India’s Manufacturing Push: Why Scale Still Eludes Us Ground realities vs policy ambition.

The Covid pandemic disruptions and export controls restrictions have significantly shifted the focus from purely efficient supply chain to supply chain having resilience prompting a move towards diversifying manufacturing away from China, often referred to as “China Plus One” or friendshoring realignment. The global imperative to diversify manufacturing bases has been met by India’s own proactive measures. The government has actively encouraged domestic production through significant financial incentives like 26 billion$ Production linked Incentives (PLI) Schemes, Electronic Manufacturing Clusters, and a massive semiconductor push. This strategy is clearly yielding results in some of the sectors. For example, Apple is rapidly scaling operations, and India now captures roughly a quarter of its global iPhone production.In absolute terms, Indian manufacturing generates over $400 billion in value. But a stubborn reality persists as the sector employs just 11% of the workforce and despite the influx of foreign capital and ambitious government policies, manufacturing’s share of GDP is stuck at 15 to 17 percent, well short of the 25% target envisioned under Make in India. We are inviting capital, but scale still eludes us.

 We cannot afford to skip the industrial phase. While High value services can be lucrative, they simply won’t be able to absorb the 45% of India’s workforce still dependent on agriculture. In fact, shifting millions of unskilled and semi-skilled workers into manufacturing jobs is the only mathematically viable way to meet the government ‘s ambitious target of doubling farmer incomes by pulling excess labor out of severe disguised unemployment in the agricultural sector. Beyond jobs, manufacturing also serves security and strategic autonomy purposes, like in critical minerals, semiconductor e.t.c. As External Affairs Minister S. Jaishankar underscored, “Supply chains are no longer just about economic efficiency; they are national security imperatives.” We cannot be held hostage by foreign monopolies for essential goods like APIs or semiconductors. India is uniquely positioned to execute large scale manufacturing. Domestically, we offer a massive demographic dividend, low wages that provide a distinct labor arbitrage advantage, and a vast internal market which allows scale. Globally, despite a volatile and often hostile geopolitical environment, the urgent need for supply chain diversification and friendshoring has made China increasingly risky for export oriented MNCs. This presents a critical, narrow window for an Indian labor intensive manufacturing boom.

The policy response, however, misdiagnoses the problem. While some macroeconomists argue we should lean into our comparative advantage of high-end services rather than making a forced attempt to achieve an industrial boom through state subsidies, government think tanks like NITI Ayog posited the PLI scheme in the sunrise sector as an important step in boosting manufacturing. PLI scheme successfully drives electronics exports, but it heavily subsidizes capital intensive, final stage assembly. As former RBI Governor Raghuram Rajan cautions, we are “subsidizing capital in a labor abundant country.” We are not putting much focus on the labor-intensive sectors like garments and footwear that built the East Asian economic miracles. Protectionism exacerbates this issue. As Arvind Panagariya points out, raising import tariffs on intermediate parts under the Atmanirbhar banner risks deglobalization. We may also be ignoring a crucial geopolitical reality. Western economies will not repeat the mistake of the early globalization era. They have no intention of allowing another single nation to achieve the monopolistic manufacturing dominance that China did. Multinationals are actively seeking highly diversified supply chains spread across multiple friendly nations. Modern manufacturing requires frictionless, cross border component flows to tackle this economic fragmentation. Taxing imported parts makes finished Indian goods globally expensive and uncompetitive. It encourages companies to assemble products merely for the captive domestic market to harvest subsidies, rather than building genuine export engines.

Macroeconomic ambition is meaningless without proper ground level execution. At the state level, factor markets including land, labor, and logistics remain severe bottlenecks. Without these structural reforms, it’s really difficult for manufacturing to really take off. India suffers from a missing middle problem where we lack the mid-sized, highly productive factories that drive global scale. Historically, stringent labor laws penalized scale, forcing entrepreneurs to deliberately stay small or operate as dwarfs to avoid the inspector raj. As economist Shruti Rajagopalan highlights, this regulatory cholesterol actively creates a system that protects smallness rather than protecting labor. Furthermore, as Arvind Subramanian has diagnosed, India suffers from a unique internal variant of the Dutch Disease. Historically, rigid and artificially high public sector salaries distorted the broader labor market. This raised economy-wide wage expectations without delivering parallel increase in shop floor productivity, making low margin Indian manufacturing globally uncompetitive before it could even mature. Add to this skills deficit, a dismal female labor force participation rate, and the physical friction on the ground like bureaucratic red-tapism. There are other issues of high industrial power costs due to cross subsidization, messy land acquisition, and port delays that hamper the manufacturing scale. Subsidies cannot fix these structural friction.

Indian manufacturing is growing in absolute terms, but the explosive growth of the services sector dwarfs the manufacturing GDP share. To increase the manufacturing GDP share, we must transition from mere low value assembly to deep component manufacturing and indigenous value addition and should focus more on labour-intensive manufacturing. Capturing the China Plus One shift requires more than just top-down capital subsidies. We must initiate a virtuous flywheel effect of value addition where state level factor reforms reduce the physical cost of doing business, which in turn attracts the scale needed to justify localized component ecosystems. Scale will only arrive when it is structurally cheaper and easier to produce in India rather than just when it is subsidized.

Sunny Kumar is a PGDM(GM) Student at XLRI Jamshedpur.

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