Viksit Bharat target has a low manufacturing value-addition problem

Top export sectors remain vulnerable due to high reliance on imported components

In his Independence Day speech, Prime Minister Narendra Modi invoked “Saptadhara” — seven streams of power — to realise the vision of Viksit Bharat by 2047. Manufacturing is the first power of “Saptadhara”. To make India a developed nation, its manufacturing sector must grow to create jobs and integrate the country into global value chains.

 

At the moment, however, the manufacturing sector is faltering. The Gross Value Added (GVA)-to-Gross Value of Output (GVO) ratio — a key measure of efficiency in value addition — has declined for both manufacturing and the broader Indian economy.

 

An industry’s GVO equals its GVA plus the cost of intermediate goods. A falling GVA-to-GVO ratio means companies are using more inputs to produce the same output, signalling lower efficiency and weaker value addition.

 

Manufacturing’s GVA-to-GVO ratio was 21.96 per cent in FY15 and increased to 24.57 per cent in FY18. Thereafter, the ratio started to decline, falling below the FY15 level by FY22. Since FY23, irrespective of the change in the base year, the figures have fallen further below the FY22 numbers. A similar trend is visible in the GVA-to-GVO ratio for the whole economy. 

 

Petroleum products and telecom equipment, including smartphones, were India’s top exports by value in FY26. Notably, the two sectors had one of the lowest GVA-to-GVO ratios among all Indian industries in FY24, the latest year for which data is available. The ratios for petroleum products and communication equipment were 12.33 per cent and 8.86 per cent, respectively. 

 

Other major Indian export products, such as iron and steel, transport goods and electrical equipment, had relatively better ratios. It means that India’s top export products are highly input-intensive, with very low value addition. It also underscores a high dependence on intermediate goods — whether domestically produced or imported. 

 

Low value addition and high input intensity are not a problem per se if the industry sources its intermediate goods domestically. A robust manufacturing base for intermediate goods creates jobs, strengthens supply chains and helps improve global competitiveness.

 

However, India’s exports of petroleum products and communication equipment rely heavily on imported intermediate goods and components. Domestic value addition in gross exports of petroleum products and communication equipment in 2022 was just 10.02 per cent and 20.93 per cent, respectively. Transport goods and readymade garments have low GVA-to-GVO ratios but a relatively high rate of domestic sourcing of intermediate components.