Revamping India’s Manufacturing Sector

This editorial is based on “Keeping India open and secure” which was published in The Financial Express on 15/01/2026. The article argues that India’s manufacturing growth depends on openness to imports, global capital, and technology, alongside strong protection of strategic sectors. It calls for replacing blanket restrictions like Press Note 3 with a transparent, risk-based investment screening system to boost exports.

For Prelims: Make in India, PLI Scheme,MSME Sector,Manufacturing Sector, FDI, Index of Industrial Production,Global Value Chain,Disguised Unemployment  

For Mains: Manufacturing sector current status and development, key issues and measures. 

India is reviewing its Foreign Direct Investment (FDI) framework, especially Press Note 3 (PN3), to support manufacturing exports in electronics, automobiles, and renewables. Export competitiveness depends on importing intermediate and capital goods like integrated circuits and batteries. Recent reforms like Goods and Services Tax (GST) rationalisation, removal of Quality Control Orders (QCOs), and new Labour Codes, point towards a risk-based FDI screening system. However, weak component ecosystems, and regulatory uncertainty continue to constrain manufacturing growth. Addressing these gaps is crucial to make India a globally competitive manufacturing hub.  

What are the Current Trends in India’s Manufacturing Sector?  

• Share in GDP and Output Trends: Manufacturing contributes about 16–17% of India’s GDP and has regained momentum after a weak FY24. The sector remains central to India’s medium-term goal of raising manufacturing to 25% of GDP. 
  • As per Ministry of Statistics and Programme Implementation, manufacturing GVA growth accelerated in FY25 compared to FY24, driven by automobiles, electronics, and capital goods. 
• Industrial Production Trends: Manufacturing output has strengthened, reflected in a sustained expansion in industrial production and improved capacity utilisation levels.  
  • Driven by 8.0% growth in the manufacturing sector, Index of Industrial Production (IIP) recorded a 6.7 % year-on-year growth in November 2025 
  • According to RBI’s 65th round of OBICUS survey, capacity utilisation of manufacturing companies inched up to 76.8% in the quarter ended March 2024 from 74.7% recorded in the December 2023 quarter. 
• Manufacturing PMI Trends: The strong performance of the manufacturing sector was reflected in the HSBC India  Manufacturing PMI (Purchasing Managers' Index). 
  • India’s manufacturing PMI has consistently remained in the expansion zone (above 50), signalling broad-based improvement in new orders, output, and employment. This reflects both domestic consumption recovery and export-linked orders. 
  • The PMI rose from 58.4 in June 2025 to 59.1 in July 2025. This indicates the fastest improvement in manufacturing conditions in more than 17 years, showing robust growth in output and demand. 
• Export Trends: Manufacturing exports are shifting towards higher-value segments, especially electronics, pharmaceuticals, and automobiles, strengthening India’s role in global value chains. Export resilience has cushioned external shocks. 
  • For instance, Electronics exports grew eight times from ₹38,000 crore to ₹3.27 lakh crore during FY 2024–25, led by mobile phone manufacturing clusters in Tamil Nadu and Uttar Pradesh, under the PLI scheme.

Press Note 3 (2020). 

• About: To prevent opportunistic takeovers of Indian companies during the COVID-19 crisis, the Government introduced Press Note 3 (2020) in April 2020. 
  • Under this rule, any investment from countries sharing a land border with India, or where the beneficial owner is from such countries, can be made only through the Government approval route, not automatically. 
  • The rule also applies retrospectively: if ownership of an existing or future foreign investment changes and the beneficial owner falls under this category, fresh government approval is mandatory.  
  • Press Note 3 was enforced through amendments to FEMA rules, making violations punishable under law, with enforcement by the RBI and the Directorate of Enforcement. 

What Major Reforms are Shaping India’s Manufacturing Sector? 

