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Subject: Manufacturing Sector

  • Good foundation

    Why in the News

    Growth in India’s Index of Industrial Production (IIP) quickened to 8% in August 2026, the second fastest pace in the new series. The strong run since the start of the financial year sets the economy up well for the festive season.

    What is the IIP, and why does the new series matter?

    1. What it is: The IIP is a monthly index of the volume of output from mines, factories and power plants. It works like a monthly pulse check on industry.
    2. Better measurement: The new IIP series has an updated base year, more data sources and an improved methodology, so it gives as accurate a picture of industrial growth as official data can.
    3. Short history: The new series has growth data only from April 2024, so comparisons reach back no further.
    4. The takeaway: Because the new series is more reliable, the current growth spurt can be read as genuine industrial momentum.

    How strong has industrial growth been?

    1. Peak month: The fastest growth in the new series, 8.8%, came in June 2026.
    2. Five-month run: IIP growth for April to August stood at 6.8%, faster than the same period in each of the previous two years.
    3. Manufacturing surge: Manufacturing grew by nearly 9% in August and averaged 7.6% over April to August 2026.
    4. Year-on-year jump: That compares with about 4.2% manufacturing growth in the first five months of the previous financial year.
    5. Input pressures: Producers achieved this growth even as they faced several pressures on their inputs.

    Do the IIP and the core index now agree?

    1. Index of Core Industries (ICI): The ICI, the other official gauge of industry, now largely tracks the IIP, apart from a few divergences.
    2. Electricity: The IIP shows electricity growth quickening to 12.3% in August, against 11.6% in the ICI.
    3. Construction goods: Construction goods grew a relatively strong 6.4% in August, slower than 8% in July.
    4. Cement: In step, the ICI shows cement growing a robust 12.5% in August, slightly slower than 12.7% in July.
    5. End of contrary signals: The older series of both indices often pointed in opposite directions, so this alignment strengthens confidence in the data.

    Is domestic demand now driving manufacturing?

    1. From exports to home demand: Early in 2026, manufacturing growth was driven by exports. August data show it is now supplemented by a recovery in domestic consumption.
    2. Consumer goods: Consumer durables output rose 11.1% in August, and consumer non-durables returned to growth of a little over 2% after contracting in July.
    3. Festive expectations: The boost from the Goods and Services Tax (GST) rate cuts of September 2025 should have faded by now. Higher durables output therefore signals that producers expect a strong festive season.
    4. Third quarter test: The third quarter of the financial year will be crucial, and the groundwork for a relatively good one is in place.

    Challenges

    1. Seasonal demand: A festive-season boost is seasonal, so strong output before the festivals need not mean lasting consumer demand.
    2. Export exposure: Export-led manufacturing stays exposed to global demand and trade barriers abroad.
    3. Short data history: The new series has only a short growth record, so it cannot yet show long-term trends.
    4. Modest non-durables recovery: Everyday consumer goods grew only modestly after a contraction, so the consumption recovery is uneven.

    Way Forward

    1. Linked back series: The Ministry of Statistics and Programme Implementation (MoSPI) should publish a linked back series so the new IIP can be compared with earlier years.
    2. Input cost relief: The Centre should review duties on industrial inputs that raise manufacturers’ costs.
    3. Income-led demand: The Union and States should support jobs and household incomes so demand outlasts the festive season.
    4. Export diversification: The Ministry of Commerce and Industry should use trade agreements to widen export markets for manufacturers.

    Conclusion

    Indian industry now draws strength from both exports and home demand, and the official indices finally agree on it. October to December output will show whether consumer demand holds once the festive and tax-cut effects fade.

    Back2Basics: Index of Core Industries (ICI)

    1. What it measures: Monthly output of eight core industries: coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity.
    2. Compiled by: The Office of the Economic Adviser, Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry.
    3. Link with the IIP: The eight core industries are also part of the IIP, so the two indices should broadly move together.

    Matching Previous Year Question

    “[2025, GS3, 15 marks] Discuss the rationale of the Production Linked Incentive (PLI) scheme. What are its achievements? In what way can the functioning and outcomes of the scheme be improved?”

  • The paradox of de-Sinification in global production

    Why in the News

    SpaceX‘s reported effort to strip Chinese-made parts from its supply chain shows that cutting dependence on China now means tracing suppliers several layers deep. De-Sinification is two-sided, because Chinese firms moving abroad face the same problem in reverse. For India, the stake is whether incoming factories bring their supplier networks.

    What is de-Sinification, and what is an industrial ecosystem?

