India’s Manufacturing Revival: From Capacity Creation to Global Capability

India’s Manufacturing Revival: Ambition Meets Structural Constraints

India’s manufacturing sector, buoyed by global supply chain shifts and domestic policy support like the Production-Linked Incentive (PLI) schemes, is poised to transition from capacity creation to capability building. However, this optimism masks deeper structural flaws—fragmented industrial clusters, inconsistent regulations across states, and low technology adoption—that threaten the sector’s long-term sustainability.

The Institutional Landscape: Policies and Frameworks at Play

The government’s flagship schemes such as Make in India and PLI have been designed to attract foreign investment, incentivise manufacturing, and embed Indian firms into global value chains. For instance, the PLI scheme for electronics manufacturing promises incentives amounting to Rs. 40,000 crore over its implementation period. Complementary initiatives like PM Gati Shakti and the National Logistics Policy aim to address infrastructure bottlenecks, with logistics costs now at 7.97% of GDP as of FY 2023–24, close to global benchmarks. However, these successes remain patchy and limited to select sectors such as electronics, pharmaceuticals, and automobiles.

Legal frameworks such as the Labour Codes promise simplification but face uneven implementation across states. Similarly, the institutional focus on MSMEs—via schemes like the Credit Guarantee Fund Scheme—aims to ensure affordable financing, yet a significant portion of MSMEs remains excluded from formal credit channels. The National Manufacturing Mission, recently proposed, envisions aligning incentives, infrastructure, and innovation for systemic transformation, but its success will hinge on bridging institutional gaps.

Structural Deficits in India’s Manufacturing Ambitions

India’s manufacturing share in GDP stagnates at 15–17%, far below China’s 27% or South Korea’s 26%. The NITI Aayog’s manufacturing competitiveness report acknowledges the deficit in R&D funding, which is less than 0.7% of GDP compared to South Korea’s 4.5%. This technological lag limits India’s entry into high-value, complex products like precision instruments or advanced machinery. For example, despite success in electronics manufacturing, key components such as semiconductors still rely heavily on imports, revealing underinvestment in domestic capacity for critical technologies.

Infrastructure inefficiencies compound the problem. As the Economic Survey FY 2025–26 notes, coastal shipping and rail carry only 35% of India’s freight at long distances, compared to 70% in the EU, underscoring high-cost road dependence. Furthermore, uneven last-mile connectivity and port congestion add significant costs for manufacturers. State-level variations in power tariffs, labour laws, and land acquisition processes create hurdles for pan-India investment projects, with states such as Tamil Nadu outperforming laggards like Uttar Pradesh in industrial growth.

The Underutilisation of MSMEs and Fragmented Clusters

MSMEs contribute 45% to exports but face barriers to scaling. Despite SAMARTH and skill-development initiatives, labour shortages persist as skilling systems ignore advanced manufacturing technologies. Textiles, though labour-intensive, struggle to compete against Bangladesh and Vietnam due to fragmented industrial clusters, which limit economies of scale and infrastructure synergy.

Similarly, regulatory uncertainty—highlighted by frequent policy shifts at state levels—discourages firms from long-term investments. As the Standing Committee on Industry (2026) reports, inconsistent enforcement of Quality Control Orders (QCO) for MSMEs raises compliance costs without enabling competitive advantages.

Counter-Narrative: A Comparative View

India’s defenders argue that its democratic framework naturally complicates uniform regulations, but they underestimate the harmonisation seen in other federal democracies. Germany, for example, uses a robust model of cooperative federalism to align state and federal industrial policies under shared frameworks. This enables seamless transitions across sectors like automobile manufacturing, where Germany consistently competes globally while maintaining high labour standards.

Critics might also point out the success of India’s electronics manufacturing surge—exports grew eight-fold in a decade. However, these gains remain concentrated in basic assembly work rather than core technological innovation. India risks becoming an “assembly hub” rather than a technology powerhouse unless its manufacturing strategy evolves beyond incremental incentives.

International Comparison: Lessons from China’s Strategic Precision

China’s rise in manufacturing was meticulously planned over decades, focusing simultaneously on local value chains and global competitiveness. Its Made in China 2025 programme prioritises subsidised R&D, skilled manpower, and technological autonomy. Unlike India, which allocates only 2% of PLI funds to R&D, China spends over three times more on fostering innovation. India must learn from this model, shifting attention from capacity to capabilities—particularly in areas like green hydrogen equipment and semiconductors.

Assessment: Charting the Way Forward

Where does India’s manufacturing revival leave us? The sector shows promise but remains vulnerable to old structural weaknesses—uneven state-level reforms, fragmented clusters, and underwhelming technological depth. To compete globally, India needs coherent policies beyond short-term incentives. Critical steps involve scaling R&D investment to at least 2% of GDP, strengthening industry-academia linkages through initiatives like sectoral innovation hubs, and ensuring state-level policy harmonisation under NITI Aayog’s manufacturing roadmap.

Realistically, progress will require bold reforms at the state level, such as land banking for industrial zones and transparent power tariffs. These incremental efforts must align with ambitious goals—building sectors like green energy and semiconductors into globally competitive industries. The task is urgent but achievable.

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