• Rising Manufacturing Growth with Make in India and PLI Scheme: Make in India shows positive recent trends with record FDI, significant growth in electronics/auto sectors and successes in defence & pharma, boosting self-reliance and job creation, 
  • Under PLI, sectors like electronics, medical devices, and automobiles have seen measurable growth in production and employment supporting India’s exports and reducing reliance on imports. 
    • The scheme has catalysed massive manufacturing expansion, attracting nearly ₹2 lakh crore in realised investments across 14 priority sectors as of late 2025.  
    • For instance, domestic production of Mobile phones increased from ₹18,000 crore in 2014–15 to ₹5.45 lakh crore in 2024–25, a 28-fold rise. 
  • Also, India launched the National Manufacturing Mission (NMM) in the 2025-2026 Union Budget, a significant initiative to boost India's manufacturing growth. 
• Operationalisation of the 4 Labor Codes: The historic implementation of the four Labor Codes in late 2025 has replaced a fragmented colonial-era framework with a unified compliance regime.  
  • This allows manufacturers the flexibility to adjust workforce size based on global demand cycles (Fixed Term Employment) while ensuring a universal safety net, effectively removing the "fear of scaling" that plagued Indian MSMEs for decades. 
  • For instance, for the first time in the country, social security benefits have been extended to unorganised, gig and platform workers under Sections 113 & 114 of the Code on Social Security, 2020.. 
• Policy Relaxations to Boost Foreign Investment: The government is recalibrating strategic sector policies to attract global capital. For instance, The Government of India increased FDI in the defence sector by liberalizing it to 74% through the automatic route and 100% through the government route. 
  • This is intended to strengthen domestic production with advanced technology and scale manufacturing capacities. 
  • Overall, government data shows that Foreign Direct Investment (FDI) equity inflows into manufacturing rose by 69%, increasing from ₹8.37 lakh crore (US$ 97.7 billion) in 2004–14 to ₹14.15 lakh crore (US$ 165.1 billion) in 2014–24. 
• Semiconductor Commercialisation & Sovereignty: 2025 marked the graduation of the India Semiconductor Mission (ISM) from "policy" to "production."  
  • The strategic shift is to decouple from Chinese supply chains by establishing a domestic fab ecosystem.  
    • This move is critical not just for electronics but for "future-proofing" the auto and defense sectors against global chip shortages.  
  • For instance, As of August 2025, India has approved 10 semiconductor projects across six states with cumulative investments of ₹1.60 lakh crore. 
    • Also, four major units (Tata Electronics, Micron, CG Power, Kaynes) are set to begin commercial production in 2026.  
• Logistics Optimisation via  PM Gati Shakti: The "Gati Shakti" platform has successfully broken departmental silos, allowing for multimodal connectivity that drastically lowers transit times.  
  • By integrating railways with ports and roads, the structural disadvantage of high logistics costs, which previously made Indian exports more expensive than Vietnam’s, is being neutralized.  
  • For example, India's logistics cost has dropped to 7.97% of GDP(down from 14%). Also, 118 Gati Shakti Cargo Terminals were commissioned by late 2025 to facilitate seamless rail-freight movement. 
• MSME Formalisation via Digital Public Infrastructure: The integration of MSMEs into the formal economy is being driven by the "Digital Public Infrastructure" model (ONDC + Udyam). By democratizing access to markets and credit, small manufacturers are being pulled out of the "dwarfism" trap, allowing them to supply directly to large global OEMs without expensive intermediaries.  
  • For instance, over 5.70 crore MSMEs are registered on the Udyam Registration and Assist Platforms as of June 2025. 
  • Also, Raising and Accelerating MSME Performance (RAMP) Scheme, a World Bank-supported Indian government program with a ₹6,062.45 crore outlay, aiming to boost the Micro, Small & Medium Enterprises (MSME) sector's growth, market access, finance, technology. 
• Defense Indigenisation & Export Surge: The aggressive notification of "Positive Indigenisation Lists" has effectively ring-fenced the domestic market, forcing foreign OEMs to form Joint Ventures for local production rather than direct sales.  
  • This structural protection has allowed private players to mature from component suppliers to full-system integrators, reducing import dependency significantly while opening global export markets. 
  • Record defence production hit ₹1.54 lakh crore in FY25, with exports reaching an all-time high of ₹23,622 crore. 
• Bio-Manufacturing Revolution (BioE3 Policy): The rollout of the BioE3 Policy (Biotechnology for Economy, Environment and Employment) positions India to lead the "Green Industrial Revolution" by replacing petrochemical-based manufacturing with bio-based alternatives. It creates a new industrial vertical by integrating high-performance biomanufacturing with AI to produce sustainable chemicals, smart proteins, and materials. 
  • The policy focuses on 6 thematic sectors including bio-chemicals and functional foods. The government is setting up Bio-AI hubs and Biofoundries to scale lab-innovations to commercial production. 
• Regional and State-Led Industrial Growth Initiatives: States are driving strategic manufacturing zones and export clusters to decentralise and scale industrial development, supporting MSMEs and larger manufacturers alike. 
  • Gujarat’s Saurashtra region is being developed into a multi-sector manufacturing and export zone, integrating clusters in ceramics, automotive parts, and defence manufacturing. 
  • In addition,state-level business and investment summits such as Vibrant Gujarat and Global Investors Summits have facilitated large MoUs, accelerating factory establishment and capacity expansion.

What are the Key Issues Associated with India's Manufacturing Sector? 

