Why manufacturing continues to fail even with unprecedented incentives

The fact is the economy is slowing down with the GDP growth falling sharply by 2.7 percentage points – from 9.2 per cent in FY24 to 6.5 per cent in FY25.

Going by the latest projections, by both the Reserve Bank of India (May 29) and Chief Economic Advisor (CEA) V Anantha Nageswaran (May 30), growth would be 6.5 per cent in FY26 – indicating a stagnation at the current level.

Economy on slow-burn

In the post-pandemic recovery phase, growth peaked at 9.7 per cent in FY22 (from -5.8 per cent in FY21) and has gone down to 6.5 per cent now, to below the pre-pandemic average of 6.8 per cent during FY15-FY20.

This isn’t so much due to external shocks hurting its trade (Russia-Ukraine and Israel-Palestine wars and now the tariff war unleashed by the US). Rather, its domestic factors are to be blamed. After all, China’s growth beat all forecasts to rise in both Q4 of 2024 and Q1 of 2025 to 5.4 per cent (more than forecasted 5.1 per cent growth for both quarters), despite it being the primary target of the US tariff war.

China’s performance is attributed to its domestic factors: stronger industrial output and retail sale. If that had that been the case with India, its growth story would have been different.

Also read: Why India is facing an investment winter despite booming GDP

Manufacturing refuses to fly

The other development to note is India’s manufacturing slump.

India’s manufacturing has consistently failed to deliver despite a series of unprecedented fiscal incentives and policy assistances in the past 11 fiscals.

Some of these are: (a) ‘Make in India’ mission of 2014 that liberalised FDI regime, brought single-window clearances, reduced compliance burdens, decriminalized a large number of corporate violations (Jan Vishwas Act of 2023 is just one of those, now Jan Vishwas Bill 2.0 is in the pipeline) and pushed physical infrastructure

(b) protectionist policies (both tariff and non-tariff import barriers) to shield domestic companies from foreign competition since 2014

(c) corporate tax cut of 2019 amidst fiscal constraints

(d) massive PLI-DLI subsidies launched in 2020 (total allocation of ₹2.96 lakh crore) and

(e) repo rate cuts to address manufacturing slump since February 2025, continued in April and June cycles (by 100 bps in all) and also cut CRR to 3 per cent (by 100 bps), even as listed companies increased cash and bank balance by 15 per cent to ₹10.7 lakh crore in FY25 – reflecting little need for credit.

Also read: GDP growth likely to slow down due to global uncertainty and tariff war

No, these fiscal incentives and policy assistances didn’t bring “a decade of transformational growth” as the Centre claimed while celebrating a decade of ‘Make in India’ last year.

What official data says

The official data (National Accounts Statistics) tells a contrary tale:

a) Growth in manufacturing Gross Value Added (GVA) fell sharply from 12.3 per cent in FY24 to 4.5 per cent in FY25, even below agriculture’s 4.6 per cent. Its GVA share is back at 17.2 per cent, the same as in FY14, since when a flurry of incentives and protections flowed to it, instead of taking it to 25 per cent (‘Make in India’ objective).

b) Manufacturing GVA growth since pre-pandemic FY20 – when it recorded the first negative growth of 3.1 per cent in the 2011-12 GDP series – averages 4.2 per cent during FY20-FY25, which is again below agriculture’s 4.7 per cent in the same period (graph below).

Industrial growth (mining, manufacturing and electricity, gas etc., with or without construction) has fallen too. Newspaper headlines provided a selective reading of data to mask this failure:

a) Growth in industrial GVA (excluding construction) fell sharply from 11 per cent in FY24 to 4.5 per cent in FY25; with construction too, industrial GVA fell from 10.8 per cent to 5.9 per cent.

b) Growth in industrial GVA was negative, for the first time, in pre-pandemic FY20 (with or without construction) and its average growth during FY20-FY25 was 4 and 4.9 per cent (without and with construction, respectively). This is also probably a historic first, given that agriculture GVA growth averaged 4.7 per cent during the same period.

Ignored by India Inc

But no official study exists to explain why manufacturing and industry recorded negative growth in FY20 – beyond a facile explanation that the Economic Survey of 2019-20 offered, listing slowdown in credit outflows, tapering of demand and trade uncertainties to account for it and sought, as usual, “sectoral incentives for industrial revival”.

Also read: Manufacturing pulls down Q4 GDP to 7.4 pc; FY25 growth to 6.5 pc: Govt data

This negative growth followed a massive corporate tax cut in September 2019, which came amidst severe fiscal constraints forcing Union Finance Minister Nirmala Sitharaman to tell state finance ministers at the Goa GST Council meet in the same month (September 2019) that the Centre wouldn’t be able to pass on GST compensation.

The Finance Ministry took loans to pay states their GST dues for FY21 and FY22 (when it ended).

