India’s Industrial & Manufacturing Growth: Policies, Challenges, & Global Comparison - A Comprehensive Analysis
India’s manufacturing sector has seen multiple economic stimulus measures and industrial policies since its economic liberalization in 1991. However, despite numerous government efforts such as “Make in India” (2014), “Atmanirbhar Bharat” (2020), Production-Linked Incentive (PLI) schemes, and sector-specific stimulus measures, India has not emerged as a global manufacturing powerhouse like China, Germany, or the United States. The manufacturing sector’s share in India’s GDP has remained stagnant at 14-17%, failing to reach the targeted 25%. In contrast, China’s manufacturing sector contributes 27% to its GDP, South Korea 25%, and Germany 23%. India’s challenges stem from weak policy execution, low research and development (R&D) investment, an over-reliance on services instead of manufacturing, complex regulations, supply chain weaknesses, high logistics costs, and limited foreign direct investment (FDI) in industrial sectors. This analysis will provide an in-depth examination of these issues, comparing India’s industrial performance to global leaders and identifying the reforms needed to improve its competitiveness.
Manufacturing Contribution to GDP (%) from 2000 to 2025 for India, China, Germany, South Korea, and the U.S.. The data illustrates India’s manufacturing stagnation (~14-17% of GDP) compared to China (27%), Germany (23%), South Korea (25%), and the U.S. (11%). This comparison highlights how different economies have structured their industrial sectors over the years.
One of the primary reasons for India’s underperformance in manufacturing is poor execution and policy instability. While the government has introduced several policies aimed at industrial growth, their implementation has been slow, inconsistent, and riddled with bureaucratic inefficiencies. The National Manufacturing Policy (2011) was designed to increase manufacturing’s GDP share to 25% by 2022, yet over a decade later, the goal remains unmet. “Make in India” (2014) was an ambitious policy to promote local manufacturing, but it failed to attract large-scale foreign investment due to infrastructure and regulatory bottlenecks. In contrast, China has executed its industrial strategies with long-term vision and stable policies. The Five-Year Plans, dating back to 1953, have provided clear industrial roadmaps, ensuring strong execution of economic goals. The “Made in China 2025” (2015) strategy focused on high-tech industrialization, robotics, artificial intelligence (AI), and semiconductor manufacturing, with the government offering massive state-backed funding and subsidies to promote these industries. Similarly, in the United States, the CHIPS and Science Act (2022) was introduced with $52.7 billion in funding to revive semiconductor manufacturing, while the Inflation Reduction Act (2022) provided tax credits and industrial incentives to boost local production. These countries have structured industrial policies with clear execution timelines, funding mechanisms, and industry collaboration, which India has largely failed to replicate.
R&D Spending as % of GDP from 2000 to 2025 for India, China, the U.S., South Korea, and Germany. The data illustrates India’s low R&D investment (~0.7% of GDP) compared to China (~2.4%), the U.S. (~3.4%), and South Korea (~4.8%), highlighting how R&D funding is directly linked to high-tech industrial production and global competitiveness.
India also lags in research and development (R&D) investment, which is crucial for driving manufacturing innovation and industrial competitiveness. India’s R&D spending is only ~0.7% of GDP, compared to China (~2.4%), the United States (~3.4%), and South Korea (~4.8%). Low investment in high-tech manufacturing, automation, and AI-driven production has prevented India from developing a globally competitive industrial base. Unlike China, where R&D investment is driven by both government and private-sector firms, in India, the government accounts for 75% of total R&D funding, with very little contribution from industries. This is in stark contrast to the U.S. and Germany, where private enterprises fund the majority of R&D activities. China’s dominance in semiconductors, electric vehicles, AI, and robotics is a direct result of its high-tech innovation push, whereas India remains dependent on foreign technology for most advanced manufacturing needs. In comparison, Germany’s strong industry-university collaboration has allowed it to maintain a competitive edge in automobiles, chemicals, and precision engineering, with research institutions like the Fraunhofer Institutes playing a pivotal role in bridging academia and industry. If India wants to compete in advanced manufacturing, it must significantly increase its R&D spending to at least 2% of GDP and create robust public-private partnerships to drive industrial innovation.
