Why Manufacturing Has Failed in India — Reasons, Suggestions, UPSC Notes

Development economists describe three classic escape routes from poverty — Geography (tourism, as in Switzerland or Mauritius), Geology (natural resources, as in Saudi Arabia, Australia) and Jeans (labour-absorbing manufacturing, as in Korea, China, Vietnam). Despite having the world’s largest workforce, India has not taken the “Jeans” route successfully. Manufacturing as a share of GDP has stagnated at 15–17 per cent since 1991 and the high-profile Make in India campaign has under-performed on investment, output and employment. For UPSC GS-III, this is one of the most frequently asked analytical themes.

The four peculiarities of Indian manufacturing

1. Small and stagnant share of GDP — still about 17 per cent.
2. Skewed towards skill- and capital-intensive activities rather than labour-intensive.
3. Around 70 per cent of manufacturing employment is in the unorganised sector.
4. Employment concentrated in very small firms with limited productivity.

These four features explain why manufacturing has failed to trigger the structural transformation that lifted East Asia.

Analysing the Make in India campaign

Launched in September 2014 with a target of raising manufacturing to 25 per cent of GDP and creating 100 million jobs, Make in India's outcomes can be evaluated across three variables.

Investment rate

Gross fixed capital formation as a share of GDP fell from 31.3 per cent in 2013-14 to about 28.6 per cent in 2017-18, recovering partially thereafter. The manufacturing sector's contribution to overall investment remained weak through the second half of the 2010s.

Output growth

The Index of Industrial Production (IIP) registered double-digit manufacturing growth only twice between 2012 and 2019. Post-pandemic, IIP manufacturing has averaged around 5 per cent — respectable but not transformative. The share of manufacturing in GDP remained stuck in the 15–17 per cent band.

Employment growth

The PLFS revealed unemployment at a 45-year high of 6.1 per cent in 2017-18. Informalisation of the workforce worsened through the 2010s before improving marginally in 2023-24. Employment elasticity remains low — each 1 per cent GDP growth generates only 0.1–0.2 per cent job growth.

Why did Make in India under-perform

Poor condition of the financial sector

The twin balance sheet crisis — NPA-laden banks and over-leveraged corporates — choked credit to manufacturing through most of the 2010s. The IL&FS collapse in 2018 triggered an NBFC liquidity squeeze. Credit to industry grew in low single digits for several years.

Archaic labour laws

Over 40 central labour laws and 100+ state laws imposed high compliance costs, pushing firms to stay small or hire informally. The 2020 labour codes were intended to fix this, but their operationalisation has been patchy.

Missing middle

Indian manufacturing is dominated by many small enterprises and a few very large ones. Mid-sized firms — the engine of exports in Korea, Taiwan and China — are missing. Incentive structures historically rewarded smallness (SSI reservation, tax thresholds, subsidy ceilings), creating the "dwarf firm" problem: firms that never grow beyond 20 workers.

Skill deficit

India Skills Report estimates that only around 46-50 per cent of graduates are employable. Shop-floor-ready technicians are in short supply. ITI and polytechnic quality is uneven.

Logistics cost

Around 13–14 per cent of GDP — significantly higher than the 8–10 per cent seen in developed economies. This directly raises the landed cost of manufactured goods.

Adverse impact of FTAs

FTAs with Japan, Korea and ASEAN have widened India’s trade deficit with these partners, particularly in electronics, machinery and chemicals. Inverted duty structures worsened the problem.

High taxation

Corporate tax rates were about 50 per cent higher than competitor economies before the 2019 cut to 22 per cent (15 per cent for new manufacturing). Complex GST compliance still burdens MSMEs.

Technology adoption

Industry 4.0 — AI, robotics, IoT, data analytics — is an existential challenge for SMEs. Most small firms lack the capital or skill bandwidth to upgrade.

Other factors

• Cumbersome land acquisition under the 2013 Act.
• Poor ease of doing business despite improvements.
• Policy uncertainty — retrospective tax, tariff increases, sudden export bans.
• Poor infrastructure in Tier-2 and Tier-3 cities.