• Low Share in GDP and Global Manufacturing: Despite sustained reforms and growth, India’s manufacturing sector has failed to expand beyond 16–17% of GDP.  
  • Unlike China or Vietnam, India has not achieved the Lewis turning point, as surplus labour continues to remain trapped in agriculture or informal services rather than being absorbed into productive manufacturing.  
    • Also, India holds only 2.8% of the global manufacturing share, compared to China's dominant 28.8%. 
  • Agriculture continues to absorb about 42–45% of the workforce while contributing only ~15% of GDP, indicating large-scale disguised unemployment, yet manufacturing employs merely ~11–12% of workers, far below the levels seen in East Asian economies at comparable stages of development 
• High Import Dependence for Critical Inputs: India’s manufacturing is weakened by deep dependence on imported intermediate and capital goods, especially in high-tech segments such as electronics and semiconductors, because domestic industry has yet to build the upstream inputs that add value and reduce vulnerability.  
  • In FY 2023-24, India’s total imports of electronic components reached about $34.4 billion, with over $12 billion coming directly from China and another $6 billion from Hong Kong, together supplying more than half of these critical parts used in “Made-in-India” products like smartphones and TVs—despite local assembly growth. 
  • Further Semiconductor imports remain very high, with chips worth over ₹1 lakh crore imported in 2021–22, highlighting India’s near-total dependence on external fabrication ecosystems.  
• The MSME "Missing Middle”: India’s manufacturing suffers from a persistent scale deficit rooted in the structure of its MSME sector, where over 95% of manufacturing enterprises are micro or small units, many operating informally and below efficient scale. 
  • In contrast, East Asian manufacturing clusters, most notably in China—are characterised by dense networks of scaled firms, specialised suppliers, shared infrastructure, and patient credit, allowing even smaller firms to benefit from agglomeration economies. 
• Logistics and Infrastructure Bottlenecks: India’s manufacturing competitiveness has long been eroded by logistics and infrastructure inefficiencies, but recent reforms have only partially closed the gap rather than eliminated it.  
  • Although India’s logistics costs have fallen from 13–14% of GDP to around 7.97%, multi-modal connectivity remains weaker than best-practice economies like South Korea. 
  • This results in longer port delays, higher inventory costs, and weaker reliability for time-sensitive exports, reducing India’s competitiveness in just-in-time global value chains. 
• Skill Mismatch and Labour Productivity: India’s manufacturing paradox lies in abundant labour but uneven skills and low shop-floor productivity, reflecting a gap between workforce availability and industrial requirements.  
  • Although India produces millions of workers annually, less than 5% of the workforce has received formal vocational or technical training, compared to over 50% in countries like South Korea and Germany.  
  • As a result, advanced manufacturing segments such as electronics, precision engineering, and semiconductor packaging frequently depend on foreign technicians, expatriate supervisors, or costly in-house retraining, raising production costs and slowing scale-up.  
• Regulatory Uncertainty and Policy Overhang: India’s manufacturing investment climate continues to be weighed down by regulatory uncertainty and policy overhang, where frequent rule changes, layered approvals, and discretionary clearances raise the cost of committing long-term capital.  
  • This is evident from Press Note 3 (2020), which mandates prior government approval for FDI from land-bordering countries.  
  • While aimed at national security, opaque approvals taking 6–12 months have delayed investments even in low-risk sectors like auto components, renewables, and electronics ancillaries embedded in global supply chains. 
• Carbon Border Risks (The Green Wall): The sector’s heavy reliance on coal-fired power makes Indian exports vulnerable to "Green Protectionism" like the EU’s Carbon Border Adjustment Mechanism (CBAM).  
  • As Western markets tax "embedded carbon," India’s cost advantage in steel, aluminium, and cement is rapidly eroding against green-powered competitors.  
  • For instance, although India's CBAM-exposed exports to the EU account for only 0.2% of its GDP, the iron and steel sector constitutes 90% of these exports, which can be heavily impacted. 
• Technology and R&D Gaps: India’s manufacturing ascent is constrained by a persistent technology and R&D gap. India’s R&D expenditure remains below 1% of GDP (~0.7%), compared with over 2–3% in advanced industrial economies such as South Korea and Japan.  
  • Also, Indian manufacturing accounts for a small share of global patents, limited proprietary designs, and weak standards leadership, forcing firms to compete at the lower rungs of global value chains.

What Measures are Needed to Strengthen the Manufacturing Sector ?  