Industrial Growth Rate (%) from 2000 to 2025 for India, China, Vietnam, Germany, and the U.S.. The data tracks India’s industrial sector performance compared to global economies, highlighting periods of slowdown and acceleration in India’s manufacturing sector. The trends indicate how China and Vietnam initially had rapid industrial growth, while India showed moderate growth but with stagnation in recent years.
India’s excessive reliance on services instead of manufacturing has further slowed its industrial development. Currently, services contribute over 55% to India’s GDP, while manufacturing remains at ~14-17%. The post-1991 economic reforms led to a rapid boom in IT and software services, turning India into a global hub for technology outsourcing and digital services. However, this growth did not translate into a strong manufacturing sector. Unlike China, which pursued export-led industrialization, focusing on large-scale factories and supply chain integration, India largely ignored manufacturing-led growth. Today, China accounts for nearly 30% of global manufacturing exports, while India’s share is only around 2%. Southeast Asian countries like Vietnam, Thailand, and Indonesia have also prioritized manufacturing, attracting FDI in electronics, textiles, and automotive industries, making them preferred locations for global supply chains. Apple, Samsung, and Intel have expanded manufacturing in Vietnam, while India has struggled to attract similar large-scale investments due to complex regulations and high production costs.
India’s Infrastructure Investment in Industrial Development (Roads, Ports, Freight Corridors) vs. China & Germany from 2000 to 2025, alongside India’s Ease of Doing Business Rank vs. Competing Manufacturing Hubs (China, Vietnam, Germany, U.S.). The data highlights India’s lower infrastructure investment (~3-7% of GDP) compared to China (~7-11%) and Germany (~4.5-6%), illustrating the gap in logistics, ports, and high-speed freight connectivity. Additionally, the Ease of Doing Business ranking shows India’s improvement from 142nd in 2014 to 63rd in 2020, yet still trailing behind China, Vietnam, Germany, and the U.S., emphasizing regulatory and investment climate challenges.
One of the major obstacles hindering India’s manufacturing sector is its complex regulatory framework, bureaucratic red tape, and slow decision-making. India ranked 63rd in the Ease of Doing Business Index (2020), far behind China (31st) and the U.S. (6th). Land acquisition for industrial projects remains a major challenge, with businesses facing years of delays due to environmental clearances and legal disputes. Rigid labor laws discourage large-scale hiring, making it difficult for companies to set up labor-intensive industries like textiles and consumer goods. In contrast, China has streamlined regulations, offered fast-track industrial approvals, and developed Special Economic Zones (SEZs) with tax breaks and land acquisition incentives. Vietnam has also simplified its business regulations, making it one of the top choices for foreign manufacturers.
India’s Logistics Costs as % of GDP from 2000 to 2025, compared to China, Germany, the U.S., and South Korea. The data highlights how India’s high logistics costs (~13-14% of GDP) make exports uncompetitive, compared to China (~8-10%), Germany (~9%), and the U.S. (~7%), illustrating the impact of poor infrastructure, transport inefficiencies, and high supply chain costs.
India’s supply chain weaknesses and high logistics costs further prevent its manufacturing sector from scaling. Over 80% of India’s electronic components, 70% of pharmaceutical Active Pharmaceutical Ingredients (APIs), and nearly all semiconductor chips are imported. Logistics costs in India (~13-14% of GDP) are significantly higher than China (~8-10%), making Indian goods more expensive and less competitive in global markets. Poor road and rail infrastructure, slow port clearance times, and inefficient supply chain management further increase costs. China has invested massively in high-speed rail, ports, and highways, reducing industrial transport costs and improving export efficiency. Similarly, Germany ranks #1 in the Logistics Performance Index, ensuring its manufacturers can efficiently distribute goods across global markets.
