India’s Transition to an Industrial Economy in the “China+1” Era: Structural Bottlenecks, Localisation & MSME Integration

By- Kartik Shyam Mogha, Research Associate &

Manya Bhati, Research Intern

Swadeshi Shodh Sansthan

Throughout history, the locus of global production has continually shifted, fundamentally altering the balance of power and civilizational progress. For decades, the world relied on a monolithic engine of manufacturing. In the face of all this uncertainty that is shaking the old models around the world, however, a great philosophical question is rising about economic sovereignty and how it can be achieved: It is not a right that is to be transferred; it must be created. This article explores the awakening of India to this historical call to action. It discusses how the country has moved from a passive, bureaucratic state to an active catalyst of industry, as witnessed by its past move to direct, performance-based manufacturing incentives. But creating a viable industrial civilisation isn’t all about scale and final-stage assembly. Gradually, India is building a resilient, autonomous economic future amidst the rapidly decentralising world by critically examining infrastructural leaps, the need to democratise capital for smaller enterprises and the need of the hour: mastery over the synthesis of raw materials.

Can India Replicate China’s Manufacturing Sector?

Global enterprises are diversifying their supply chains to mitigate the risks of being overly reliant on a single economy. For thirty years, China has been the world’s manufacturing engine (National Bureau of Statistics of China, 2024). Data on manufacturing value added as a percentage of GDP, which has historically been between 14.5% and 15.2% in recent development indicators, reveals the astronomical scale of operations needed to underpin global supply chains (World Bank, 2024). This enabled China to convert hundreds of millions of farmers into factory workers. Rising wages in the East Asian nation and the “China+1” strategy pursued by multinational corporations has prompted firms to seek out alternative industrial centres that possess the capacity to produce such a staggering volume of goods (World Bank, 2024).

India’s demographic dividend (UN Population Division, 2024) and its exponential economic growth (S&P Global PMI, 2026) provide a compelling case as to why enterprises would allocate their resources here. Realising our aspirations and ambitions for economic growth requires policy design and implementation. Recent data indicates that India has replaced widespread subsidies with specific monetary rewards tied to performance, successfully cultivating a highly competitive manufacturing sector that provides a viable opportunity to generate extensive employment.

How has the government support for the manufacturing sector changed?

Historically, industrial production boosting initiatives have focused on indirect support. The government has enhanced general ease of doing business and amended regulations to attract foreign capital. According to the Press Information Bureau, India witnessed USD 81.04 billion in Foreign Direct Investment in FY 2024–25 (Department for Promotion of Industry and Internal Trade [DPIIT], 2025). While this has improved the general corporate climate, it had not translated into an explosion of factory construction.

The launch of the Production Linked Incentive (PLI) scheme in 2020 represents a fundamental shift in India’s approach to manufacturing financing. The Indian government has shifted away from indirect tax reductions to direct performance-based cash rewards. Under the PLI methodology, eligible manufacturers will receive a direct financial incentive of between 4% and 18% for additional sales relative to a specified base year (Ministry of Finance, 2025). Cash bonuses will be given out only if the company successfully scales its production and achieves targets. The performance-based nature of the PLI scheme encourages firms to ramp up production volumes and also operate at a reduced cost. A National Manufacturing Mission was announced in the Union Budget 2025-26, with a stupendous financial outlay earmarked to support key sectors of the economy (Ministry of Finance, 2025). This includes large-scale electronics, pharmaceuticals, medical devices, automobiles and speciality steel. The objective is to subsidise the marginal cost of production to enable Indian firms to export their products at a price lower than their Chinese counterparts.

Which Sectors Are Attracting the Most Investment?

This performance-based approach has been extremely successful in mobilising private sector capital. According to the Department for Promotion of Industry and Internal Trade, PLI schemes have attracted over ₹2.40 lakh crore in actual investment (DPIIT, 2026). This has exponentially boosted cumulative domestic production and resulted in a record export surge in the Indian economy.

