Focus of manufacturing policy should be on new startups and tech growth

Thirty-five years ago, in 1991, Manmohan Singh, then Union finance minister, presented a Budget that abolished industrial licensing and launched what has been described as “liberalisation” reform, but which is better described as “privatisation” reform because it involved a shift from the public sector in industry. Perhaps the most important intention was to accelerate growth in manufacturing, and there was a boost with the share of manufacturing in gross value added (GVA) at current prices rising to 19.7 per cent in 1995-96. 

But this was a temporary achievement. The share of manufacturing in GVA at current prices has fluctuated in the 17-18 per cent range since then and was 17.4 per cent in 2011-12. Subsequently it declined steadily to 14.3 per cent in 2023-24, which is 3 percentage points lower than the level reached as far back as 1974-75. This decline is also matched by the fall in the share of manufacturing in gross fixed capital formation from 40.8 per cent in 2011-12 to 31.6 per cent in 2023-24.  An even more disturbing feature is that the share of manufacturing in employment remained static at a little over 10 per cent all the way from 1990-91. 

From a global perspective, the “World Development Indicators” show that in calendar year 2024, manufacturing value added as a percentage of gross domestic product (GDP) in current dollars was 12.6 per cent in India. This is distinctly below that of our neighbours Bangladesh (21.9 per cent) and Sri Lanka (17.6 per cent); Southeast Asian countries Indonesia (19.0 per cent), Malaysia (22.5 per cent), Thailand (24.3 per cent), and Vietnam (24.4 per cent); and East Asian nations China (24.9 per cent) and South Korea (26.6 per cent). 

A comparison with China is most striking. In 1990, China and India had nearly identical manufacturing bases. But by 2025, China’s manufacturing value added became approximately 10 times larger than India’s. Clearly this substantial difference in the share of manufacturing in GDP between India and most Asian states is an indication that our policy on manufacturing promotion has been less than adequate. 

Perhaps the most important development challenge India faces at present is the revival of manufacturing growth and a greater prospect of achieving the 25 per cent target, articulated first in 2012 and repeated in the 2015 and 2025 policy announcements.  The truth is that the “privatisation” of manufacturing development has not led to the “liberalisation” that opened up opportunities for new starters. Established industrial conglomerates flourished and broadened their presence. 

Government intervention must shift from being business-friendly to being market-friendly.  That will be more consistent with the “liberalisation” change, launched in 1991. Our present policy involves entrepreneurship selection even after the abolition of industrial licensing and continues in support programmes in manufacturing like the production-linked initiative (PLI). Much of this is in favour of conglomerates that operate in multiple sectors. This link between the government and some enterprises dissuades others from entering and competing in the relevant sectors. The sad part is that these favoured conglomerates have not established a high presence in global trade or, for that matter, in technology development, as South Korean companies like Samsung and Hyundai and Chinese companies like Huawei and BYD have done.   

Significant structural development requires what Joseph Schumpeter called “creative destruction”. Giving support to established enterprises in public policy works against this. The success of entrepreneurship does not require any close link between corporate managers, bureaucrats or ministers because it may lead to the prevention of competition. 

What we need is strong emphasis on encouraging newcomers and this is what requires a market-friendly policy approach.  The basis of this approach is what the government does for small and medium enterprises (SMEs). Do note that the spectacular growth of manufacturing in China is basically Chinese governments, at the Centre and in provinces and cities, promoting new private enterprises in manufacturing and services with the focus on starters that were basically SMEs. What is even more spectacular is the rapid rise in their presence in advanced technologies. 

India does have a programme for micro, small and medium enterprises (MSMEs).  But the impact is modest, with MSMEs accounting for just 31 per cent of GDP, way below what it is in China. There was a move to enhance development for MSMEs in the 2025-26 Budget and a provision of ₹11,954 crore was made for the “Employment Guarantee” programme and for “Credit Support” schemes. But the 2026-27 Budget reported that the revised outlay in 2025-28 was just ₹2,549 crore. This is way below the funds accruing to larger enterprises through the PLI, where the revised outlay reported for 2025-26 is ₹13,145 crore and the saving in corporation tax from tax incentives, which is ₹98,095 crore. 

Our MSME programme seems to be separated from the one on industrial policy. This may be because two different ministries are responsible for their formulation and implementation. Perhaps the MSME scheme is seen as a welfare scheme. What we need to do is to separate the welfare part of MSMEs, say, the part that is devoted to helping khadi and village industries, connect the manufacturing-oriented support for them with the broader industrial policy, and focus attention on newcomers vigorously in manufacturing promotion. An example of this is the “Design-Linked Incentive Scheme” in semiconductor development. Yes, there may be a few programmes based on global strategic considerations. They may be wider in their approach and include both established enterprises and foreign companies. 

We must understand that adventurous and technologically advanced startups will come from mainly new starters. That is what happened in the infotech boom and perhaps also in the recent expansion of the initiative on digital transactions. A particularly interesting  case is the recent boom in 190 space-related enterprises following the 2023 Indian Space Policy, with India’s space economy expected to reach $44 billion fairly soon.  Most of the space-service providers are new starters promoted by technologically savvy newcomers. Our industrial policy must focus on promoting many “little giants” that will start as newcomers, become developers of advanced technologies, grow in size, and increase both the national availability of advanced items that are imported and support greater export capacity growth in fast-growing new items.  

Basically we need a substantial reorientation from past practices that have not delivered the results required for faster growth in manufacturing and employment.  Reduce the number of central schemes focused on manufacturing — now over 100 — and make them longer-lasting and predictable. Do not focus on conglomerates and large established enterprises that can grow and hopefully develop without government support. The primary focus of the government’s manufacturing policy should be on new startups and a strong focus on support for technological growth. Do that and the 1991 promise of liberalisation will restart.

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desaind@icloud.com