Image used for representational purposes. File
| Photo Credit: Reuters

78 Years of Freedom

The Narendra Modi government’s quest to bolster the domestic manufacturing sector is not the first time a government has tried this. In fact, the manufacturing sector has been the focus of government policy — in one way or the other — ever since 1956, to relatively modest success.

At the time of Independence or thereabouts, the Indian economy looked very different from its current state both in terms of size as well as composition. At the time, agriculture was the overwhelmingly dominant driver of the economy, contributing about half of the country’s Gross Domestic Product (GDP), as per data with the Reserve Bank of India.

The nascent manufacturing sector, on the other hand, made up about 11% of the GDP. Now, the services sector has taken over the dominant role vacated by agriculture, while manufacturing has remained largely where it was.

The first Five Year Plan (1951-56) focused on the idea of increasing domestic savings, since it was presumed that higher savings would directly translate into higher investments. This policy, however, ran into a fundamental problem: investments could not materially increase as the country did not have a domestic capital goods producing sector.

The second Five Year Plan (1956-61), based on the ideas of PC Mahalanobis, and successive Plans sought to address this by increasing investments in the capital goods producing sectors themselves. The idea was to increase government investment in capital goods production, while the micro, small, and medium enterprises (MSMEs) would cater to the consumer goods market.

As the economist and professor Aditya Bhattacharjea noted in a paper published in Springer Nature: “With long-run growth being seen as the means for reducing widespread poverty, the model provided an intellectual justification for increasing investments in the capital goods sector of a labour-abundant country.”

So, what followed was that growth rates of both investment in and output of the machinery, metals, and chemicals industries outpaced those of consumer goods industries.

The Mahalanobis model did not incorporate specific industry-wise policies, but it had a few broad themes that came to characterise India’s industrial policy over the country’s first three decades since Independence.

The first and most obvious theme was the huge role of the public sector. The feeling at the time was — not unlike what the Modi government felt in the wake of the COVID-19 pandemic — that private sector investment would not be picking up the load for some time, and so the public sector would have to do the heavy lifting.

The 1948 Industrial Policy Resolution (IPR) reserved the production of arms and ammunition for the Union government, and new investments in sectors as diverse as iron and steel, aircraft, ships, telephone, telegraph and wireless equipment were kept as the exclusive domain of central public sector enterprises.

The 1956 IPR, which came after the historic Avadi session of the Indian National Congress in 1955, expanded the reserved list to 14 sectors. The driving ideology was that the government and the public sector would assume the “commanding heights” of the economy.

The second and equally significant theme of this thought process was the use of licensing as a means to ensure that scarce resources were allocated to priority sectors.

Third, the belief was that the domestic industry would need to be protected from international competition, and this protection took the form of high tariffs — something U.S. President Donald Trump seems to have a problem with even today — and import licensing.

By 1980, the share of manufacturing in India’s GDP had grown to about 16-17%. According to some economists like Pulapre Balakrishnan, the real growth in the manufacturing sector took off from here, and not from the 1991 liberalisation, as is often assumed.

This, they said, was due to a few policy changes enacted by the government of the time: allowing up to 25% automatic expansion of licensed capacities, allowing manufacturing licences to be used to produce other items within the same broad industrial category, and significant relaxation of price controls on cement and steel.

The 1991 reforms and the resultant end of the ‘licence raj’, the opening up of the economy to the private sector and international competition further helped things, with the manufacturing sector growing strongly and contributing a steady 15-18% of a rapidly-growing GDP till about 2015.

Steep fall

That year saw a marked change, however, with the share of manufacturing in GDP consistently falling for the next decade. A major reason for this change was the non-performing assets (NPA) crisis in the banking sector. Profligate lending by banks in the 2009-14 period led to a build-up of bad loans, which came to light in 2015-18 following an Asset Quality Review of the banking sector. Such was the crisis and its fallout that bank lending to large industry virtually dried up.

This, coupled with the loan-fuelled over-capacity that had been created during the 2009-14 period meant that companies did not need to invest in additional capacity to meet demand, and could not find adequate credit even if they wanted to invest.

Underpinning all of this was the increased reliance on imports from China, which virtually converted large parts of Indian manufacturing into assembly and repackaging units. Of course, the COVID-19 pandemic also severely hampered both demand and investments in India.

The Modi government’s Make in India efforts, thus, could not prevent the share of manufacturing in GDP falling from 15.6% in 2015-16 to 12.6% in 2024-25 — the lowest share in 71 years.

Another problem faced by the Modi government, something all previous governments also faced, was that a lot of the reforms to drive manufacturing were needed at the State level. So, while the Union government has put in place the framework for land and labour reforms that could potentially increase the scale of Indian manufacturing, they are held up as most State governments are not cooperating.

The services sector, on the other hand, has gone from strength to strength on the back of the IT boom. So, where services made up 37% of the GDP in 1950, this grew to 42% by 1996-97. Thereafter, the acceleration was rapid, with the sector now making up nearly 58% of the GDP.