Foreign Direct Investment (FDI) Inflows in Manufacturing from 2000 to 2025 for India, China, ASEAN (Vietnam, Thailand, etc.), and the U.S., along with the USD to INR exchange rate trends. The data highlights India’s relatively low FDI inflows in manufacturing compared to China and ASEAN nations, demonstrating India’s regulatory and infrastructure challenges in attracting global firms. The USD to INR exchange rate trend also reflects India’s currency depreciation, impacting investment attractiveness and industrial costs.
Foreign direct investment (FDI) in manufacturing remains relatively low in India, as most FDI inflows go to IT, finance, and real estate. China and Vietnam have successfully attracted global manufacturers by offering tax incentives, strong infrastructure, and low production costs. While India has introduced PLI schemes to attract electronics and semiconductor firms, execution remains slow and inconsistent, discouraging long-term foreign investments.
India’s Import Dependence on Key Industrial Inputs (Electronics, Semiconductors, Auto Components) from 2000 to 2025, along with Workforce Skill Levels and Vocational Training Investment (% of GDP) for India vs. Germany, China, and South Korea. The data highlights India’s heavy reliance on imports (~80% for electronics, ~97% for semiconductors) from China, Taiwan, and South Korea, demonstrating the risks associated with external supply chains. Meanwhile, the workforce training investment comparison shows India’s lack of investment in industrial skill development (~1% of GDP), whereas Germany, South Korea, and China invest significantly more, ensuring a skilled labor force for high-tech industries.
Lastly, high industrial energy costs and sustainability challenges make Indian manufacturing less competitive. Electricity costs for industries in India range from ~7-10 cents per kWh, while in China, it is ~4-6 cents per kWh. India also relies heavily on coal-based power, leading to higher carbon emissions and environmental concerns. With global carbon taxes and sustainability standards rising, Indian exports face risks of higher tariffs and reduced market access. Meanwhile, China dominates renewable energy production, solar panel exports, and battery storage technologies, reducing its energy costs. Germany’s Energiewende policy has also helped its industries transition towards sustainable production.
The Path Forward for India’s Manufacturing Growth: A Comprehensive Roadmap
India has immense potential to become a global manufacturing powerhouse, but to achieve this, it must address long-standing structural inefficiencies, policy execution failures, supply chain weaknesses, and inadequate R&D investments. Unlike China, Germany, South Korea, and the U.S., which have built their industrial dominance through consistent policies, strong infrastructure, and high-value manufacturing, India’s manufacturing sector has remained stagnant at 14-17% of GDP, failing to reach the targeted 25%. For India to emerge as a competitive industrial hub, it must focus on policy stability, supply chain development, infrastructure expansion, labor market reforms, regulatory simplification, R&D investment, and strategic foreign direct investment (FDI) attraction.
Increasing R&D Spending and Building Innovation Ecosystems
One of the biggest weaknesses of India’s manufacturing sector is its low investment in research and development (R&D). India spends only ~0.7% of GDP on R&D, which is significantly lower than China (~2.4%), the U.S. (~3.4%), and South Korea (~4.8%). In contrast, countries with strong industrial capabilities invest aggressively in R&D, ensuring that cutting-edge technologies, automation, and AI-driven manufacturing drive their economic growth. To become competitive, India must increase its R&D spending to at least 2% of GDP over the next decade. This requires both government and private-sector participation. The Indian government must offer tax incentives, research grants, and public-private partnerships to encourage corporate investment in industrial R&D, similar to the way Germany’s Fraunhofer Institutes and South Korea’s chaebol-driven research initiatives bridge academia and industry.
Additionally, India needs to foster innovation hubs similar to Silicon Valley in the U.S. or Shenzhen in China, where technology-driven industrial growth can thrive. Establishing specialized R&D parks in artificial intelligence (AI), semiconductors, green energy, and robotics will attract global investors and enable India to reduce its reliance on foreign technology imports. These R&D hubs should also be linked to India’s top universities and IITs (Indian Institutes of Technology) to promote university-industry collaboration, ensuring that research findings are commercialized into real-world applications.
