India’s Manufacturing Sector, Growth, Challenges, and Opportunities

Context: The innovation-driven, high-tech manufacturing, fueled by R&D and advanced skills, and current high tariffs demand a manufacturing reset, requiring policies that directly confront the challenges.

India’s Manufacturing Sector Growth and Performance: Insights from ASI 2022-23

Impressive Sectoral Growth

Manufacturing output grew by 5% in 2022-23, with GVA increasing by 7.3%.

• PLI-covered sectors like basic metals, petroleum products, food products, chemicals, and motor vehicles contributed 58% to total manufacturing output, registering an output growth of 5%.
• The recovery from the COVID-19 pandemic disruptions is evident, with performance surpassing pre-pandemic levels.

PLI Scheme Impact

The PLI scheme has enhanced productivity in sectors such as:

• Mobile manufacturing
• Electronics
• Automobiles
• Pharmaceuticals
• Textiles

This scheme underscores India’s ability to align policy support with industrial growth.

Why India Needs to Reset Its Manufacturing Sector

• Lagging Manufacturing Productivity: India’s per capita value added in manufacturing is $0.32K vs global average of $2K.
  • Productivity is $8.9K vs $32K global average (World Bank, 2023).
• Global Shift Toward High-Tech Manufacturing: Global trade is moving toward innovation-driven, medium- and high-tech sectors (e.g., semiconductors, robotics).
  • India risks missing the bus if it doesn’t catch up in R&D and skills.
• Over-reliance on Services Sector: India’s economic growth is service-heavy, while manufacturing’s contribution to GDP is stagnant (~16-17%).
  • This limits employment generation and resilience.
• Strategic Concerns in Global Supply Chains: Geopolitical shifts (e.g., US-China tariffs) are reorganising supply chains.
  • India must reposition itself as a reliable manufacturing base.

Key Concerns Hindering India’s Manufacturing Sector Growth

• Low Investment in R&D: India’s R&D expenditure is just 0.65% of GDP, compared to 2–4% in industrial economies.
• Weak Industry-Academia Linkages: Engineering institutions focus on grades and theory, not on practical innovation or industry problems.
• Skill Mismatch: Lack of alignment between technical education and industry needs, especially in core engineering skills.
• Inadequate Infrastructure: Delays in industrial park development, high logistics costs, and a lack of plug-and-play facilities.
• Policy Gaps: Existing schemes like Make in India and PLI have limited coverage and uneven implementation across states and sectors.

Challenges in India’s Manufacturing Sector

• Rising Input Costs: Input prices surged by 4% in 2022-23, leading to a notable gap between output growth (21.5%) and GVA growth (7.3%).
  • Import dependency for raw materials exacerbates the cost pressures.
• Regional Imbalances: Industrial activity is concentrated in five states — Maharashtra, Gujarat, Tamil Nadu, Karnataka, and Uttar Pradesh — which collectively account for:
  • 54% of total manufacturing GVA
  • 55% of employment
  • Other regions lag in development, limiting nationwide manufacturing growth.

Opportunities for Growth and Expansion of Manufacturing Sector

• Extending PLI Coverage: Labour-intensive sectors such as apparel, leather, footwear, and furniture can benefit from PLI expansion.
  • Sunrise industries like aerospace, space technology, and Maintenance, Repair, and Overhaul (MRO) hold immense growth potential.
  • Focus on capital goods to reduce import dependency and promote domestic capabilities.
• Boosting MSMEs: MSMEs contribute 45% of India’s manufacturing GDP and employ 60 million people.
  • Tailoring PLI incentives for MSMEs by lowering capital investment thresholds and production targets could enable better integration into value chains.
• Increasing Women’s Workforce Participation: Women’s participation in manufacturing could boost output by 9% (World Bank estimate).
  • Infrastructure development near factories, such as hostels, dormitories, and childcare facilities, is essential to enhance inclusivity.
• Promoting Green and Advanced Manufacturing: Encouraging green manufacturing and R&D in advanced technologies can enhance sustainability and competitiveness.

Policy Recommendations for Overcoming Challenges

• Addressing Input Costs: Simplify import tariffs into a three-tier system:
  • 0-2.5% for raw materials
  • 5-5% for intermediates
  • 5-7.5% for finished goods
  • This strategy could reduce input costs, enhance competitiveness, and improve integration into global value chains.
• Reducing Regional Imbalances: Encourage state-level participation in implementing reforms related to land, labour, power, and infrastructure.
  • Invest in underdeveloped regions to balance industrial growth.
• Improving Ease of Doing Business: Streamline regulatory frameworks to attract domestic and foreign investments.
  • Reduce the cost of doing business to enhance global competitiveness.

Future Prospects: Towards a Developed Economy

• With sustained efforts, the manufacturing sector’s share in GVA could rise:
  • From 17% currently to 25% by 2030-31.
  • Further to 27% by 2047-48, aligning with India’s vision of becoming a developed economy.
• The sector’s transformation will require leveraging policy initiatives like the PLI scheme, fostering inclusivity, and enhancing domestic capabilities.

What Needs to Be Done for India’s Manufacturing Sector

• Increase R&D Spending: Raise R&D investment to 2% of GDP.
  • Promote mission-based R&D hubs for manufacturing technologies.
• Reform Engineering Education: Focus on practical training, product design, and prototyping.
  • Redesign the entrance and graduation systems to foster creativity and problem-solving.
• Build Advanced Manufacturing Ecosystems: Develop state-specific manufacturing clusters with in-house prototyping, testing, and design labs.
  • Encourage manufacturing-focused startups with access to toolrooms and workshops.
• Strengthen Core Engineering Sectors: Prioritise traditional sectors like civil, mechanical, chemical, metallurgy, etc., alongside AI and electronics.
• Industrial Infrastructure Investment: Allocate 1% of GDP for developing plug-and-play industrial parks, logistics, and certification labs.
• Policy Innovation and Monitoring: Tailor policies to specific sectors and geographies; ensure real-time feedback and coordination between the centre and states.

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