The share of manufacturing in India’s economy can easily expand

At first glance, this decline is both puzzling and disheartening, especially when set against the country’s ambition of lifting manufacturing’s share in GDP to 25%. After all, the share of manufacturing in the country’s gross value of output (GVO) has held steady at around 38%—almost the same as services. So, why is the manufacturing share of GVA low?

The answer lies not so much in output, but in prices. In GVA terms—which measure a sector’s ‘net contribution’ after subtracting inputs—manufacturing looks far smaller than its share of 38% in GVO because intermediate consumption is very large in the manufacturing sector.

Secondly, unlike agriculture, where prices have risen sharply due to the prevalence of government support, which sees an annual guaranteed price increase, or services, which enjoy more pricing power, manufacturing is usually characterized by global competition, cost-cutting technologies and narrower margins. For instance, by fiscal year 2024-25, the agricultural price deflator (current price GVA/constant price GVA) stood at 2.17 from the base year value of 1, compared to just 1.41 for manufacturing and 1.75 for services.

In other words, manufacturing’s relative price (calculated as the manufacturing sector’s deflator divided by the other sector’s deflator) compared to agriculture has fallen by half over two decades (from 1.29 in 2004-05 to 0.65 in 2024-25), and even against services it has slipped by a quarter (to 0.81 by 2024-25).

That is why manufacturing’s share has not collapsed in real (constant price) terms, but remains steady at 18%. However, in nominal (current price) terms, it has lost ground. This is no reflection of any de-industrialization.

We can do better, though.

India depends on the rest of the world for critical inputs and finished products, including capital and infrastructure goods, particularly those needed for an energy transition. This is reflected in our large merchandise trade deficit.

India must learn from small countries that have created global technological choke points. For instance, the global semiconductor industry depends on companies like ASML for lithography machines, TSMC for production and Arm for chip designs. They show how strategic indispensability can give a country outsized leverage.

India should identify a handful of critical technologies with the aim of becoming irreplaceable in those areas. That is the overarching purpose of government initiatives like the 2023-born Anusandhan National Research Foundation (ANRF) and its recently announced Research, Development and Innovation (RDI) scheme.

However, they will work only if India’s private sector sheds its risk-averse mindset. For too long, Indian firms have relied on wage arbitrage and low-cost repetitive IT services rather than building world-class products. With AI eroding that advantage, the only way forward is deeper investment in R&D and bold bets on sunrise sectors.

The Indian pharma sector overcame the challenge posed by the World Trade Organization’s agreement of 2015 on Trade-Related Intellectual Property Rights (TRIPS) by stepping up its R&D investment substantially. Other manufacturers must emulate them now. By engaging proactively with the government’s new research initiatives through augmented funding, co-development and policy inputs, the private sector can help shape India’s R&D and innovation landscape to ensure government schemes deliver purposeful, sustainable and globally competitive outcomes for the country.

For the private sector to become competitive, smart regulation and less protection are urgent. Regulations must be put through a framework or checklist that ensures consideration of a comprehensive set of factors such as ease and cost of compliance, duplication, scope for targeted versus general application of rules, net economic costs and benefits, and possibilities of unintended adverse consequences.

The costs of protection for large enterprises and of regulation fall disproportionately on small and medium enterprises. Protection must be limited in scope and time and always be in return for productivity and export performance.

The rationalization of India’s GST into mostly a two-slab system with its correction of inverse duty structures (where raw materials have more taxes than final output) is expected to lower input costs, reduce prices of many consumption goods and boost demand for manufactured goods. Now the proposed National Manufacturing Mission needs to be finalized and operationalized soon, including as a mechanism for facilitating coordination between central and state agencies interacting with Indian industry.

For now, India faces a very high tariff barrier in one of its key markets. This challenge must be turned into an opportunity to raise Indian manufacturing to global standards. India can become a manufacturing powerhouse only by building what the world cannot do without. As a Chinese government policy document published a decade ago, and cited in Patrick McGee’s book Apple in China: The Capture of the World’s Greatest Company, observed, “Without a strong manufacturing industry, there will be no country and no nation.”

The authors are, respectively, the chief economic advisor and an economic advisor to the Government of India.