Manufacturing ambition: India needs a coherent strategy to boost industry

The Union government’s recent decision to fast-track approval to foreign direct investment (FDI) from China and other neighbouring land-border countries in 40 manufacturing sub-sectors within 60 days reflects a growing recognition that India’s industrial ambitions require deeper integration with global supply chains. After years of heightened scrutiny following the introduction of Press Note 3 in 2020, India now appears more willing to open up and integrate into global production networks, which continue to be dominated by Chinese firms. Significantly, China is India’s largest trading partner with bilateral trade reaching $151.1 billion and the trade deficit with Beijing widening to $112.16 billion in 2025-26. It has been argued that one of the ways to reduce the trade deficit and dependence on China is to attract Chinese investment so that production shifts to India.

 

The sectors identified for quicker clearances — such as rare-earth magnets, printed circuit boards, advanced battery components, display modules, machine tools and polysilicon wafers — lie at the core of India’s push in electronics, electric mobility, and renewable energy. The move must be welcomed because it provides clarity and will help increase manufacturing output over time. Unfortunately for India, manufacturing’s share in gross domestic product has remained stuck at 15-17 per cent for a long time, far below the government’s target of 25 per cent and behind several East Asian economies.  A recent analysis showed that manufacturing firms’ share in the gross value added of listed companies fell to 33.4 per cent in 2024-25 from over 40 per cent before the pandemic. The government has taken several measures over the years, including the production-linked incentive (PLI) scheme, but the results have not been as desired. The PLI scheme, for instance, worked in the mobile space, but the effects in other sectors have been sobering.

 

Thus, it must be recognised that faster clearances for investment from certain countries in certain sectors alone will not solve India’s manufacturing challenge. The sector continues to face structural bottlenecks such as higher logistics costs, skill shortages in areas such as electronics and advanced manufacturing, rigid compliance systems, and weak contract-enforcement mechanisms, all of which raise the cost of doing business. As a result, India has not been able to generate employment at scale for its rising workforce.

 

In a fast-changing global environment, India needs a coherent strategy and a set of reforms to attract investment and meaningfully increase manufacturing output. The labour Codes passed by Parliament in 2019 and 2020, for instance, were intended to simplify compliance, improve labour flexibility, and encourage the formalisation of employment. However, their implementation was delayed because the rules were notified only last week. Acquiring land for large industrial units remains a challenge, which needs to be addressed. The government also needs to review the trade policy. While India signed several free-trade agreements in the recent past, including with the European Union, its average tariffs are still quite high compared to its peers. It must be recognised that the bulk of the global trade happens in intermediates, and higher tariffs tend to create friction. To push manufacturing output, it’s important to integrate with global value chains. FDI flows are also often linked to trade openness and the level of integration in global value chains.  Thus, India needs to go beyond selective opening for FDI. Economists have argued that India is failing to capture the low-cost manufacturing space being vacated by China. The Indian policy establishment must ask why.