India’s ability to move beyond assembly-stage manufacturing into higher-value, technology-intensive production, and it is reflected in India’s ranking of around fortieth place on the Global Innovation Index.
Access to formal credit remains a persistent constraint, particularly for micro, small, and medium enterprises, which form the bulk of India’s industrial base. As of the financial year 2021, only about 19 percent of the credit demand from such enterprises was being met through formal channels, leaving a financing shortfall estimated in the hundreds of billions of US dollars. This forces many smaller manufacturers to depend on expensive informal lending or to postpone investment in modern equipment altogether.
Workforce skilling presents an equally pressing challenge. Only around 4.7 percent of India’s total workforce has undergone formal skill training, compared with approximately 96 percent in South Korea and 80 percent in Japan. Even well-intentioned programmes such as Skill India have struggled to keep pace with the demands of modern manufacturing, particularly in emerging fields such as robotics, automation, and artificial intelligence-enabled production.
Finally, India’s own history of protectionist policy, while intended to nurture domestic industry, has at times discouraged the kind of two-way trade integration that mature manufacturing economies rely upon. A degree of continued reform in tariff structures and trade facilitation will be necessary to ensure Indian manufacturers remain plugged into, rather than isolated from, global value chains.
The Global Opportunity: India as an Alternative Manufacturing Hub
Global trade tensions and rising tariffs on Chinese exports, particularly those imposed by the United States, have accelerated a broader corporate strategy of diversifying manufacturing bases away from a single country. Several major global companies, including well-known names in electronics and consumer technology, have already begun shifting portions of their production to India, with some projections suggesting that a significant share of smartphones sold in the United States could eventually be assembled in Indian factories. This diversification trend, often referred to as a China Plus One strategy, favors India because of its large and youthful labour force, its improving infrastructure, and its expanding domestic market, which offers manufacturers both production capacity and a growing base of consumers.
At the same time, officials within India’s foreign policy establishment have stressed that the country cannot rely on favorable global conditions alone. As a senior Ministry of External Affairs official noted at a public forum on July 28, 2025, India must build its own robust supply chains rather than depending entirely on external partnerships, since doing so is essential to sustaining growth rates high enough to meet the goal of becoming a developed economy by 2047. This underscores that while global supply chain realignment presents an opening, India’s ability to capture it will depend on its own preparedness in infrastructure, skilling, and technology absorption.
The Road Ahead: Measures Needed to Strengthen Manufacturing
Sustaining momentum will require India to move beyond assembly-stage manufacturing toward deep-tier component production, particularly in specialized chemicals, precision machinery, and advanced metallurgy, where import dependence remains high. This can be supported by developing dedicated industrial clusters equipped with pre-cleared environmental approvals, reliable green energy supply, and shared effluent treatment facilities, reducing the time and cost burden on individual manufacturers.
Equally important is the adoption of Industry 4.0 technologies, including industrial sensors, predictive analytics, and automation, across small and medium manufacturing clusters through shared digital infrastructure hubs that make expensive computing and machinery accessible on a pay-per-use basis. Expanding formal credit access through alternative financing mechanisms, including cash-flow-based lending built on digital tax and transaction data, would help resolve the working-capital constraints that continue to hold back smaller manufacturers.
On skilling, a fundamental restructuring of vocational training is needed, with industry playing a much larger role in co-designing curricula for Industrial Training Institutes and apprenticeship programmes, particularly in emerging domains such as robotics and additive manufacturing. Finally, as global markets increasingly factor in carbon intensity when assessing trade partners, India’s manufacturing growth must be paired with a genuine shift toward cleaner production methods, positioning Indian industry as a sustainable and reliable alternative for global buyers seeking to diversify their supply chains.
Conclusion
India’s ambition to become a US$ 35 trillion economy by 2047 cannot be realised through services growth alone. Manufacturing offers the surest route to broad-based job creation, reduced import dependence, and technological depth, all of which are essential for a nation of India’s size and demographic profile. The policy architecture built over the past three decades, from liberalisation and the Goods and Services Tax to Make in India, the Production-Linked Incentive scheme, and the ecosystem-driven approach of the Union Budget 2026-27, provides a credible foundation. What remains is the harder task of execution: lowering logistics costs, closing the research and development gap, widening credit access for small enterprises, and building a workforce equipped for modern factories. If India can address these structural gaps with the same urgency it has shown in policy design, it stands a genuine chance of transforming its economy from one led by consumption and services into one anchored by a strong, technologically advanced, and globally competitive manufacturing base.