So, 78 years after Independence, the manufacturing sector remains an also-ran in India’s growth story, despite fervent attempts by government after government. The services sector, on the other hand, has blossomed outside the government’s focus.

Published – August 15, 2025 03:26 am IST

New Delhi:

India’s manufacturing industry is bearing the brunt of a fallout between the United States and China over threats of a trade and tariff war by the incoming Trump administration, and its retaliatory measures imposed by Beijing.

In recent years, under its flagship ‘Make in India’ programme, India has seen exponential growth in key sectors like solar power, electronics and mobile manufacturing, and the automobile sector, especially for electric vehicles or EVs – all of which are directly or indirectly dependent on raw materials, components, and ancillaries supplied by China.

As China prepares for an imminent face-off with the US, which may be just days away with Donald Trump’s return as President on January 20, Beijing has already made the first move by taking some precautionary measures as a warning to Washington that it too will suffer the trade war.

China has put restrictions on the export of key raw materials, essential rare earth minerals, components, high-tech equipment, and machinery which are needed to manufacture solar panels, its parts, mobile phones and other gadgets, as well as EVs and its batteries.

These curbs not just pertain to direct exports to the United States, but to any other country which uses them to manufacture finished products meant to be shipped to the US.

In December 2024, China banned the export of gallium and germanium, which are vital for solar cell production. Shortly after that, it also banned antimony, critical for semiconductors and essential defence technologies. Earlier this month, Beijing further declared that it will now add lithium extraction and battery cathode technologies – which are crucial for EV battery manufacturing – to its controlled export list.

With the US having reduced its dependence on China for a large part of its overall imports, Washington has, in recent years, increasingly turned to New Delhi as an alternative to Beijing to fill the deficit. And so, China’s latest curbs, though aimed at the US, has indirectly hurt India too.

“Indian firms in electronics, solar, and EV sectors are facing major delays and disruptions as China has blocked exports of inputs and machinery,” economic think-tank GTRI founder Ajay Srivastava said, adding that “India is particularly vulnerable to China’s export restrictions, as many of its industries depend on Chinese machinery, intermediate goods, and components.”

“This also signals deeper geopolitical tensions and trade war. We hope India-specific restrictions go away soon as they will also hurt China,” he added.

India’s imports from China increased to $101.73 billion in 2023-24 from $98.5 billion in 2022-23.

The think-tank even suggested that China’s moves may be double-edged, as Beijing has been displeased for a while over New Delhi’s restrictions on Chinese investments and visas for its nationals.

In 2020, shortly after the deadly Galwan Valley clash between Indian and Chinese soldiers in eastern Ladakh, the Government of India had made it mandatory for countries sharing land borders with India to seek its approval for investments in any sector. The move was also made keeping in mind India’s national security objectives in its volatile neighbourhood.
 

New Delhi:

India’s manufacturing industry is bearing the brunt of a fallout between the United States and China over threats of a trade and tariff war by the incoming Trump administration, and its retaliatory measures imposed by Beijing.

In recent years, under its flagship ‘Make in India’ programme, India has seen exponential growth in key sectors like solar power, electronics and mobile manufacturing, and the automobile sector, especially for electric vehicles or EVs – all of which are directly or indirectly dependent on raw materials, components, and ancillaries supplied by China.

As China prepares for an imminent face-off with the US, which may be just days away with Donald Trump’s return as President on January 20, Beijing has already made the first move by taking some precautionary measures as a warning to Washington that it too will suffer the trade war.

China has put restrictions on the export of key raw materials, essential rare earth minerals, components, high-tech equipment, and machinery which are needed to manufacture solar panels, its parts, mobile phones and other gadgets, as well as EVs and its batteries.

These curbs not just pertain to direct exports to the United States, but to any other country which uses them to manufacture finished products meant to be shipped to the US.

In December 2024, China banned the export of gallium and germanium, which are vital for solar cell production. Shortly after that, it also banned antimony, critical for semiconductors and essential defence technologies. Earlier this month, Beijing further declared that it will now add lithium extraction and battery cathode technologies – which are crucial for EV battery manufacturing – to its controlled export list.

With the US having reduced its dependence on China for a large part of its overall imports, Washington has, in recent years, increasingly turned to New Delhi as an alternative to Beijing to fill the deficit. And so, China’s latest curbs, though aimed at the US, has indirectly hurt India too.

“Indian firms in electronics, solar, and EV sectors are facing major delays and disruptions as China has blocked exports of inputs and machinery,” economic think-tank GTRI founder Ajay Srivastava said, adding that “India is particularly vulnerable to China’s export restrictions, as many of its industries depend on Chinese machinery, intermediate goods, and components.”

“This also signals deeper geopolitical tensions and trade war. We hope India-specific restrictions go away soon as they will also hurt China,” he added.

India’s imports from China increased to $101.73 billion in 2023-24 from $98.5 billion in 2022-23.

The think-tank even suggested that China’s moves may be double-edged, as Beijing has been displeased for a while over New Delhi’s restrictions on Chinese investments and visas for its nationals.

