To revive manufacturing, India must focus on strengthening six key pillars

The world’s attention in the last few weeks has sharply turned to global trade, driven by the United States administration’s escalated import tariffs. These shifts have rekindled debates over economic competitiveness. For India, this poses both challenges and opportunities: While exporters may encounter higher trade barriers, there is also potential to expand their global market share. The pivotal question remains: What strategy will India adopt?

 

Despite its large economic size, India has struggled to integrate into manufacturing global value chains (GVCs), unlike many of its Asian peers. India’s share in global manufacturing exports has remained largely stagnant in recent years, inching up from 1.7 per cent in 2017 to 1.8 per cent in 2023, while Vietnam’s share rose from 1.5 per cent to 1.9 per cent during the same period, reflecting a more export-oriented and globally integrated manufacturing ecosystem. To move forward, it is critical to identify and address the structural barriers limiting India’s participation in GVCs compared to its competitors.

 

A recently released CSEP Competitiveness Index benchmarks India against key “China Plus One” Asian economies — Malaysia, Vietnam, Thailand, and Indonesia — across six pillars of manufacturing competitiveness: Factor conditions, demand conditions, firm strategy, supporting industries, regulatory quality, and global trade policy.

 

The findings reveal that India lags behind its peers on most pillars, weighed down by structural issues such as high tariffs, low research & development (R&D) investment, excessive firm concentration, limited engagement in free trade agreements (FTAs), to name a few. These insights were reinforced through industry consultations across sectors like auto components, pharmaceuticals, apparel, and electronics, which highlighted persistent competitiveness challenges specific to their sectors.

 

These factors have contributed to a steady decline in the manufacturing sector’s share of gross domestic product (GDP), from 16 per cent in 2015 to just 13 per cent in 2023, despite successive policy efforts. To reverse this trend, India needs a bold, forward-looking strategy focused on four key areas: Tariff rationalisation, deepening FTAs, regulatory reform, and accelerating technology adoption.

 

First, India’s high and fragmented tariff regime inflates input costs, reduces export competitiveness, and pushes firms to focus on domestic rather than global markets. Tariff reform must be seen not merely as a fiscal issue but as a strategy for integrating into global value chains, which cover 70 per cent of the global trade. While duty drawback schemes offer some relief, they are insufficient. What’s needed is comprehensive, supply-chain-wide tariff reduction, rather than selective adjustments.

 

Second, India must deepen its FTA engagement, signing agreements with new partners and deepening existing agreements. Its absence from major trade blocs such as the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) puts its exporters at a disadvantage compared to peers like Vietnam.

 

Recent FTAs with Australia, the United Arab Emirates (UAE), and the European Free Trade Association (EFTA), as well as the announcement of an agreement on an FTA with the United Kingdom on May 6, are promising steps. However, India must now finalise a deal with the European Union, a major market and supplier. In today’s environment of trade tensions and a weakening multilateral system, bilateral agreements remain the most politically viable option.

 

These FTAs should transcend traditional tariff reductions and encompass broader, more comprehensive elements. They should focus on facilitating investment flows, technology transfers, and services trade, while also addressing non-tariff barriers (NTBs) and promoting mutual recognition of standards.

 

Third, regulatory reform is crucial to help firms grow and scale. Current labour laws impose restrictions once firms cross certain workforce size limits, discouraging expansion. Raising these thresholds and simplifying compliance would remove these barriers. Additionally, effective urban planning and affordable housing policies are vital to boost labour mobility and lower costs for both workers and employers. Practical measures — such as building worker dormitories and improving transport — can significantly attract skilled workers, especially women, who remain vastly underrepresented in India’s workforce. Addressing these challenges will help resolve labour shortages, boost productivity, and strengthen India’s manufacturing competitiveness.

 

Finally, India must prioritise technology adoption and scale up investment in R&D. This is essential to move up the value chain — from producing low-value-added goods to high-value-added, high-tech products — where India continues to lag behind its global peers.  Currently, India invests only 0.6 per cent of its GDP in R&D, which is insufficient compared to competitors like Malaysia (0.9 per cent) and Thailand (1.2 per cent). Despite various government incentives, private R&D remains low, primarily due to limited competitive pressure. Innovation thrives under exposure to both domestic and international competition, not through subsidies alone. A more open, competitive market environment is essential to push Indian firms up the value chain.

 

A thriving manufacturing sector is not just about growth — it is central to solving India’s employment challenge. As highlighted in the Economic Survey 2023–24, India needs to generate nearly 7.85 million non-farm jobs annually. While the services sector may absorb highly skilled professionals, a robust manufacturing base is vital for creating jobs for semi-skilled and unskilled workers transitioning from agriculture.

 

To increase manufacturing’s share of GDP from 13 per cent to 25 per cent over the next decade — assuming GDP growth of 6.5 per cent — the sector must grow at an average annual rate of 13.6 per cent. This level of growth cannot be achieved through domestic demand alone. A much stronger export performance, built on the suggested policy reforms, is essential. India’s window of opportunity is open — for now. Seizing it requires bold coordinated action across these four pillars to unlock manufacturing’s full potential. 

The authors are, respectively, associate fellow, visiting senior fellow, and visiting senior fellow, Centre for Social and Economic Progress.

 

The views are personal