Business, India, Factory – Young Businessman with his factory floor supervisor inspecting the newly installed heavy machinery at a textile factory.
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This report is from this week’s CNBC’s “Inside India” newsletter which brings you timely, insightful news and market commentary on the emerging powerhouse and the big businesses behind its meteoric rise. Like what you see? You can subscribe here.
The big story
India has long harbored ambitions to become a manufacturing powerhouse. A flagship scheme launched five years ago to help the country realize that aim, however, has fallen short of achieving key goals.
In 2020, the Indian government launched a production-linked incentive scheme to attract local and foreign businesses to establish and grow operations in the country.
The scheme was rolled out as a pilot under the “Make in India” initiative which seeks to galvanize the nation’s efforts in becoming a manufacturing hub.
With an outlay of 1.97 trillion Indian rupees ($23 billion), the PLI program focused on 14 sectors, including aerospace, automotive, electronics, pharmaceuticals and textiles. The scheme, along with other reforms, was expected to help lift the share of manufacturing to 25% of India’s gross domestic product by 2025.
It has, however, fallen dramatically short of helping meet that target. Manufacturing’s share in GDP dropped to 14% in the fiscal year ending March 2025 from over 15% when the scheme was launched.
The program had also targeted to generate production/sales worth 15.52 trillion Indian rupees, but as of November 2024 that figure was just about 14 trillion Indian rupees.
This has led to speculation that the scheme might not be extended, with Reuters reporting last week that the government will let it lapse in light of disappointing results.
Several firms failed to kickstart production, while others that met manufacturing targets found the subsidy pay out to be slow, according to government documents and correspondence seen by Reuters.
A statement released by India’s Ministry of Commerce and Industry following the report did not address the status of the PLI scheme.
Instead, it highlighted the effectiveness of the program, and how it “incentivized domestic manufacturing, leading to increased production, job creation, and a boost in exports.”
According to MCI, 764 companies, including Apple supplier Foxconn, Indian conglomerate Reliance Industries and auto giant Mahindra and Mahindra, signed up for the PLI scheme, with investments standing at $1.61 trillion Indian rupees as of November last year.
Systemic issues
While the fate of India’s PLI scheme appears uncertain at this juncture, the issues the country faces in realizing its lofty ambitions need a deeper look.
Experts CNBC’s Inside India spoke to argue that the cracks in the country’s manufacturing sector extend beyond the outcome of the PLI or the “Make in India” initiative as a whole.
“There was never a case that the PLI scheme will work out in all 14 sectors. It has worked out in some niche areas, but manufacturing in India has been constrained for a very long time. And this goes back to policy which shielded domestic manufacturing and made it less competitive than other global manufacturing hubs,” said Dhiraj Nim, a foreign exchange strategist and economist at ANZ Bank.
Policy gaps include regulatory burdens, inflexible labor laws and difficulties in doing business, which cumulatively “could be holding back manufacturing,” he said.
India has also been a services-oriented economy that has traditionally focused on tech and global command center operations over manufacturing, creating a labor force that is not as prepared to participate in manufacturing.
A skills gap in sectors such as textile production has impeded India’s productivity and output, with other emerging markets including Bangladesh, the Philippines, Vietnam, Morocco and Mexico, faring better, Nim noted.
These countries also have cheap labor and a price advantage, given that the “Indian rupee has not been competitive relative to other currencies for 15-20 years,” he said.
“These are structural challenges that India has been facing for decades. There is no easy fix,” Nim added.
Tailwinds
While India has teething issues to contend with in its manufacturing sector, it does have one major advantage: a growing young and urban population with rising disposable incomes to afford quality products.
Global conglomerates are increasingly vying for a space in the fifth largest economy to tap these consumers — incentivizing having a presence in the country.
“All major manufacturers already have or are considering having a plant in India,” Anupam Singhal, global head of manufacturing at the Tata Group-owned TCS Global, told CNBC’s Inside India.
“India is considered to be the youngest nation and a lot of young people have aspirations to consume. So, for any company to be competitive, they need to be in India,” he added.
Even companies that had exited are looking to return: Ford Motors is looking to reenter India with a plant in Chennai, Tamil Nadu.
Aside from favorable demographics, mounting trade tensions between the U.S. and countries such as China, Mexico and Canada have made India a “strategic location” for companies to manufacture and export from, said Samir Kapadia CEO of India Index, which helps foreign companies set up operations in the country.
