As global economies look to reduce their reliance on China, India has emerged as a key alternative manufacturing hub due to its market potential, favourable policies and competitive advantages; and while the economy is still a work in progress, if it quickly learns to deal with its challenges it is well positioned to lead the global economy

Recent news about India makes one take notice of this huge economy of over 1.4 billion people and growing, for more reasons than one. The nation, according to the International Monetary Fund, is poised to overtake Japan as the fourth-largest economy in the world by end 2025, on its way to overtaking Germany as the third largest by 2028. Till a few years ago, it was considered part of the third world, a term used for poor developing nations.

Absolute reduction of poverty in India, according to the World Bank’s Spring 2025 Poverty and Equity Brief, is a remarkable achievement of the past decade, during which India lifted 171 million people out of extreme poverty. The proportion of people living on less than US$2.15 per day, the international benchmark for extreme poverty, fell from 16.2% in 2011-12 to 2.3% in 2022-23. It saw a decline in non-monetary poverty, with the multidimensional poverty index dropping from 53.8% in 2005-06 to 16.4 in 2019-21. Even at the US$3.65 per day poverty line, India’s poverty rate dropped from 61.8% to 28.1, lifting 378 million people out of poverty.

The Reserve Bank of India, following an earlier reduction of 50 basis points ( bp ) since February 2025, lowered on 6th June the repo rate by a further 50 bps to 5.5% and cut the cash reserve ratio by 100bp releasing about US$30 billion in the economy. Reportedly, this has already improved rural demand as seen in the case of entry-level motorcycles ( 110cc to 125cc ), which logged a growth of 12.7% in FY25.

These stories raise hopes about the prospects of India, the fastest-growing large economy in the world that is said to consistently disappoint the optimists as well as the pessimists. The government, however, seems determined to disappoint the pessimists going by the measures it has initiated, particularly to boost the manufacturing sector.

Manufacturing: key to employment-led growth

India’s finance minister Nirmala Sitharaman acknowledged on April 22 2025 that the service sector contributed about 64% to India’s GDP and the gig economy employed 7.1 million people in 2022, likely to go to 230 million by 2030. “But that’s not manufacturing,” she added. “Manufacturing has historically been a cornerstone of the economic transformation of nations from 19th century Britain to 21st century East Asia. It creates forward and backward linkages, catalyses skilling and pushes demand for infrastructure and governance reforms.” As well, she noted that India planned to double the current share of the manufacturing sector to over 23% in the next two decades, aiming to create jobs for its youthful workforce, drive economic growth, reduce import dependencies and build competitive global supply chains.

India’s manufacturing sector has come a long way from the pre-Independence ( 1947 ) days when most products were handicrafts. The first charcoal-fired iron making was attempted in 1830 and the present-day conglomerate Tata Group was started in 1868. Yet the growth of Indian industry was slow essentially due to regressive policies of the colonial era. In the early years after independence, the focus of Indian governments was on basic and heavy industries that formed the basis of industrial planning led by the public sector. It was in the post 1991 era of economic reforms that Indian markets were opened to global competition with liberalization, privatization and globalization driving opportunities for private entrepreneurs.

Steady or slow?

In India, the Index of Industrial Production ( IIP ) tracks the growth rates of three key sectors – mining, manufacturing and electricity on a monthly basis. Whereas the share of industry in India’s GDP is about 27% – manufacturing contributes about 13%; construction around 9%; electricity, gas, water supply and other utilities services about 2.5%; and mining and quarrying about 2%.

Many economists express disappointment with India’s manufacturing sector as its share in GDP has stagnated and the desired structural change favouring the sector hasn’t taken place. However, some scholars observe that between 2011 and 2023, the GDP share of manufacturing declined in India by 3.2% percentage points ( pp ), in comparison to the decline in China ( 6pp ), South Korea ( 4pp ), Indonesia ( 3.1pp ), Thailand ( 4.1pp ) and Philippines ( 5.5pp ). India’s performance might seem relatively better than several Asian countries but India is yet to realize its full potential in manufacturing, endowed as it is with favourable factors of production.