In 2020, shortly after the deadly Galwan Valley clash between Indian and Chinese soldiers in eastern Ladakh, the Government of India had made it mandatory for countries sharing land borders with India to seek its approval for investments in any sector. The move was also made keeping in mind India’s national security objectives in its volatile neighbourhood.
 

New business activity in the services industry and manufacturing orders remained robust. File
| Photo Credit: Reuters

India’s business activity accelerated at its fastest pace in three months in July, thanks to strong demand, especially in the services sector, according to a survey that also showed companies hired at the fastest pace in over 18 years.

The data reflected sustained growth in the private sector, which according to the NDA government’s Union Budget since the national election will get incentives to improve skills and spur employment.

HSBC’s flash India composite purchasing managers’ index, compiled by S&P Global, rose to 61.4 this month from June’s final reading of 60.9, marking three years of expansion. The 50-level separates growth from contraction.

“The Flash Composite Output Index signalled continued robust growth in India’s private sector,” noted Pranjul Bhandari, chief India economist at HSBC. “The rise in output in July was led by a further increase in business activity in the manufacturing sector, while the pace of expansion in services output also accelerated and remained well above its long-run average.”

Services, manufacturing register growth

Overall expansion was led by the dominant services industry, whose PMI rose to a four-month high of 61.1 this month from 60.5 in June. Growth in manufacturing was also robust, and the factory PMI increased to 58.5 from 58.3 – its highest since April.

The report said favourable market conditions, buoyant client appetite and enhanced technology helped in the improvement of private sector activity. Both new business activity in the services industry and manufacturing orders remained robust.

Job creation rose at the fastest pace since April 2006, supporting overall business confidence at the start of this quarter, which eased to a seven-month low in June.

Inflation worries

“Companies turned more optimistic in July, following a moderation in business confidence in June,” Mr Bhandari said, adding, “We note that the rate of input cost inflation continued to trend higher in both sectors, which has driven firms to keep raising sales prices.”

Meanwhile, prices charged rose at the steepest pace in over 11 years, but robust demand allowed firms to pass on lofty input costs from high material, transportation and labour prices, to their clients.

Higher prices could cloud the Reserve Bank of India’s interest rate outlook, which is focused on returning inflation to its 4% medium term target. The central bank is expected to cut its key policy rate next quarter.

The production of capital goods picked up pace in January. File
| Photo Credit: Reuters

The industrial output growth slowed to 3.8% in January, from an upgraded uptick of 4.24% in December. The manufacturing sector’s growth slowed to 3.2% from 4.5% a month ago, even as the uptick in mining and electricity generation accelerated to 5.9% and 5.6%, respectively.

The production of consumer durables jumped 10.9%, the highest growth in three months, but gained from base effects as their output had contracted 8.2% in January 2023.

Capital goods production picked up pace to grow 4.1% in January, and intermediate goods also grew faster at 4.8% compared to 3.9% in December 2023. However, the growth rates for primary goods and infrastructure/construction goods eased to 2.9% and 4.6%, respectively in January.

Eight of the 23 manufacturing segments tracked by the National Statistical Office to compute the Index of Industrial Production (IIP) contracted in January, with computers, electronics and optic products seeing the steepest fall of 11.9%. Pharmaceuticals’ output remained flat compared to last January.

Between April 2023 and January 2024, electronics and computers have contracted 14%, second only to the 17.5% drop in apparel production over the same period. In January, apparel production fell 1.6%.

Other transport equipment grew 25.3%, fabricated metal products rose 21.4%, followed by motor vehicles and furniture whose output rose 18% and 15.1%, respectively, in January.

Prices of food remained elevated. File
| Photo Credit: SUSHIL KUMAR VERMA

India’s retail inflation remained virtually unchanged at 5.09% in February from 5.10% in January, even as food prices paid by consumers rose from 8.3% to 8.66%, the National Statistical Office said on March 12.

The industrial output growth slowed to 3.8% in January, from an upgraded uptick of 4.24% in December. The manufacturing sector’s growth slowed to 3.2% from 4.5% a month ago, even as the uptick in mining and electricity generation accelerated to 5.9% and 5.6%, respectively.

The production of consumer durables jumped 10.9%, the highest in three months. However, consumer non-durables output shrank 0.3%, marking the second year-on-year drop in production levels in three months.

The production of capital goods picked up pace to grow 4.1% in January, and intermediate goods also grew faster at 4.8% compared to 3.9% in December 2023. However, the growth rates for primary goods and infrastructure/construction goods eased to 2.9% and 4.6%, respectively in January.

Eight of the 23 manufacturing segments tracked by the National Statistical Office to compute the Index of Industrial Production (IIP) recorded a contraction in January, with computers, electronics and optic products seeing the steepest fall of 11.9%, while pharmaceuticals’ output remained flat compared to last January. Between April 2023 and January 2024, electronics and computers have now contracted 14%, second only to the 17.5% drop in wearing apparel production over the same period. In January, wearing apparel production fell 1.6%.