Capital has been funnelled primarily towards those sectors that play a critical role in the global energy transition and consumer electronics. Compiling data from Ministry of Commerce and Industry statistics reveals that High Efficiency Solar PV Modules led the pack with an actual investment of ₹64,873 crore. This was followed closely by Pharmaceuticals at ₹45,158 crore and Automobiles and Auto Components at ₹44,326 crore. Other vital sectors witnessed significant capital investment, which were Specialty Steel at ₹23,896 crore and Large-Scale Electronics Manufacturing at ₹20,580 crore (DPIIT, 2026). Until the advent of the PLI scheme, India was overwhelmingly reliant on imports for consumer electronics. In accordance with the Electronics Components Manufacturing Scheme guidelines, domestic mobile phone manufacturing has witnessed a significant upsurge (Ministry of Electronics and Information Technology [MeitY], 2025). With an increase in local assembly, mobile phone imports have nosedived, and the vast majority of mobile phones being consumed in India are now locally assembled.

The pharmaceutical sector provides another compelling illustration. Companies participating in the pharmaceutical PLI tier have witnessed record sales. This financial impetus has allowed domestic firms to localise the production of thousands of essential medicines and pharmaceutical ingredients, eliminating critical pinch points in the supply chain.

Are these policies actually creating jobs?

The fundamental success of the Chinese manufacturing model lay in its ability to provide employment opportunities to millions of semi-skilled workers. The Periodic Labour Force Survey highlights the need to replicate such an ability to employ workers for India’s own expanding workforce, which is gradually transitioning to an organised economy (Periodic Labour Force Survey [PLFS], 2023; PLFS, 2025).

Current employment data provides some hope in this regard. With national training programs such as the PM-SETU scheme, the manufacturing push has created over 14.15 lakh direct and indirect jobs (Ministry of Skill Development and Entrepreneurship, 2026; DPIIT, 2026). According to the India Skills Report 2025 (CII, 2025), the nature of employment varies strategically from one sector to another. Both the food processing and textile industries are labour-intensive and provide crucial employment to workers transitioning from the agriculture sector. At the same time, electronics manufacturing provides large-scale assembly opportunities, and the pharmaceutical and medical device sectors provide specialised and technical employment.

Can India fix its high shipping and transport costs?

Capital investment in manufacturing is rendered futile if the logistics of transporting finished goods is inadequate. Traditionally, inadequate infrastructure and high shipping costs have been a huge impediment to global manufacturers. Paying a hefty ‘penalty’ to transport raw materials and finished goods would destroy the price competitiveness of Indian exports.

The Indian government has tackled this logistical challenge by initiating infrastructure projects that synchronise rail, road and port networks to reduce transportation delays. The objective was to drive down domestic logistics costs to match the global average.

Recent economic assessments indicate that this objective is being achieved well ahead of schedule. Unprecedented upgrades in the transport sector have significantly equalised India’s logistics costs. This physical infrastructure leapfrogging is reflected in the World Bank’s Logistics Performance Index, wherein scores are evaluated on a scale of 1 to 5 from low to high (World Bank, 2023b). By operating on a logistical level with global competitors, domestic manufacturers now possess the pricing flexibility to directly compete with East Asian exporters in the international market.

What are our biggest structural challenges in the way?

In order to scale the Indian industrial base to match the Chinese industrial base, policymakers need to tackle structural bottlenecks within the policy framework. The PLI model favours large corporations due to high minimum investment thresholds. These prohibitively high financial requirements prevent the participation of Micro, Small and Medium Enterprises. As MSMEs traditionally manufacture intermediate goods that are utilised by large-scale assemblers, their absence undermines the domestic supply chain.