While India’s manufacturing sector experienced steady growth in the past decade, it has been somewhat underwhelming relative to the country’s large population. Recently, however, the sector has gained momentum, driven by new investments and a strategic move by several foreign manufacturing firms to diversify their operations across multiple markets. Within the manufacturing sector, 19 out of 23 industry groups, according to the latest IIP data released by the Ministry of Statistics and Programme Implementation on March 12 2025, have recorded a positive growth in January 2025 over January 2024. India’s industrial production growth rate for the month of April 2025, as per the latest IIP figures released on May 28, is 2.7%.

There is a heightened realization of the economic potential of manufacturing in India due to the increasing global anxiety with the extraordinary concentration of manufacturing capacities in China and the supply-chain disruptions evident in the last few years. This, combined with the need to create jobs for its growing population, has led the Indian government to undertake major initiatives to promote manufacturing and improve the business environment.

Make in India: Policy support, process reforms

With this in view, the Indian government launched ‘Make in India’ in September 2014 to facilitate investment, foster innovation, build best in class infrastructure and make India a hub for manufacturing, focusing on 15 manufacturing and 12 service sectors. This meant easing of foreign direct investment ( FDI ) and infrastructure development in the form of industrial corridors to remove transportation bottlenecks. The National Industrial Corridor Development Programme was adopted for developing greenfield industrial regions with sustainable infrastructure.

Adopting a transformative approach to data-based decisions for integrated planning of multimodal infrastructure to reduce logistics cost, the PM Gati Shakti National Master Plan, a geographic information system ( GIS )-based platform with portals of various government departments, was launched in October 2021. This was accompanied by the simplification of procedures, rationalization of legal provisions, digitization of government processes, and decriminalization of minor, technical or procedural defaults, in order to improve the ease of doing business at different levels. This included the setting up of the National Single Window System, a digital platform to help investors navigate the regulatory approval process.

In addition, a national GIS land bank was created with over 4,000 industrial parks mapped across 600,000 hectares of land with information on allotted and available plots, contact details and nodal points of connectivity. A Project Monitoring Group was created for expediting resolution of issues and removing regulatory bottlenecks in projects with investments upwards of US$70 million.

PLI scheme: Galvanizing manufacturing

The Production Linked Incentive ( PLI ) scheme launched in 2020 is by far the most attractive and effective government initiative offering financial incentives to companies that boost domestic manufacturing in 14 critical sectors, strategically chosen to enhance the country’s manufacturing prowess, foster technological advancements and elevate India’s position in global markets. These sectors are aligned with the government’s broader vision of Atmanirbhar Bharat ( self-reliant India ). The incentives are linked to the production and sales of specific goods, encouraging companies to increase production and achieve economies of scale. The sectors covered under the PLI scheme include renewable energy and solar photovoltaic ( PV ), mobile manufacturing, manufacturing of medical devices, automobile and auto components, pharmaceutical drugs, speciality drugs, telecoms, electronics, white goods, with an overall outlay of US$23.4 billion. As of Nov 2024, US$18.72 billion stands invested under this scheme.

Reaffirming its commitment to strengthening manufacturing, the government has significantly increased budget allocations under the PLI scheme in 2025-26 for key sectors, such as electronics and IT hardware, automobiles and auto components, textiles, and footwear and leather. The Ministry of Micro, Small and Medium Enterprises ( MSME ) has launched multiple schemes, such as the Raising and Accelerating MSME Performance Scheme, the Emergency Credit Line Guarantee Scheme and the Scheme of Fund for Regeneration of Traditional Industries for boosting the small and medium industries. In addition, benefits have been announced for manufacturing units, such as for electric vehicles ( EVs ).

