The missing manufacturing middle

That is emerging as the missing middle in India’s manufacturing push.

The imbalance is stark. Of the 92.4 million enterprises registered on the government’s Udyam and Udyam Assist platforms as of August 9, 91.9 million were micro enterprises, 541,000 were small and just 41,751 were medium enterprises, according to the Ministry of MSME’s real-time dashboard.

More than 99% of registered enterprises are therefore micro, while medium enterprises account for less than 0.05%—roughly 2,200 micro enterprises for every medium one. The figures cover manufacturing, services and trading, not manufacturing alone, but they underline the scale of the graduation challenge. The dashboard separately lists 18.4 million registered manufacturing enterprises. And “medium” is not particularly large by official standards.

Experts say this thin middle matters because the economic gains from a new factory depend partly on the ecosystem that develops around it. A semiconductor fab, data centre or electric vehicle plant needs a long chain of suppliers making everything from cables, motors, gears and cooling systems to precision components, sensors, specialised materials and testing equipment. The deeper that domestic ecosystem, the greater the potential for local value addition.

MSMEs already account for about 35.4% of India’s manufacturing, 48.58% of exports and 31.1% of GDP, according to the Economic Survey 2025-26. The Survey identifies scaling up MSMEs, improving competitiveness, expanding market access and bridging the credit gap as key to India’s industrial transformation.

Demand from the new investment cycle is creating opportunities, but relatively few companies have the scale and technological capability to capture them.

Established Engineering Firms Lead

Thermax closed FY26 with a consolidated order book of Rs 13,604 crore, up 27% year-on-year, while full-year order bookings rose 34.2% to Rs 13,871 crore. Data centres accounted for about 2% of its order book at FY26-end but are becoming a growing opportunity.

“Artificial intelligence is reshaping industries while creating unprecedented demand for power, cooling and infrastructure. Thermax can participate across this value chain through power and heat recovery systems, absorption cooling, water treatment solutions and digital optimisation,” said MD & CEO Ashish Bhandari.

Polycab is seeing a similar shift. Its annual report estimates cables can account for 8-10% of data-centre capex, compared with about 3% in conventional infrastructure. EV charging, renewable energy and semiconductor manufacturing are also identified as “sunrise sectors”. Its Project Spring entails Rs 6,000-8,000 crore of capex over five years to expand capacity.

Elecon Engineering, meanwhile, is benefiting from demand for industrial gears used in machinery across new-age infrastructure. Management has stressed “profitability over volume” as it moves towards higher-value engineered products.

At TD Power Systems, data centres and AI-led power demand are emerging as major growth catalysts, with generators and rotating electrical equipment needed to provide reliable power amid grid constraints. The company is expanding capacity and its product range to capture the opportunity.

CG Power and Industrial Solutions is also positioned in this infrastructure layer. Chairman Vellayan Subbiah has described its transformers, switchgear and rail systems as “foundational” to India’s infrastructure and energy transition.

Schaeffler India offers evidence of what deeper localisation can look like. CFO Hardevi Vazirani said localisation is close to 80%, while the company continues to invest in capacity. “We have capacities, but we need to use them in the right area and use them to our strengths,” she said.

These companies represent one end of the emerging opportunity: established manufacturers with the balance sheets, technology and engineering capabilities to move into new supply chains. The harder challenge is creating many more such companies.

That becomes particularly visible in electronics and semiconductors, where gaps in the domestic supply chain remain significant. Brandworks Technologies founder Ishwar Kumhar said the next generation of technology must be “designed, engineered, and built in India”. While the company is expanding local manufacturing, critical inputs such as chips and sensors remain largely imported.

“Government schemes like PLI have played a meaningful role in encouraging companies like ours to invest further in local manufacturing and localisation,” Kumhar said, adding that the company is continuing to assess how to expand component-level manufacturing.

GX Group is targeting another gap through photonics. CEO Paritosh Prajapati said its partnership with SMART Photonics represents a shift from importing optical technology to exporting innovation. The company plans to invest Rs 500 crore initially and eventually Rs 3,000 crore in the ecosystem.

“Certain highly specialised inputs such as compound semiconductor wafers and specialty optical materials will continue to be sourced globally in the near term,” Prajapati said. “Our localisation roadmap focuses on building capability progressively rather than overnight substitution.”

Agnit Semiconductors is seeing demand from Indian strategic OEMs for indigenous GAN-based power solutions, particularly in wireless, automotive and industrial applications, a company spokesperson said.

Key Bottlenecks

For the millions of smaller businesses below this layer, however, graduating into sophisticated suppliers requires capital, technology, skills, certification and the ability to deliver consistently at scale.

Finance remains one of the biggest constraints. Gujarat MSME expert Divyesh Ladva said cash flow is the biggest bottleneck. “You need proper infrastructure to earn revenue,” he said, adding that several MSMEs struggle to meet banks’ requirements despite financing schemes.

Odhav Industries Association president Mukesh Vekaria said Indian component makers also face a cost disadvantage because raw materials and manufacturing can be cheaper in China. He pointed to financing difficulties and the need for skill-development programmes.

Southern India Chamber of Commerce and Industry senior vice-president V.N. Shiva Shankar has similarly stressed technology, skills, credit and global supply-chain access for smaller firms.

Digital capability is another dividing line. “The biggest barrier to digital transformation is not intent, but the lack of internal capability to execute,” said Amit Saluja, managing partner at digiXLT Consulting LLP.

The result is an unusual manufacturing structure. At the top are increasingly large and sophisticated anchor investments—fabs, battery gigafactories, smartphone plants, data centres and renewable-energy projects. At the other end are millions of micro enterprises. What remains relatively thin is the layer in between: scaled-up domestic suppliers capable of meeting demanding standards of technology, precision, quality and volume.

Gujarat Chamber of Commerce and Industry president Rajesh Gandhi said MSMEs supply components, sub-assemblies and services, but “larger anchor plants” such as fabs, battery gigafactories and smartphone factories still dominate the high-value parts of the supply chain.

Experts say closing that gap could determine how much India ultimately gains from the manufacturing investment boom. Attracting an assembly plant or mega factory is only the first step. The larger prize comes when the machinery, components and engineering systems it needs are increasingly supplied by competitive companies operating around it—and when today’s micro and small businesses are able to graduate into that supplier network.

The next phase of Atmanirbhar Bharat, therefore, is less about replacing every import than about building competitive depth. India has begun attracting the mega-projects. The harder task now is to build the industrial middle beneath them.