– By Ranjitha Ajay
India’s manufacturing sector, often touted as the engine of economic growth, is now facing one of its most critical challenges. The sector’s contribution to GDP, which has stagnated at 16-17% for years, is projected to drop to 13-14% by 2025. This decline comes despite government initiatives such as Make in India and reflects structural weaknesses that global headwinds have exacerbated. Supply chain disruptions, cost disadvantages, and a tepid export environment have significantly eroded the sector’s competitiveness. Budget 2025 presents an important opportunity to reverse this trajectory and set the foundation for a manufacturing renaissance in India.
The decline in manufacturing is due to a combination of global and domestic factors. The global supply chain realignment post-pandemic has favoured more cost-efficient hubs in ASEAN economies over India. Rising costs of raw materials, energy, and logistics have further compounded the issue, making Indian manufacturing less competitive globally. For instance, the cost of steel in India is 20-30% higher than in China, significantly impacting the competitiveness of sectors like construction and automotive. Moreover, merchandise exports fell by 11% year-on-year in the first half of FY24, with traditional strongholds like textiles and electronics witnessing a sharp downturn. These challenges call for immediate policy interventions, and Budget 2025 should rise to the occasion with targeted measures that address both immediate concerns and long-term structural bottlenecks.
One of the most critical areas requiring attention is the adoption of advanced manufacturing. India’s reliance on labour-intensive and low-value manufacturing is increasingly unsustainable in a technology-driven global economy. Enhanced Production-Linked Incentive (PLI) schemes for sectors such as semiconductors, EVs, and robotics can drive investment and innovation. Countries like South Korea have successfully stimulated growth in advanced manufacturing by offering significant tax benefits for R&D, and India can replicate this model by earmarking a substantial portion of GDP for technology-intensive sectors. Similarly, fostering green manufacturing can position Indian products as competitive in global markets increasingly driven by Environmental, Social, and Governance (ESG) considerations. The adoption of renewable energy in manufacturing processes, incentivized through tax rebates and subsidies, can align India’s manufacturing sector with global sustainability standards.
The logistical inefficiencies that plague Indian manufacturing also demand urgent attention. Logistics costs account for 14% of India’s GDP, compared to 8-10% in developed nations. Port modernization, improved last-mile connectivity, and the establishment of multi-modal logistics hubs are essential to reduce costs and improve efficiency. Lessons can be drawn from Vietnam, which has significantly reduced port turnaround times through targeted infrastructure investments, enabling it to emerge as a manufacturing powerhouse in Southeast Asia.
At the same time, India must address the growing skills gap in its workforce. Despite the scale of initiatives like Skill India, nearly 70% of India’s labour force lacks formal training, leaving it ill-prepared for emerging manufacturing sectors such as artificial intelligence, robotics, and IoT. Budget 2025 must prioritize vocational training programs that equip workers with the skills needed for high-value manufacturing. Public-private partnerships, modelled on Germany’s dual vocational training system, could play a transformative role in aligning workforce capabilities with industry requirements.
Reforming trade policies to boost exports is another critical area where the budget can make an immediate impact. Export tariffs, complex GST norms, and high import duties on raw materials have deterred global manufacturers from investing in India. Streamlining these regulations and negotiating trade agreements that focus on strategic sectors can enhance India’s attractiveness as a manufacturing hub. ASEAN’s trade-friendly policies have consistently attracted global investments, and India must adopt a similar approach to remain competitive.
The potential benefits of these interventions are significant. With targeted policies, India’s manufacturing sector could rebound, with its GDP contribution rising to 18% by FY26. The focus on advanced and green manufacturing alone could create over 10 million jobs in the next five years, while strategic trade reforms could enable manufacturing exports to grow at a compound annual rate of 12-15% by FY26. These outcomes are not only achievable but necessary to realise India’s ambition of becoming a $5 trillion economy.
Budget 2025 is more than a fiscal exercise. It is a pivotal moment for India’s manufacturing sector and, by extension, its economic future. By addressing the core challenges of cost competitiveness, infrastructure, workforce skilling, and trade policy, the government can control the sector’s decline and build a foundation for long-term growth. The stakes are quite high, but so is the opportunity to reimagine India’s manufacturing story and reclaim its place as an economic powerhouse.
(Prof. Ranjitha Ajay, Associate Professor, Finance at Great Lakes Institute of Management, Chennai.)
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