The new manufacturing policy — broad contours

Focus on Coastal Economic Zones (CEZs)

Port-led industrialisation can replicate what Shenzhen did for China. India's CEZ roadmap needs to be fast-tracked around Sagarmala ports — JNPA, Paradip, Tuticorin, Vizhinjam, Vadhavan.

Focus on sunrise sectors

Semiconductors, AI, robotics, biotechnology, renewable energy, EV batteries — where India can leapfrog rather than catch up. PLI and National Manufacturing Mission are steps in this direction.

Boosting innovation through startups

DPIIT-recognised startups crossed 160,000 by 2025. The startup ecosystem increasingly spins off manufacturing IP — Ather, Ola Electric, Tata Neu hardware, Agnikul, Skyroot. The challenge is connecting startups to manufacturing capex.

Plug-and-play investment model

Ready-to-use industrial land with pre-clearances (environment, power, water, roads). Maharashtra, Haryana and Telangana have led here; the template needs national scale via NIMZs.

Facilitate investment

• Reforms in PSBs for working-capital lending.
• Strengthen the corporate bond market.
• Resolve residual NBFC stress.
• Development Financial Institutions (DFIs) — NaBFID operational since 2022 — must actively finance long-gestation manufacturing projects.

Extend PLI

The PLI scheme has delivered visible results in mobile phones, pharma, food processing and speciality steel. The next round should extend to labour-intensive sectors (leather, garments, toys, furniture, gems and jewellery).

Quality standards

Bureau of Indian Standards (BIS) and Quality Council of India must issue mandatory quality orders (QCOs) linked to WTO-compliant standards to both keep cheap imports out and push domestic producers up the curve.

Renegotiate FTAs

Fix inverted duties, demand reciprocity in market access, aggressively negotiate upcoming FTAs with the UK, EU and Oman on goods, services and digital trade.

Skilling India

Tighter government-industry-academia collaboration. NEP 2020-aligned vocational integration, apprenticeship expansion, employability-ranked ITIs, and review of engineering education linkages with industry.

Latest developments (2024-26)

• Labour codes. All 28 states and UTs published rules by 2025; effective implementation still uneven.
• PLI 2.0. Second-round PLI for ACC batteries, IT hardware, drones announced through 2024.
• Semicon surge. Five fabs and OSATs under construction; Tata Dholera due 2026.
• National Manufacturing Mission. Announced in Budget 2025-26 with sectoral focus.
• Make in India 2.0 consultation for October 2025 — updated targets under formulation.
• Logistics cost. Official estimates put it at 7.8–8.9 per cent of GDP by FY22 (NCAER); CII puts it higher at 14 per cent — methodological debate is live.
• LPI 2023. India ranked 38th in the World Bank Logistics Performance Index (improved from 44 in 2018).
• Defence production. Crossed Rs 1.27 lakh crore in FY24; exports at record Rs 21,083 crore.

UPSC Relevance

For GS-III (mobilisation of resources; industry; infrastructure; employment):

• Analytical: diagnose why manufacturing has stagnated — structural, policy, factor-market.
• Comparative: India vs Korea, China, Vietnam, Bangladesh — the East Asian template.
• Policy: Make in India, PLI, labour codes, corporate tax cuts — evaluate design and outcomes.
• Forward-looking: CEZs, Assemble in India, plug-and-play, FTA renegotiation, skill reforms.

An answer that ties the missing middle to dwarf firm incentives, connects logistics cost to export competitiveness, and ends with Assemble in India + Global Value Chain integration will hit the mark.

Conclusion

India's manufacturing failure is not for lack of policy — it is for lack of factor-market reform and consistent execution. Tariff protection, tax cuts and PLI can get firms to the starting line, but only labour flexibility, cheap land, reliable power, cheap logistics and skilled workers can carry them across it. The next decade will decide whether India runs the "Jeans" race, or watches it from the sidelines again.