Strengthening Domestic Supply Chains and Reducing Import Dependence
India’s manufacturing sector is heavily dependent on imports for key components, particularly in electronics, semiconductors, auto parts, and high-tech industries. Over 80% of India’s electronic components and nearly all semiconductor chips are imported, primarily from China, Taiwan, and South Korea. Similarly, 70% of pharmaceutical Active Pharmaceutical Ingredients (APIs) are sourced from China, posing risks to India’s healthcare industry. This dependency increases production costs, reduces global competitiveness, and makes Indian manufacturing vulnerable to global supply chain disruptions.
To address this, India must aggressively build domestic supply chains for key industries like semiconductors, electric vehicles (EVs), defense, and consumer electronics. The Production-Linked Incentive (PLI) schemes introduced by the government are a step in the right direction, but their implementation must be accelerated, and incentives should be expanded to cover mid-tier component manufacturing as well. In the semiconductor sector, India must fast-track investments in domestic chip manufacturing by ensuring that planned projects such as Vedanta-Foxconn’s semiconductor plant receive the necessary infrastructure, power supply, and policy support.
Additionally, India must focus on vertical integration in industries such as automobiles, defense, and aerospace. Countries like China and Germany develop their own raw materials and supply chains in-house, reducing their reliance on imports. India needs to establish end-to-end manufacturing ecosystems by developing a robust supplier base within the country. This can be achieved by incentivizing domestic component manufacturers and partnering with global technology leaders to transfer know-how and expertise to Indian firms.
Improving Infrastructure and Logistics to Reduce Manufacturing Costs
One of the biggest hurdles for India’s industrial growth is its high logistics and transportation costs. Currently, India’s logistics costs account for ~13-14% of GDP, which is significantly higher than China (~8-10%), making Indian-manufactured goods less competitive in global markets. Poor infrastructure leads to higher production costs, delayed shipments, and inefficiencies in supply chain management. To reduce logistics costs, India must massively invest in infrastructure projects that enhance industrial connectivity. The PM Gati Shakti initiative, which aims to integrate road, rail, and port networks, must be executed with speed and efficiency. India should expand its freight railway network, modernize ports, and improve last-mile connectivity to industrial zones to streamline exports. The development of dedicated freight corridors (DFC) is a step forward, but its implementation has been slow and must be accelerated to improve industrial efficiency.
In addition, smart manufacturing hubs should be developed near major ports and airports, similar to how China has structured its coastal SEZs in Shenzhen, Guangzhou, and Shanghai, allowing for efficient production and export movement.
Simplifying Regulations and Easing Land & Labor Laws to Attract Investments
India has long struggled with complex regulations, excessive red tape, and slow bureaucratic approvals, which discourage both domestic and foreign investment in manufacturing. India ranked 63rd in the Ease of Doing Business Index (2020), far behind China (31st), Vietnam (70th), and Germany (22nd). One of the biggest hurdles is land acquisition, which remains a time-consuming and legally complicated process for setting up large industrial projects. To attract more manufacturing investment, India must introduce a faster and more transparent land acquisition framework that reduces delays in industrial approvals.
Labor market rigidities also hinder India’s ability to scale manufacturing. Rigid labor laws discourage companies from hiring at scale, making India a less attractive destination for labor-intensive industries such as textiles, garments, and consumer electronics. In contrast, China has flexible labor policies that allow rapid industrial expansion. India must implement labor law reforms that provide flexibility while ensuring worker protections, enabling factories to scale production efficiently.
Additionally, India needs greater tax and regulatory stability. Investors are often deterred by frequent policy shifts, high corporate taxes, and unpredictable government interventions. If India wants to become a preferred global manufacturing hub, it must establish clear, long-term industrial policies that provide certainty and consistency to investors.
