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India's manufacturing sector, a cornerstone of its economic growth, is experiencing a significant downturn. Its contribution to the GDP, stagnant at 16-17% for years, is projected to plummet to 13-14% by 2025. This decline, despite government initiatives like 'Make in India,' highlights underlying structural weaknesses exacerbated by global headwinds. Supply chain disruptions, escalating costs of raw materials, energy, and logistics, and a sluggish export environment have severely hampered the sector's competitiveness. The global supply chain realignment post-pandemic has favored more cost-effective locations in ASEAN, leaving India at a disadvantage. For example, the cost of steel in India is 20-30% higher than in China, significantly impacting sectors like construction and automotive. The decline in merchandise exports, falling 11% year-on-year in the first half of FY24, further underscores the urgency of the situation. This necessitates immediate policy intervention, and Budget 2025 must provide the necessary targeted measures to address both short-term challenges and long-term structural issues.
One crucial area requiring immediate attention is the transition to advanced manufacturing. India's dependence on labor-intensive and low-value manufacturing is unsustainable in today's technology-driven global economy. The implementation of enhanced Production-Linked Incentive (PLI) schemes for sectors such as semiconductors, electric vehicles (EVs), and robotics is vital to stimulate investment and foster innovation. Learning from countries like South Korea, which successfully boosted advanced manufacturing through significant tax benefits for research and development (R&D), India should allocate a substantial portion of its GDP to technology-intensive sectors. Furthermore, promoting green manufacturing, aligning with global Environmental, Social, and Governance (ESG) standards, can make Indian products more competitive. This can be achieved through tax rebates and subsidies for the adoption of renewable energy in manufacturing processes.
Addressing logistical inefficiencies is equally critical. Logistics costs represent a staggering 14% of India's GDP, significantly higher than the 8-10% seen in developed nations. Modernizing ports, improving last-mile connectivity, and establishing multi-modal logistics hubs are essential for cost reduction and efficiency enhancement. India can learn from Vietnam, which drastically reduced port turnaround times through focused infrastructure investment, propelling its rise as a manufacturing powerhouse in Southeast Asia. Simultaneously, the widening skills gap in the Indian workforce needs immediate attention. Despite initiatives like 'Skill India,' approximately 70% of the labor force lacks formal training, hindering their preparedness for emerging sectors like artificial intelligence, robotics, and the Internet of Things (IoT). Budget 2025 must prioritize vocational training programs that equip workers with the necessary skills for high-value manufacturing. Public-private partnerships, mirroring Germany's dual vocational training system, can effectively align workforce capabilities with industry demands.
Trade policy reforms are also crucial for boosting exports. Export tariffs, complex Goods and Services Tax (GST) regulations, and high import duties on raw materials have deterred global manufacturers from investing in India. Streamlining these regulations and negotiating trade agreements focusing on strategic sectors can enhance India's attractiveness as a manufacturing hub. ASEAN's trade-friendly policies have consistently attracted substantial foreign investment, providing a model for India to emulate. The potential benefits of these interventions are significant. With targeted policies, India's manufacturing sector could experience a resurgence, with its GDP contribution rising to 18% by FY26. Focusing on advanced and green manufacturing alone could generate over 10 million jobs in the next five years, while strategic trade reforms could propel manufacturing exports to grow at a compound annual rate of 12-15% by FY26. These objectives are not only achievable but essential for realizing India's aspiration of becoming a $5 trillion economy.
Budget 2025 transcends a mere fiscal exercise; it represents a pivotal moment for India's manufacturing sector and its overall economic future. By decisively addressing the core challenges of cost competitiveness, infrastructure development, workforce skilling, and trade policy, the government can effectively reverse the sector's decline and lay the groundwork for sustained, long-term growth. The stakes are undeniably high, but so is the opportunity to reshape India's manufacturing narrative and reclaim its position as a global economic powerhouse. The success of Budget 2025 in revitalizing the manufacturing sector will significantly impact India's trajectory towards achieving its ambitious economic goals. Failure to address these crucial challenges will likely lead to a prolonged period of stagnation and missed opportunities in a highly competitive global landscape. The urgency of the situation necessitates bold and decisive action from the government to ensure the sector's recovery and long-term sustainability.
Source: Recalibrating growth: How Budget 2025 can offset decline in India’s manufacturing sector