“Manufacturing has moved back to the forefront again”

India's Manufacturing sector stands at a critical juncture. Initiatives like ‘Make in India’ and the Production-Linked Incentive (PLI) schemes have created a conducive environment for growth in sectors such as pharmaceuticals, electronics, and renewable energy. As global supply chains shift and new opportunities emerge, India is expected to corner a major share of the shift. But will this renewed push for manufacturing ensure that its share in the GDP surpasses the 20% mark? Rahul Jain, Managing Director & Senior Partner, and Head of BCG in India spoke with Anand Adhikari about whether India is merely moving in the right direction or is genuinely poised to lead in global manufacturing. Edited excerpts:
 

Over the last decade, we have seen ‘Make in India’ and PLI schemes aimed at encouraging manufacturing. But manufacturing’s share in the country’s GDP has remained less than 20% over the past few decades. What changes are you seeing on the ground?

If I go back in time, let’s say seven or eight years ago, when I spoke to major corporate houses in India, manufacturing was not a priority. The focus was largely on services, consumption-led and technology-driven businesses because those sectors were generating profits and higher valuations. However, since the launch of the Atmanirbhar Bharat and PLI schemes, there has been a shift in mindset. Manufacturing has moved to the forefront. Today, if you talk to any group, they are actively discussing what more can be done in manufacturing.

Why has this happened? It’s a combination of both global and domestic factors. Globally, with geopolitical shifts and the need to diversify supply chains, many global companies view India as an attractive location. India offers geopolitical neutrality, a large labour force-not just for today but for the future as well, a reasonably good cost structure, and alignment with long-term plans to establish an alternative source for diversified supply chains. If you look at the PLI schemes, while not all planned investments have materialised, a significant portion has. Across the PLI-supported sectors, India’s share of imports has decreased, while exports have increased, which is a positive trend. That said, the share of manufacturing in the GDP has not grown substantially; it has increased only in line with overall GDP growth. Manufacturing still accounts for 17–19% of GDP. In comparison, China is at nearly 26%, and South Korea stands at 28%. Clearly, there is a long way to go. If India is to achieve its ambitious plan of becoming a $-30 trillion economy by 2047, growth cannot be driven solely by consumption and the services sector.
 

Are you seeing signs of growth in specific sectors or segments, particularly in manufacturing?
 

Certain sectors are already showing progress, such as pharma and electronics. For instance, in the case of Apple iPhones, India has gone from contributing nothing to now accounting for 13–15% of production, with expectations of reaching 30-35%. Similarly, there are significant investments in the solar and battery value chains. The Tata group, for example, has made major commitments, not just in electronics and semiconductor fabrication, but also in military aircraft production. In the defence sector, the share of domestic private sector production has substantially increased, leading to a significant reduction in defence imports.

For example, if you look at the pharma sector and bulk drugs, our share of exports has increased significantly, while the share of imports has declined. In the auto components and the broader automotive ecosystem, we used to run a trade deficit. However, we have now transitioned to a situation of surplus. Many components from India are now globally recognised and accepted, which has boosted our export share.

That said, all these developments have not yet moved the needle as much as we would like, in terms of the share of manufacturing in GDP. However, the sentiment is positive, and investments are flowing in steadily.
 

Could you elaborate on the kind of ‘hard work’ that will be required?

We are not yet at a point where we can afford to be complacent and assume that progress will happen on its own. A lot of effort is still required. First is cost competitiveness. To compete globally, we must be cost-competitive. Key factors such as land, capital, logistics, and power costs need attention. Currently, our logistics costs are significantly higher than the global average. On the positive side, new ports and infrastructure are being developed, which should help reduce these costs over time. However, for now, logistics remains an area where we lag. Similarly, power costs are still on the higher side.

Land and labour policies require substantial reform. On the land front, progress varies from state to state. Compliance requirements have decreased compared to the past, but until we have fully digitised land records and a national land code, these issues will persist. Labour reforms also need continued focus to ensure they meet the demands of modern manufacturing while maintaining global competitiveness. It’s not just about being a low-cost manufacturing hub. Industries must invest significantly in R&D, innovation, and quality to position India as a leader in high-value manufacturing. We need to move away from the perception of being a low-cost manufacturing destination and instead be recognised for excellence and innovation.

You talked about R&D and innovation. Globally, there is talk of industry 4.0. Generative Artificial Intelligence (Gen AI) is bringing in new efficiencies. There are new sectors, especially electric vehicles, that require fresh innovations. Are we doing enough in these areas?

I do see progress, especially in sectors that are knowledge-intensive and technology-driven, where we have seen a shift up the value chain.

However, the journey is still long. We are moving in the right direction, but significant investment is required. For example, in the pharma industry, we began as large-scale generic manufacturers. Now, most companies recognise the need to focus on becoming innovators, investing heavily in R&D, and moving further up the value chain. However, this is a long journey that takes decades to achieve.

In many areas, manufacturing currently happens primarily at the assembly level. For instance, in the production of iPhones and other electronics, we are assembling end products. While this is a start, we need to shift toward local value addition, meaning the production of sub-components and aggregates. If these components are not manufactured locally, we risk remaining dependent on imports for critical inputs, which limits the value we derive from the manufacturing process. I do see a shift in the mindset, but many of these components cannot be manufactured solely by large companies. They require active participation from the SME and MSME sectors, which are vital for developing a full value-chain ecosystem.
 

MSMEs are receiving funding support from banks and new-age NBFCs, as cash flow lending is gaining traction. Do you also see a change underway?

While changes are happening, are all MSMEs well-funded? No, there are still significant gaps in terms of credit. If you look at banks and fintech companies, many are focused on MSME lending, but the penetration still has a long way to go. Addressing this gap will be critical. As you rightly mentioned, the role of the new generation is equally important. Often, the focus is solely on very large companies and what the government needs to do, but all these elements need to work in unison to drive real change.
 

Are developments, like in semiconductor manufacturing, happening mainly because of incentives under schemes like PLI?

I think the answer is both yes and no. For example, in battery manufacturing, the only large-scale lithium-ion set-up currently operational is the one established by Exide. Interestingly, they did not receive PLI approval. What the PLI scheme has done is bring these opportunities into the spotlight. Many companies applied for it-some received approval, while others did not. But it made businesses think more deeply and strategically about these sectors.

Even though Exide did not qualify for PLI incentives, they still went ahead with their investment. Of course, for those who qualify, the incentive improves the return on investment or internal rate of return, making the business case more attractive.

However, incentives are not the primary reason companies undertake such projects.

Businesses aim to create long-term economic value, generate jobs, and establish a strong market position.

Incentives simply act as an additional benefit, encouraging companies to evaluate opportunities more closely.
 

How do you see India’s progress in sunrise sectors like renewable energy, green hydrogen, and EV batteries?

It’s not a uniform picture. If we look at the energy transition ecosystem, I think India is well-positioned. For example, in the solar value chain, just a few years ago, we were fully dependent on imports for panels and modules. However, recent policy changes have enabled us to build sufficient module manufacturing capacity, and now many companies are evaluating cell manufacturing as well. This could eventually become more cost effective than importing, although it may not yet be 100% cheaper due to factors like power costs. The intent, however, is to drive efficiencies and achieve cost competitiveness. In the wind energy ecosystem, we already have established players.

In the battery ecosystem, we now have one established company, and many others are exploring the production of components and modules.

India is positioning itself well in the energy ecosystem to potentially become a significant exporter of green energy over time, reducing its reliance on imported gas.


@anandadhikari