While revealing for the first time (in the famous ‘Hanuman’ speech of September 2022) that both the corporate tax cut and PLI-DLI subsidies were granted because India Inc had demanded those, the FM demanded to know why private investment in manufacturing had not gone up. But by February 2025, she had given up (“the answer is not for me to give”) and the Chief Economic Advisor was lamenting at the “paradox” of India Inc’s rising investments abroad (OFDI) while not doing the same in India.

Last month, the Finance Ministry’s latest monthly report reflected their sentiments.

It is apparent that India is no longer a better investment destination, from both global and domestic perspectives, even for India Inc. A part of it can be explained through the manufacturing/industrial production (IIP) and manufacturing capacity utilization (CU) data.

Also read: India set to remain fastest growing major economy in FY26: RBI

Low demand for manufacturing goods

Going by the state of economy, one can’t really blame India Inc. Here is why.

Slowdown in manufacturing IIP growth: Average manufacturing IIP growth has fallen to 2.5 per cent since FY20 (when it hit negative growth), from 4 per cent during the previous fiscals of FY13-FY19. Similarly, industrial IIP (general) has also fallen to 2.9 per cent, from 3.8 per cent, for the respective periods.

Idle manufacturing capacity: Manufacturing capacity utilization (CU) averages 74.3 per cent between Q3 of FY22 (when it exceeded 70 per cent after Q1 of FY20) and Q2 of FY25 (up to which the RBI data is available)

Both warrant no boost to manufacturing production from the current level.

Why manufacturing is failing

Apart from economic slowdown and low demand for manufacturing goods, there are many policy and governance issues. Some of the key ones follows with a few examples for illustration (not exhaustive).

1. Missing vision, plan, strategy and roadmap: India’s last National Manufacturing Policy was framed in 2011. This was renamed and relaunched as ‘Make in India’ in 2014. A fresh attempt was made to frame a new manufacturing policy but was abandoned in December 2023, as the Centre decided to persist with its half-baked PLI-DLI subsidy model (more of it later).

In fact, all manufacturing initiatives are ad hoc and piecemeal in nature, often contradictory.

For example, protectionist tariff and non-tariff barriers prevent India Inc. from competing globally but it co-exists with the PLI-DLI and a host of other incentives to boost manufacturing and manufacturing-linked exports (like, refunds and incentives under GST, SEZs, EOUs, Deemed Export Benefit Scheme, Advance Authorization Scheme, Duty Drawback, DFIA, ECGC, MEIS, RoDTEP, RoSCTL, EPCG and so on).

Also read: Five reasons why liquidity crunch will endure, hurting India’s growth

Ironically, services exports get too few incentives in comparison despite the fact that it has, for years, delivered trade surpluses to reduce deficits caused by goods exports and it overtook goods exports in November 2024.

2. Policy sans evidence and logic: What evidence or economic logic led to corporate tax cut of September 2019?

None. On the contrary, months before this cut, the US Congress had, in May 2019, published the outcomes of US President Donald Trump’s 2017 corporate tax cut, revealing that the US lost $40 billion in revenue in 2018 due to this, while corporates used the tax cut to invest in stock buybacks (touching historic high of $1 trillion), instead of the promised investment in real economy and raise wages.

The same happened in India: direct revenue loss of ₹2.28 lakh crore in FY20 and FY21; corporate tax collection fell below that of income tax in FY21, FY23, FY24 and FY25 (BE and RE) and FY26 (BE) and the tax cut was “utilised in debt servicing, build-up of cash balances and other current assets rather than restarting the capex cycle” (RBI annual report 2019-20).

The RBI’s repo rate cut, after a long time, in February 2025 came to address manufacturing slump but its effect is not yet visible. Nonetheless, the RBI cut it for the third time last week.

No debates, consultations

Another example. Budget 2025 announced “Manufacturing Mission: Furthering Make in India” without homework or blueprint (specifics) in hand. It came with a facile statement that said this would further ‘Make in India’ mission “by providing policy support, execution roadmaps, governance and monitoring framework for central ministries and states”.

Following on this, on May 30, 2025, NITI Aayog CEO BVR Subramanian said that a blueprint would be unveiled later this month.

This is a big departure from the past.

Public debates and scrutiny of policies inside or outside the Parliament, elaborate consultations with stakeholders before major policy decisions are no longer in vogue. Policies are announced and then details are worked out.

The havoc such a policy approach causes is evident from what the three recent economic shocks – demonetisation, GST and national lockdown – did to the economy, including to manufacturing.

3. No reviews, no course corrections: There is no known review of why ‘Make in India’, protectionist tariff barriers or corporate tax cut failed to deliver – making course correction a ‘no-go’ area. Even when reviews are carried out, like in the case of PLIs (PLI for semiconductor is called design-linked or DLI, taking the total sectors covered to 15), the findings are not in public domain.

Sure, PLIs help in manufacturing activities, as do ‘Make in India’ even though the outcomes are unsatisfactory for both.

