India’s Manufacturing Sector

Why India’s Manufacturing Sector Remains Stuck Below 17% of GDP

As of 2025, manufacturing contributes just 16.5% to India’s GDP—a figure modestly up from the 13.7% recorded a decade ago. Compare that to China: manufacturing added 28.7% to its GDP in 2025, supported by robust infrastructure, streamlined regulation, and cohesive industrial policy targeting scale economies. Despite aggressive pushes like the Production-Linked Incentive (PLI) scheme and the recently unveiled National Manufacturing Mission, India’s path toward industrial leadership remains riddled with bottlenecks. The question is no longer whether India has ambitions—it clearly does—but whether these ambitions are supported by institutional capacity and an economic strategy that reconciles structural flaws at their source. The real concern lies in execution.

The Institutional Framework: Policies and Initiatives in Focus

India’s manufacturing sector operates on a complex policy base anchored in schemes like PM MITRA Parks (Promoted Mega Integrated Textile Regions and Apparel), the Gati Shakti National Master Plan for logistics, and targeted incentives under PLI programs for 14 sectors, including electronics, automotive, and pharmaceuticals. The strategic pivot is unmistakable: scaling domestic production, cutting supply-chain inefficiencies, and creating jobs. Notable budgetary announcements include allocations for clean-tech manufacturing under the National Manufacturing Mission. This mission, introduced in the Union Budget 2025–26, integrates policy frameworks for green hydrogen, EV batteries, and solar photovoltaics.

On institutional actors, the responsibility for implementation falls across multiple ministries—the Ministry of Heavy Industries, Ministry of Commerce and Industry, and NITI Aayog—but coordination remains uneven. For example, delays under PM Gati Shakti suggest the Ministry of Road Transport and Highways often struggles to synchronize efforts with state infrastructure projects. This fragmented governance risks undermining flagship ambitions.

Where Policy Meets Ground Reality

The headline numbers obscure deeper dysfunctions. Manufacturing employs merely 11.4% of India’s workforce, with informal jobs dominating the sector. Productivity per Indian manufacturing worker remains abysmal—less than 20% of their Chinese counterparts, according to CMIE data. Small-scale units, often reliant on old machinery with limited automation, survive but do not thrive. Vocational programs such as Skill India Mission claim progress in training youth for Industry 4.0 technologies. However, industry feedback consistently highlights skill mismatch, particularly in precision engineering and robotics.

Infrastructure is another glaring weakness. Logistics costs amount to 14–18% of product value in India versus 8% in East Asia. While the Gati Shakti Master Plan aims to bridge this gap, execution delays dilute the benefits. Port connectivity in key industrial clusters remains inadequate; earlier ambitions tied to Sagarmala projects failed to meaningfully resolve bottlenecks.

“India’s manufacturing suffers less from a lack of policy and more from sporadic, shallow execution—a mismatch between vision documents and real-world results.”

The Structural Bottlenecks Holding Back Scale

The root causes extend to issues of land acquisition, regulatory complexity, and domestic demand constraints. Setting up a large industrial facility in India still takes 3–5 years, compared to 18 months in Vietnam. Labour laws have seen gradual liberalization, but persistent entry barriers discourage new investments. Transitions toward large-scale, formal manufacturing remain slow.

Add to this India’s reliance on imported intermediate goods, which weakens domestic supply chains. In sectors like electronics, over 60% of components are imported, raising costs and dependence. Without a deeper push for indigenous design and manufacturing ecosystems, the PLI schemes risk becoming subsidies for assembly industries.

International comparisons amplify concerns. Vietnam, with a manufacturing-heavy export profile, has leveraged free trade agreements, competitive logistics, and simplified land acquisition frameworks to position itself as a global supplier, particularly in electronics and apparel. India’s policies are aspirational but lack Vietnam’s speed and sharp execution.

Policy-Induced Dutch Disease: A Legacy Impact?

India offers a nuanced example of Dutch Disease driven by public sector dynamics rather than resource booms. Over decades, high government salaries pulled labor away from manufacturing, driving up wage expectations across the economy. Combined with real exchange rate pressures, this policy-induced distortion made domestic manufacturing less competitive globally. Public sector crowds matter in economic outcomes.

The irony here is that attempts to promote services—Internet technology, outsourcing—outpaced efforts to industrialize. The premature leap into services not only bypassed large-scale manufacturing but created skill and capital mismatches in the economy that are still hard to reverse.

What India's Success Would Look Like

If India’s manufacturing ambitions are realized—a target GDP share of 25% by 2047—it would require a quantum shift in employment, productivity, and R&D. Key metrics to watch include formal employment share (currently 11.4%), logistics costs (targeting under 10% of product value), and R&D spending (aiming to breach 1.5% of GDP).

NITI Aayog’s roadmap emphasizes Industry 4.0 adoption, green manufacturing aligned with net-zero commitments, and cluster development modeled on Tamil Nadu’s automobile hubs. But success depends on closing institutional gaps: Centre-State coordination on industrial land, streamlined approvals for new projects, and tighter vocational-industry links.

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