As global economies look to reduce their reliance on China, India has emerged as a key alternative manufacturing hub due to its market potential, favourable policies, and competitive advantages. Its National Manufacturing Policy provides a comprehensive framework aimed at boosting the country’s manufacturing sector, primarily through initiatives like National Investment and Manufacturing Zones for supporting small and medium-sized enterprises. The National Manufacturing Mission announced in the Union Budget 2025-26 emphasizes five focal areas, that is, ease and cost of doing business; future ready workforce for in-demand jobs; a vibrant and dynamic MSME sector; availability of technology; and quality products. The mission will support cleantech manufacturing and aims to build the ecosystem for solar manufacturing PV cells, EV batteries, motors and controllers, electrolyzers, wind turbines, very high voltage transmission equipment and grid-scale batteries. To further enhance India’s manufacturing capabilities, the government has created investment opportunities under the National Infrastructure Pipeline and National Monetisation Pipeline.

Investment in manufacturing, exports

The “Make in India” initiatives appears to have played a pivotal role in boosting FDI equity inflow in the manufacturing sector by 57% between 2014-2022, compared with the previous eight years ( 2006-2014 ). FDI inflows into the manufacturing sector, as of August 2024, rose by 69% to US$165.1 billion during 2014-24, compared with the previous decade ( 2004-14 ), when inflows stood at US$97.7 billion. At the same time, domestic investment announcements surged to 37,00,000 crore Indian rupees ( US$428.04 billion ) in FY23-24 from 10,00,000 crore rupees in FY21.

India’s gross value added ( GVA ) by manufacturing at current prices was estimated at 73,74,445 crore rupees as per the quarterly estimates of Q1 FY25. The Index of Eight Core Industries, reflecting the production performance of coal production, crude oil production, natural gas production, petroleum refinery processing, steel production, cement production and electricity generation, stood at 157.8 for 2023-24 against 146.7 for 2022-23.

During FY25 ( until December 2024 ), India’s merchandise exports reached US$321.71 billion, up from US$316.65 billion in the previous fiscal year. India’s total exports during April-December 2024 is estimated at US$ 602.64 billion registering a positive growth of 6.03%, driven by strong growth in non-petroleum goods and services, with key contributions from pharmaceuticals, electronics, engineering goods, chemicals, and the e-commerce sector. In FY24, the export of the top six major commodities ( engineering goods, petroleum products, gems and jewellery, organic and inorganic chemicals, electronics goods, and drugs and pharmaceuticals ) stood at US$308.65 billion. Chemicals, pharmaceuticals, electronics, automotive, industrial machinery and textiles ( among others ) are expected to propel manufacturing exports to reach US$1 trillion by FY28.

These government initiatives have reduced import dependency. For instance, mobile phone imports dropped from US$5.7 billion in 2014-15 to US$914 million in 2023-24, while exports surged from US$186 million to over US$15.3 billion during this period. India’s smartphone exports hit a record US$2.44 billion in November 2024, marking a 92% surge from US$1.27 billion in November 2023.  A report in the Business Standard on 16 June 2025 stated that Apple vendors have crossed 20% value addition in India with exports touching 1.5 trillion rupees ( free on-board value ) in FY25, recording a 76% rise from the previous year.  Samsung and Padget Electronics ( a wholly owned subsidiary of Dixon ) have also crossed this threshold of 20% GVA. Google is set to begin manufacturing Pixel 9 smartphones in India in collaboration with Foxconn and Dixon Technologies, aiming to cater primarily to export markets in Europe and the US, leveraging the PLI scheme.

Electronic motherboards demand in India is expected to grow by over sixfold to reach US$81.5 billion by 2026, according to the Manufacturers’ Association for Information Technology report. The government has launched six new technology innovation platforms indigenous to manufacturing with the aim of facilitating globally competitive manufacturing. The focus would be on backward integration giving business higher control on the cost, quality and quantity of raw material. Businesses are also encouraged to pursue forward integration strategy to reduce production costs, improve the firm’s efficiency by acquiring supplier companies.

Recent trends

The manufacturing activity for January 2025, according to a report released by S&P Global in April 2025, was at the Purchasing Managers’ Index ( PMI ) of 57.7, marking the fastest expansion since July 2024, with new orders rising at the sharpest pace in six months, driven by the steepest increase in exports in nearly 14 years. As a result, manufacturers ramped up production, continuing a substantial expansion trend since October 2024. India’s manufacturing sector recorded its fastest expansion in eight months, rebounding from a more than year-long low. The growth was primarily driven by strong domestic demand. Additionally, output inflation eased to its lowest level in a year and the manufacturing PMI jumped to 58.1 in March from 56.3 in February. March marked the 33rd consecutive month of output growth, and the fastest growth in new orders in three and a half years. Both domestic and export markets contributed to this rise, with export orders increasing at their quickest pace since May 2022. The manufacturing sector witnessed record high job creation in May, even though the PMI slipped to a three-month low of 57.6, down from 58.2 in April.