Expanding Foreign Direct Investment (FDI) in Manufacturing and Strengthening Trade Agreements
Compared to China, Vietnam, and Germany, India has not been able to attract large-scale FDI in manufacturing. While India has received record-breaking FDI inflows in IT, finance, and real estate, manufacturing FDI remains weak due to regulatory uncertainties and infrastructure challenges. Global companies prefer China, Vietnam, and Thailand for their efficient business environments, skilled workforce, and lower logistics costs.
To change this, India must aggressively market itself as an attractive manufacturing hub, offering special incentives to companies willing to relocate from China due to trade tensions. Countries like the U.S. and Japan are looking to diversify their supply chains away from China, and India must seize this opportunity by offering tax breaks, regulatory fast-tracking, and infrastructure support. Expanding bilateral trade agreements and regional partnerships will also help India integrate into global value chains and boost exports.
Conclusion: India’s Road to Becoming a Global Manufacturing Powerhouse
India has the potential to become a global manufacturing powerhouse, but achieving this goal requires bold structural reforms, long-term policy stability, infrastructure expansion, supply chain localization, increased R&D investment, and workforce upskilling. Unlike China, Germany, South Korea, and the U.S., which have built strong industrial bases through consistent execution and innovation, India’s manufacturing sector has remained stagnant at 14-17% of GDP, failing to reach the targeted 25%. To transform its industrial landscape, India must develop a comprehensive National Industrial Policy that provides predictability and long-term investment stability, ensuring that tax laws, labor regulations, and incentives remain consistent. Infrastructure improvements are equally critical, as India’s high logistics costs (~13-14% of GDP) make its exports less competitive compared to China (~8-10%). By accelerating the PM Gati Shakti program, expanding Dedicated Freight Corridors, and building smart industrial hubs near ports and airports, India can significantly reduce manufacturing costs and enhance supply chain efficiency. Additionally, India must strengthen domestic supply chains to reduce import dependence, as it currently imports over 80% of electronic components and nearly all semiconductor chips, making production expensive and vulnerable to global disruptions. Expanding the Production-Linked Incentive (PLI) scheme to mid-tier component manufacturers, fast-tracking investments in semiconductor fabs, and encouraging global technology partnerships with firms like Intel, Foxconn, and Tesla can help India localize production and enhance global competitiveness.
A major challenge India faces is its low research and development (R&D) investment, which currently stands at ~0.7% of GDP, far below China (~2.4%), the U.S. (~3.4%), and South Korea (~4.8%). Without strong R&D, India cannot transition from low-cost assembly to high-tech industrial production. To change this, the government must increase R&D spending to at least 2% of GDP, establish innovation hubs focused on AI, robotics, and renewable energy, and strengthen industry-academia collaboration to drive technological advancements. Additionally, India must attract large-scale Foreign Direct Investment (FDI) in manufacturing, as global corporations still prefer China, Vietnam, and Thailand due to their efficient business environments, logistics, and lower production costs. By simplifying land acquisition laws, providing long-term tax incentives, and securing trade agreements with major economies, India can position itself as a high-value, innovation-driven manufacturing hub. Workforce development is also crucial, as India has a young population, but a significant portion lacks industrial skills. By expanding vocational training programs, adopting Germany’s apprenticeship model, and integrating private-sector participation in technical education, India can develop a highly skilled labor force for advanced manufacturing.
If India successfully executes these reforms, enhances its industrial ecosystem, and prioritizes innovation-driven manufacturing, it can compete with global leaders, create millions of high-paying jobs, increase exports, and significantly boost economic growth. Learning from China’s supply chain dominance, Germany’s engineering expertise, the U.S.’s high-tech innovation, and South Korea’s corporate-driven industrial strategy, India can establish itself as a self-sufficient, globally competitive manufacturing giant. The next decade will be pivotal in determining whether India can transition from being a services-driven economy to a major industrial force, but with the right policies, investments, and execution strategies, India has the potential to achieve its goal of 25% manufacturing GDP share and become a global leader in industrial production.