The India story: Progress in manufacturing sector but key challenges remain

The fourth part of the series assesses what it will take to encourage domestic manufacturing, while also being an alternative to China

To boost domestic factory production and capitalise on the global “China Plus One” strategy, which encourages multinational companies to reduce reliance on China, India needs a conducive ecosystem for manufacturing.  However, instead of becoming a hub of production and integrating with the global supply chain, the contribution of manufacturing to the Indian economy has been declining, despite initiatives like the National Manufacturing Policy (NMP) and Make in India.

 

A slow progress, though, is being made in select commodities, such as telecom handsets, in reducing imports and increasing exports.

 

Though the NMP was introduced in 2011 by the United Progressive Alliance (UPA), there were several earlier measures that aimed to boost manufacturing. For instance, the National Strategy for Manufacturing (2006) targeted raising the share of manufacturing in the gross domestic product (GDP), adopting best practices and production techniques, committing to skill development and knowledge enhancement, and increasing investment in research and development (R&D). This policy led to the creation of the National Manufacturing Competitiveness Council.

 

Attempts were also made to increase merchandise exports through various export-import (Exim) policies and special economic zones (SEZs), even though SEZs encompass both services and manufacturing. In fact, services exports have outperformed manufacturing in these zones. For instance, services exports through SEZs were over 50 per cent higher, at $25.4 billion, compared to $16.5 billion for manufacturing during the first quarter of the current financial year. 

 

The Make in India initiative, launched by Prime Minister Narendra Modi in September 2014, aimed to transform India into a global design and manufacturing hub. Its core objectives were to facilitate investment, encourage innovation, and develop world-class infrastructure.

 

The initiative, covering 14 manufacturing and 12 services sectors, is supported by major programmes like the Production-Linked Incentive (PLI) scheme, PM GatiShakti, the National Logistics Policy, and tax reforms such as the goods and services tax (GST).

 

The NMP had set a target to raise the share of manufacturing to 25 per cent by 2022. The initial deliberations on Make in India also spoke of this target, though the policy did not specify a percentage. 

ALSO READ PART I: The India story: 25 years of transformation in Indian tech landscape

 

However, this share has been declining over the past 14 years. Similarly, the compound annual growth rate (CAGR) of manufacturing has been falling during this period, even though the GDP’s CAGR has risen in the past four years compared to earlier periods since the turn of the century.  Volume growth in manufacturing has also been below the index of industrial production (IIP) over the past nine years.

 

When asked about this trend, former chief statistician Pronab Sen points out that the non-corporate or micro, small, and medium enterprises (MSME) segments of manufacturing are under stress. “They were badly hit by lockdowns during Covid andare still to recover fully,” he says. Sen explains that, by and large, manufacturing has also been impacted by changes in income distribution.

 

“The income of the lower middle class has grown at a slow pace, which has affected manufacturing,” he says. “The lower middle class consumes a higher proportion of manufactured goods than services, while it is the reverse for the upper classes. This reflects changes in income distribution over the past decade.” 

 

Manufacturing grew significantly until 2007-08, but the global financial crisis of 2008-09 hit it hard, and it has not regained strong momentum since, he says. 

ALSO READ PART II: The India story: Population explosion or declining fertility rate?

 

Naushad Forbes, co-chairman of Forbes Marshall and former president of the Confederation of Indian Industry (CII), says he is not overly concerned about the small decline in manufacturing’s share in GDP over the 25-year review period, from 2000 to 2024. However, he is more worried that its share has not increased.

 

He emphasises that the crucial issue is that enterprises should be investing in creating and expanding capacities. While a few large enterprises are doing this, many more should be investing, Forbes says.

 

Investments by enterprises, which were robust in recent years, have softened, he notes. "The key question is whether this is a temporary phenomenon or a deeper issue."

 

Vikash Thakur, associate director of entity setup and management at Nexdigm, a tax consulting and accounting firm, says the Make in India campaign primarily focuses on low-skill, low-value manufacturing, while competitive India faces increasing challenges from countries like Indonesia, Taiwan, Thailand, Vietnam, and Mexico.

 

"The China Plus One migration has led to significant investments moving to Mexico to cater to the US market," he says.

 

Sen says the PLI is an excellent scheme to incentivise goods exports, but exports have been subdued in recent times. 

ALSO READ PART III: The India story: How India, the 'bright spot', can continue to shine

 

However, companies have improved domestic manufacturing of specific items, such as handsets, taking advantage of the PLI scheme, which includes electronic components, active pharmaceutical ingredients, medical devices, automobiles and their components, speciality steel, air conditioners, LEDs, food products, and textiles.

 

According to a government statement, India is now the world’s second-largest mobile phone manufacturer (after China) and has significantly reduced its reliance on smartphone imports, producing 99 per cent domestically in 2023-24.

 

Driven by PLI, tech giant Apple’s iPhone production reached a freight-on-board (FOB) value of $10 billion in the first seven months of the current financial year, according to the Minister of Electronics and Information Technology Ashwini Vaishnaw.

 

India has transformed from a net importer to a net exporter of mobile phones. Domestic production grew from 58 million units in 2014-15 to 330 million units in 2023-24, with imports dropping significantly. Exports reached 50 million units during this period, according to another official statement.

 

The prime minister recently said that the PLI scheme has attracted investments worth Rs 1.25 trillion.

 

However, Forbes says that while the PLI focuses on specific sectors, India has largely benefitted from open market policies. He predicts that the US will remain open despite Trump’s presidency, which begins next year.

 

Thakur emphasises that to capitalise on China Plus One migration opportunities, India must address key challenges. He highlights the need to remove regulatory hurdles, continue with the PLI, introduce capital and tax incentives, and focus on high-value, high-margin products requiring advanced skills and technology.

 

He suggests that "rather than imitating China’s low-cost manufacturing model, India should carve out a unique path towards sustainable growth by prioritising innovation and value creation over cheap labour."

 

Ultimately, the path forward for India's manufacturing sector will require not just policy reform, but a shift towards innovation-led growth and global competitiveness.