Future potential

India is pushing forward with significant investments in infrastructure and manufacturing to become a US$10 trillion economy in the next decade. A plan to offer incentives of up to US$2.2 billion to spur local manufacturing in six new sectors, including chemicals, shipping containers and inputs for vaccines, is under consideration.

Green energy transition

India is already the fourth largest globally in renewable energy installed capacity, fourth in wind and fifth in solar power capacity. Its aim of reaching net-zero emissions by 2070 and meeting 50% of its electricity requirements from renewable energy sources by 2030 by installing 500 gigawatts of renewable energy capacity, and its commitment to decarbonization, present an attractive opportunity for solar, wind and other renewable energy companies. It could well be a global manufacturing hub for wind power components, leveraging its manufacturing capacity, technology and global reputation.

Additionally, companies promoting energy efficiency and sustainability solutions could gain traction. The government’s push for EV adoption and the growing demand for eco-friendly transportation create exciting possibilities for EV manufacturers, battery companies and related infrastructure providers. The National Green Hydrogen Mission aims to make India the global hub for production, usage and export of green hydrogen and its derivatives. The International Energy Agency ( IEA ) expects India to overtake Canada and China in the next few years to become the third-largest ethanol market worldwide after the United States and Brazil. These and other low-carbon technologies could create a market worth up to US$80 billion in India by 2030. To reach net-zero emissions by 2070, the IEA estimates that US$160 billion per year is needed, on an average, across India’s energy economy between now and 2030.

Healthcare

Over the next 10 years, the National Digital Health Blueprint can unlock the incremental economic value of over US$200 billion for the healthcare industry in India. Adoption of digital health technologies is expected to accelerate as telemedicine and remote patient monitoring gain prominence. India has the world’s largest health insurance scheme ( Ayushmann Bharat ) supported by the government with public-private partnerships playing a crucial role in healthcare infrastructure expansion.

Other sectors

Increased modernization efforts in the Indian defence sector could benefit companies involved in aerospace, defence equipment and cybersecurity. With the revival of travel post-pandemic and India’s focus on promoting tourism, companies in hospitality, airlines and travel services are seeing a rebound as tourism is one of the highest employment multipliers. Order books of aircraft manufacturers has India as the most prominent buyer.

The Indian government estimates the infrastructure financing gap over the next decade to exceed US$1.5 trillion. The proportion of people living in urban areas almost doubled since 1950 reaching 33% in 2015, according to UN estimates, with India’s urbanization rate projected to rise to 42% by 2035. This will create a massive need for housing, including affordable housing for the economically weaker sections of the population.

Challenges

As India prepares to develop its comparative advantages, it will have to be mindful of the challenges posed by the uncertainty caused by changing geopolitics, the tendencies of deglobalization, the declining trends in global trade and the threats to democratic world order. At home, the country must work towards increasing private final consumption expenditure, improve net exports and increase private capital expenditure, in order to build a robust and sustainable economy.

Road ahead

The road ahead looks promising because India has a sizeable domestic consumer market and a dynamic entrepreneurial culture necessary to drive innovation and attract investments. It has favourable demographics: 68% of the population is young and about 56% is in the age group of 20 to 59, and the Indian middle class is expected to have the second-largest share of global consumption at 17% by 2030. It has a huge potential to reap its demographic dividend, and its desire to bridge its historical development deficit presents a vast opportunity.

India, with its economic prowess and democratic roots, is well positioned to lead the global economy, if it quickly learns to deal with the challenges in order to realize its full economic potential. India is a work in progress. Watch this space.

Ashok Lavasa is a former finance secretary of India and vice-president of private sector and public-private partnership at the Asian Development Bank.