• Deepen Domestic Value Chains and Technological Capabilities: India must correct the structural weakness of assembly-led manufacturing by building depth in upstream segments such as components, materials, tooling, and capital goods.  
  • Without domestic ecosystems for semiconductors, power electronics, precision machinery, and industrial inputs, manufacturing remains exposed to import shocks and captures only thin margins.  
  • Incentive regimes like PLI should therefore be conditional on verifiable increases in local value addition, supplier indigenisation, and technology absorption, rather than gross output.  
• Overcome the “Missing Middle”: Manufacturing competitiveness requires fewer but stronger firms, supported through patient finance, cluster-based common facilities, and structured linkages with large anchor firms.  
  • Without enabling MSMEs to grow into globally competitive mid-sized manufacturers, India will continue to have many firms, but little industrial power. 
• Restore Manufacturing’s Employment-Generating Role: Manufacturing policy must explicitly confront the problem of job-light growth, where output expands without absorbing surplus labour.  
  • This requires prioritising labour-intensive and medium-skill segments such as components, food processing, light engineering, and industrial services, over excessively capital-intensive assembly.  
    • Employment outcomes should become a core metric of industrial policy success, not a by-product.  
• Shift Logistics Reform from Cost Reduction to Reliability: While headline logistics costs have declined, Indian manufacturing continues to suffer from unreliable delivery timelines, port congestion, and fragmented multimodal connectivity.  
  • For global manufacturers, predictability often matters more than average cost. Strengthening rail–road–port integration, reducing turnaround times, and ensuring digital coordination across logistics chains are essential to integrate Indian firms into just-in-time global value chains. 
• Close the Skill and Shop-Floor Productivity Gap: India’s labour abundance will not translate into manufacturing strength unless it is matched by consistent shop-floor skills, process discipline, and quality control capabilities.  
  • The focus must shift from short-term skilling targets to workplace-based learning, apprenticeship integration, and continuous upskilling, especially in advanced manufacturing segments. 
• Raise Industrial R&D and Innovation Intensity: Manufacturing cannot move up the value chain without sustained investment in applied R&D, product development, and process innovation.  
  • Public policy must crowd in private R&D by supporting industry–academia collaboration, shared testing facilities, and risk-sharing for early-stage industrial innovation. 
• Ensure Regulatory Predictability and Policy Credibility: Manufacturing investment depends as much on policy certainty as on incentives. Frequent regulatory changes, delayed approvals, and opaque decision-making raise the cost of long-term capital and encourage firms to defer or divert investments.  
  • National security–driven regulations must be accompanied by clear timelines, transparent criteria, and predictable processes, so that risk management does not become risk aversion.  

Conclusion: 

India’s manufacturing challenge lies in converting scale and incentives into deep capabilities, productive jobs, and technological self-reliance. A credible strategy must target raising expanding employment to around 18–20% of the workforce, reducing import dependence through higher local value addition, and lifting industrial R&D toward 1.5–2% of GDP. Only a shift from assembly-led growth to innovation- and productivity-driven manufacturing can deliver structural transformation, inclusive employment, and long-term economic resilience.

Drishti Mains Question

Despite multiple policy initiatives, manufacturing in India has remained stuck at around 16–17% of GDP.Examine the structural constraints limiting its role in employment generation and structural transformation.

FAQs

1. Why has manufacturing remained stuck at ~16–17% of GDP? 
Because growth has been assembly-led with weak domestic value chains, low R&D, and limited MSME scaling.

2. Why hasn’t manufacturing created enough jobs? 
Expansion has been capital-intensive and concentrated in few clusters, resulting in low employment elasticity.

3. What is the key MSME problem in manufacturing? 
Most MSMEs remain sub-scale and credit-constrained, preventing productivity gains and global competitiveness.

4. Why is import dependence a strategic concern? 
Heavy reliance on imported components limits value addition and exposes manufacturing to supply-chain and geopolitical risks.

5. What is the single most critical reform needed? 
Shifting from incentive-driven output growth to capability-driven manufacturing with jobs, technology, and scale. 

UPSC Civil Services Examination, Previous Year Questions (PYQs)  

Prelims 

Q. In the ‘Index of Eight Core Industries’, which one of the following is given the highest weight? (2015)

(a) Coal production  

(b) Electricity generation  

(c) Fertilizer production  

(d) Steel production  

Ans: (b)

---

Mains 

Q.1. “Industrial growth rate has lagged behind in the overall growth of Gross-Domestic-Product(GDP) in the post-reform period” Give reasons. How far are the recent changes in Industrial Policy capable of increasing the industrial growth rate? (2017)

Q.2. Normally countries shift from agriculture to industry and then later to services, but India shifted directly from agriculture to services. What are the reasons for the huge growth of services vis-a-vis the industry in the country? Can India become a developed country without a strong industrial base? (2014)