Expert Comment — South Asia Programme
23 February 2026
The narrative is seductive in its simplicity. As Western companies seek to reduce their dependence on Chinese manufacturing supply chains, India — with its large workforce, democratic institutions, and improving infrastructure — is perfectly positioned to capture the “China plus one” opportunity. Prime Minister Modi’s Production-Linked Incentive scheme offers generous subsidies in 14 strategic sectors. Foreign direct investment inflows have risen. Apple now assembles iPhones in Tamil Nadu. The story writes itself. The problem is that the data tells a different and considerably more complicated story.
The Manufacturing Paradox
India’s share of global manufacturing value-added has stagnated at approximately 3 per cent for two decades, despite the country’s rapid overall economic growth. China’s share, by contrast, rose from 6 per cent in 2000 to over 30 per cent in 2020 before beginning a slow decline. The gap is not closing. Vietnam, Bangladesh, and Indonesia have all increased their manufacturing shares faster than India over the past decade. The question is not whether India is growing — it is — but whether it is growing in the sectors and at the scale necessary to absorb the 12-15 million young Indians entering the labour force each year.
India’s manufacturing story is not about failure. It is about the gap between potential and performance. The country has all the ingredients for manufacturing success — labour, capital, democracy — but the recipe has not yet produced the expected results.
The Production-Linked Incentive scheme, while generous on paper, has achieved mixed results. In mobile phones, the flagship success story, production has risen sharply, but the value-added that actually occurs in India remains low — much of the component supply continues to be imported from China and other East Asian economies. In sectors like automobiles and pharmaceuticals, where India has genuine competitive advantages, the PLI scheme has made a positive but marginal difference. In most other sectors, the impact has been negligible
The Structural Bottlenecks
India’s manufacturing challenge is not a single problem but a constellation of interrelated obstacles. Labour laws, while recently reformed in some states, continue to constrain the emergence of large-scale, formal-sector manufacturing. The average Indian manufacturing firm employs fewer than 50 workers, compared to over 500 in China and over 300 in Vietnam. Small firms cannot achieve the economies of scale necessary to compete globally. The fragmentation of India’s industrial structure is a legacy of decades of protectionist policies and remains one of the most significant barriers to manufacturing growth
Infrastructure, while improving, remains inadequate. India’s logistics costs are estimated at 13-14 per cent of GDP, compared to 8 per cent in China and 10 per cent in the United States. Power outages remain common in industrial areas. Port turnaround times are among the highest in Asia. The government’s record spending on infrastructure under the National Infrastructure Pipeline and the Gati Shakti initiative is addressing these problems, but the gap between current capacity and what is needed remains substantial
The Geopolitical Opportunity
The geopolitical environment has created an opening that India has not fully exploited. The US strategy of “friendshoring” — directing investment towards trusted partners — has benefited Mexico, Vietnam, and some Eastern European countries more than India. This is partly a function of geography — India is further from major consumer markets — but also of the investment climate. Foreign investors continue to report difficulties with land acquisition, regulatory approvals, and contract enforcement. The Telangana and Karnataka state governments have made notable progress in improving the business environment, but implementation across India remains uneven
India’s comparative advantage in manufacturing is not in labour-intensive assembly — where Bangladesh and Vietnam offer lower costs and more flexible labour regimes — but in skill-intensive, engineering-driven production. Pharmaceuticals, automobiles, specialised machinery, and defence equipment are sectors where India can compete. The challenge is to scale these sectors sufficiently to absorb the millions of workers who will otherwise remain in low-productivity agriculture and informal services
India’s manufacturing story is one of genuine progress that falls short of the narrative. The country is making gains in high-value manufacturing, attracting significant investment, and improving its business environment. But the scale of transformation required to absorb India’s growing workforce, reduce dependence on imported components, and achieve the government’s ambitious target of raising manufacturing’s share of GDP to 25 per cent from the current 17 per cent is not yet within reach. The China plus one opportunity is real, but India is not yet positioned to capture it at the scale and speed that the narrative suggests.