With countries such as China staring at increasingly harsh tariffs on exports to the U.S., Kapadia argues, “nobody can do business there with those kinds of numbers.”
“People are going to India out of necessity,” he said, adding that it offers “cost arbitrage and scale,” alongside a strong comparative advantage in the consumer electronics, aerospace, defense and automotive sectors.
The road ahead
U.S. President Donald Trump’s retaliatory tariff plans, however, make India a target as well. And that could erode its appeal as a manufacturing destination.
India is reportedly looking at cutting tariffs on 55% of U.S. imports to protect its exports. Currently, its tariffs on imports from the U.S. range between 5% and 30%.
While ANZ’s Nim said the direct impact of any tariffs by the U.S. on Indian exports “is going to be very manageable,” he cautioned that they will drive up the cost of production and make it challenging for companies to employ many workers.
India’s Commerce and Industry Minister Piyush Goyal expects overall exports, which include services as well, to hit $2 trillion by 2030, from $778.21 billion in the fiscal year 2023-2024. Initiatives to spur this include rebates on duties and taxes on exports and more free trade agreements such as with Iceland, Liechtenstein, Norway, and Switzerland later this year.
The South Asian powerhouse currently has 13 FTAs, falling behind emerging markets such as Vietnam, which has 17. Having FTAs will really move the needle for India and help keep its exports favorable — like it has for Vietnam, Nim said.
“It will reduce barriers to trade and help lower costs – which can attract foreign companies to India and help local firms have competitive products. Overall, the manufacturing sector will benefit,” he added.
Need to know
India’s former commerce secretary says the country should resist unilateral concessions in U.S. trade negotiations. Anup Wadhawan urged India not to give in to unilateral concessions and said that any trade-related concessions should be negotiated within the Bilateral Trade Agreement rather than being granted separately. India and the U.S. are engaging in critical trade talks this week ahead of Trump’s reciprocal tariffs scheduled for April 2.
India looks to shield $66 billion tariff on its exports to the U.S. The Indian government is reportedly open to cutting tariffs on more $23 billion of U.S. imports in the first phase of a trade deal between the countries, two government sources said. This is reportedly the country’s the biggest cut in years and is aimed at fending off reciprocal tariffs.
There is an urgent need for India to decarbonize its power sector. Radhika Kak, an independent researcher at the Harvard Business School and Varad Pande, a partner at BCG, explore the pressing need for the South Asian powerhouse to decarbonize its energy sector. There are three ways to go about it, they argue: first, by integrating renewable energy into the grid; second, improving energy efficiency; third, leaning into decentralized energy solutions.
What happened in the markets?
The Nifty 50 benchmark index closed at 23,591.95 on March 27. The benchmark index has risen 6.69% since the start of the month but is down 0.17% from the start of the year.
The benchmark 10-year Indian government bond yield was slightly lower at 6.596%.
On CNBC TV this week, Macquarie Capital’s Head of India Equity Research Aditya Suresh said he does not expect a “meaningful rally” in India’s benchmark indexes. This is because “earnings need a reset lower [as] expectations are too high,” he explained.
Meanwhile, Kotak Institutional Equities’ Managing Director and Co-head Sanjeev Prasad called for a new valuation framework to assess market performance, given increasing levels of uncertainty. “The valuation frameworks have become very simple,” he said, adding that investors have been basing their fair value estimates on a company’s multiples over the last 3-5 years. “The historical multiples probably don’t hold anymore, they were valid in a certain context; the environment is a lot more different now,” Prasad added.
What’s happening next week?
The week ahead sees a slew of releases ranging from the purchasing managers’ index of various countries to the unemployment reading, giving investors insight into how factory and services activities are holding up amid global trade turmoil.
March 28: Japan consumer price index for March, U.K. retail sales for February, U.K. fourth-quarter 2024 GDP, U.S. Personal Consumption Expenditure price index for February
March 31: China National Bureau of Statistics purchasing managers’ index for March
April 1: U.S. manufacturing purchasing managers’ index for March, China Caixin manufacturing purchasing managers’ index for March, Japan unemployment rate for February, Reserve Bank of Australia interest rate decision, U.S. ISM Manufacturing purchasing managers’ index for March
April 2: India HSBC manufacturing purchasing managers’ index for March
April 3: U.K. S&P Global purchasing managers’ index for March