Administrative compliance poses another structural challenge. Nodal ministries require meticulous documentation, which includes audits of sales and daily production figures in order to verify claims of incremental targets. The process of manually verifying claims prolongs the disbursement of government funds by several months. This reduces the liquidity of participating companies, limiting their ability to reinvest incentive capital to rapidly expand their operations. Importantly, while India has successfully executed final assembly, the current manufacturing ecosystem is reliant on imported subcomponents. Domestic factories still heavily depend on imports for critical inputs such as semiconductor chips and display panels (MeitY, 2025). This reliance renders Indian production timelines susceptible to global shipping disruptions.

What steps can policymakers take next?

To sustain the current growth trajectory, policymakers need to undertake ‘strategic adjustments’. Firstly, the government needs to open up manufacturing incentives by introducing an easier, lower-tier scheme for MSMEs. By reducing the minimum capital requirement, smaller domestic factories can manufacture basic intermediate goods. Providing direct cash incentives to MSMEs that supply larger PLI winners will immediately boost the local supply chains.

Second, compliance and administration need to be completely digitised. For exporters, a digital portal should instantly verify the transaction and disburse the incentive payment within days. Prompt payment allows manufacturers to grow at a much faster rate. Finally, policy interventions need to be focused on the local economy. Rewarding the final assembly of products is incapable of shielding the supply chain from global disruptions. Future financial outlays should subsidise the processing of raw materials. Providing direct capital support for semiconductor wafer fabrication, lithium-ion cell chemistry and raw active pharmaceutical ingredient synthesis will anchor the entire production lifecycle within India’s borders. The metrics confirm that India’s manufacturing sector is undergoing a stupendous structural expansion. The mobilisation of immense private investment and the rapid optimisation of logistics will establish a competitive industrial base. India is not attempting to replicate the Chinese state-run model. Instead, it is utilising targeted financial instruments to attract global capital and build an independent manufacturing sector. As international supply chains continue to be dynamic, India possesses the physical infrastructure, demographic strength and policy shifts to tap into and sustain high industrial growth.

References:

Confederation of Indian Industry [CII]. (2025). India skills report 2025. https://ciiskills.in/india-skills-report-details

Department for Promotion of Industry and Internal Trade [DPIIT]. (2025). FDI inflow FY 2024-25 [Press release]. Press Information Bureau, Government of India. https://www.pib.gov.in/PressReleasePage.aspx?PRID=2131716

Department for Promotion of Industry and Internal Trade [DPIIT]. (2026). PLI schemes investment (₹2.40 lakh crore) [Press release]. Press Information Bureau, Government of India. https://www.pib.gov.in/PressReleasePage.aspx?PRID=2287008&reg=48&lang=2

Ministry of Electronics and Information Technology [MeitY]. (2025). Electronics component manufacturing scheme (ECMS) guidelines. Government of India. https://www.meity.gov.in/offerings/schemes-and-services/details/electronics-component-manufacturing-scheme-UTM1IjMtQWa

Ministry of Finance. (2025). Union budget 2025-26 & national manufacturing mission. Government of India. https://www.indiabudget.gov.in/doc/bh1.pdf

Ministry of Skill Development and Entrepreneurship. (2026). PM-SETU [Press release]. Press Information Bureau, Government of India. https://pib.gov.in/PressReleaseIframePage.aspx?PRID=224064

Ministry of Statistics and Programme Implementation [MoSPI]. (2023). Periodic labour force survey (PLFS) 2022-2023 annual report release [Press release]. Press Information Bureau, Government of India. https://www.pib.gov.in/PressReleaseIframePage.aspx?PRID=1966154

Ministry of Statistics and Programme Implementation [MoSPI]. (2025a). Periodic labour force survey (PLFS) full report document. Government of India. https://www.mospi.gov.in/sites/default/files/publication_reports/PLFS_English.pdf

Ministry of Statistics and Programme Implementation [MoSPI]. (2025b). Periodic labour force survey (PLFS) 2025 release [Press release]. Press Information Bureau, Government of India. https://www.pib.gov.in/PressReleasePage.aspx?PRID=212866