Sure, PLI 3.0 for manufacture electronic components (separate from the other 15 sectoral schemes) was launched on March 28, 2025 as a course correction – in response to criticism that PLI was promoting ‘assembling’ (low value addition) of smartphones, including Apple’s iPhones – using imported their electronic components. Such assembling means exaggerated exports values and numbers (also true for other PLI-supported sector like solar panels).

To understand why assembling isn’t such a great idea as it may seem, look at India’s auto sector which boomed through assembling for more than four decades. Yet, India imposes 100 per cent tax on import of foreign cars – unable to make domestic ones competitive globally.

India has decided to cut this tariff from 100 per cent to 10 per cent for the UK auto makers.

By the time PLI 3.0 was launched, its fourth review had already revealed that all the PLI schemes (excluding DLI for semiconductors) would be allowed to lapse due to unsatisfactory outcomes.

Misplaced priorities

Meanwhile, many other flaws, marked out by parliamentary panels and others, remain unaddressed: administrative delays, low disbursements and negligence of labour-intensive industries. This means misplaced priorities and missed opportunities.

For example, Gujarat’s Micron plants costs India $1.9 billion in subsidy (only for setting up the plants) but will create only 5,000 jobs – each job costing India $400,000 or ₹3.2 crore. Imagine how many jobs in labour-intensive sector could have been created with this fund to address a chronic and intensifying job crisis.

Misuse of political power

Then there is arbitrariness. Many Chief Ministers have protested and publicly accused that the Indian government is using its fiscal and political power to divert PLI-DLI-supported projects to Gujarat – away from Maharashtra, Telangana, Karnataka and Tamil Nadu.

India’s manufacturing can’t be Gujarat-centric.

Yet another is the shadow of the Electoral Bond scheme (the disclosure of which revealed multiple quid pro quo deals in 2024 and 2025) looming over PLIs. An investigating report of April 2025 said, “at least 18 companies approved for the Centre’s financial incentive to manufacture pharma drugs and drug intermediates together donated at least ₹521.9 crore to (political) parties in electoral bonds”; in one case within 48 hours of subsidy being approved to a private firm.

Such deals vitiate level-playing field.

4. Lack of technological breakthroughs, innovation, R&D and skilling: India is not known for technological breakthroughs and innovations of any kind.

This is reflected in commerce and industry minister Piyush Goyal’s dig at startups at the grand ‘Startup Mahakumbh’ in April 2025. He said Indian startups were into food delivery and online betting apps while China’s firms were taking giant leaps in machine learning, robotics and next-gen factories to compete with the world.

India’s ‘national champions’ (another name for crony capitalists) are no better.

In 2023, several eminent economists and political scientists wrote about its harmful impact on the economy, including the manufacturing sector.

Economist Nauriel Roubini listed its “dark side”: “It is stifling innovation and effectively killing early-stage startups and domestic entrants in key industries; and it is changing the government’s Make in India programme into a counterproductive, protectionist scheme.”

Economist Pranab Bardhan warned: “India’s crony oligarchy is likely to keep much of the economy trapped in a low-productivity mire for quite some time.”

Political scientist Ashutosh Varshney contrasted with South Korean “chaebols” who produce globally competitive cell phones, computers, electronics, semiconductors and auto.

Low R&D expenditure

A critical failure is India’s abysmally low R&D expenditure – falling from 0.8 per cent of GDP in 2008 to 0.6 per cent in 2020 (up to which India data is available in the World Bank database), compared to global average of 2.5 per cent, OECD’s 2.9 per cent and the US’s 3.4 per cent and China’s 2.4 per cent for the same year (2020).

China’s R&D is reflected in the global panic it generated by banning exports of rare earth magnets and related material; ‘Make in India’ is driven by ‘Made in China’ in critical sectors like electronics, EVs, solar panels, pharmaceuticals etc.

Low skill levels

Another is abysmally low skill level of Indian workforce. The Economic Survey of 2023-24 said, “only 4.4 per cent of 15-29 years have formal vocation/technical training and another 16 per cent informal sources”. That is, only 21 per cent youth are trained, while developed nations have close to 100 per cent skilled workers.

India’s skill development programme started with the National Skill Development Corporation (NSDC) in 2008. It failed to deliver, which the Sharada Prasad Committee report of 2017 (not in public domain any more) pointed out. Among others, it said, “Two thousand five hundred crore of public funds was spent to benefit the private sector without serving the twin purposes of meeting the exact skill needs of the industry and providing employment to youth at decent wages”.

Yet, this programme, renamed and relaunched on a grander scale as ‘Skill India’ in 2015, continued on the same old path.

The Centre finally woke up in February 2025 to clear its revamping with Rs 8,800 crore outlay, but the details are not known. On May 17, 2025, CEO of NITI Aayog (government’s topmost think tank) BVR Subrahmanyam suggested: “Government should consider handing over skilling institutions to the private sector”.