    1. De-Sinification: Firms and countries cutting their reliance on Chinese factories, suppliers and components.
    2. Industrial ecosystem: The supplier ties, skills, tooling, know-how and logistics behind a factory. It is like a restaurant’s regular vendors and trained staff, who do not move with the building.
    3. Built by repetition: Suppliers learn to respond fast to design or volume changes through repeated dealings, not contracts, so these ties cannot simply be bought.
    4. Deep-tier suppliers: The question is no longer where products are assembled but which suppliers sit several layers down, as SpaceX’s July 2026 effort shows.
    5. The takeaway: A factory crosses a border quickly but its ecosystem does not, so replacing one Chinese supplier leaves dependence on China’s wider production system.

    How do Chinese firms face the problem in reverse?

    1. Home advantage: Chinese carmakers BYD and Xpeng compete partly on dense home networks of component makers and engineers.
    2. Three routes abroad: A firm going overseas can take its suppliers, cultivate local ones, or mix both. Each route differs in cost and in how much real localisation, local sourcing, it achieves.
    3. BYD and Xpeng models: BYD is building capacity in Hungary and courting European suppliers. Xpeng has contracted Canada’s Magna to assemble cars in Austria.

    Why is de-Sinification a two-sided paradox and a moving target?

    1. Two-sided paradox: Foreign firms are trying to pull out of China’s ecosystem. Chinese firms going global are trying to carry that same ecosystem with them.
    2. China’s own upgrading: China is building capability where it long relied on foreign technology, so firms leaving it chase a moving target.
    3. CXMT: Chinese chipmaker CXMT is now the world’s fourth-largest Dynamic Random Access Memory (DRAM) producer (DRAM is working memory in computers and phones), yet depends on foreign chipmaking tools.

    What should India build from this shift?

    1. Early arrivals: Japan’s TDK has expanded battery output in Haryana under its China-plus-one strategy (a second production base outside China). Murata Manufacturing is also expanding in India.
    2. Supplier readiness: India needs domestic suppliers meeting tough cost, quality and delivery standards, plus reliable logistics, skilled workers and secure access to critical inputs.
    3. Test of new investment: Investment should deepen links with Indian firms and bring intermediate production, meaning parts and components, not just assembly.
    4. Judging Chinese investment: The author argues Chinese investment should be valued partly by the supplier networks it builds in India.

    Challenges

    1. Assembly heavy electronics: Much Indian electronics output is assembly of imported high value parts. Eg. Phone makers import most chips and displays.
    2. Curbs on Chinese capital: Press Note 3 (2020) requires government approval for investment from land-border countries, slowing Chinese suppliers.
    3. Critical input chokepoints: China can restrict key inputs at will. Eg. Its 2025 rare earth magnet curbs hurt Indian carmakers.
    4. Cost and skills gap: High logistics costs and scarce trained workers leave Indian suppliers less competitive than Chinese ones.

    Way Forward

    1. Reward local value addition: Scale up the Electronics Component Manufacturing Scheme, which pays for domestic components rather than assembly volume.
    2. Conditional Chinese investment: Fast-track Press Note 3 approvals for component joint ventures committing to local sourcing and technology transfer.
    3. Supplier clusters: States should build ready-to-use component parks around anchor investors.
    4. Secure critical inputs: Use the National Critical Mineral Mission and partner country deals to cut dependence on Chinese rare earths.

    Conclusion

    The shift away from China is moving factories faster than the supplier networks that make them competitive. What to watch is whether new investment raises the share of locally made components or leaves India assembling Chinese parts.

    Government Initiatives for the Manufacturing Sector

    1. Make in India: Aims to raise manufacturing’s gross domestic product (GDP) share from about 17% toward 25%.
    2. Production Linked Incentive (PLI) scheme: Pays incentives on additional output across 14 sectors, including mobiles, electronics and pharmaceuticals.
    3. National Manufacturing Mission: Launched in the 2025-26 Budget to unify manufacturing policy across ministries and States.
    4. India Semiconductor Mission: A ₹76,000 crore framework for chip fabs and packaging units.

    Matching Previous Year Question

    “[2025, GS3, 15 marks] Discuss the rationale of the Production Linked Incentive (PLI) scheme. What are its achievements? In what way can the functioning and outcomes of the scheme be improved?”

  • ‘Make in India’ of 12 years shows patchy performance

    Why in the News

    Twelve years after the Make in India campaign was launched on 25 September 2014, an assessment across 12 metrics covering growth, investment, employment and exports shows the manufacturing sector has not materially raised its share in India’s economic growth, employment or global exports. The campaign’s later incentive schemes have produced some results. Those gains sit in a handful of sectors rather than across manufacturing as a whole. The contested point is whether the shortfall reflects too few incentives or a failure of private investment to broaden beyond the sectors an incentive already reaches.

    What is Make in India?

    1. Launch and objective: Make in India is a Union government campaign launched on 25 September 2014 to raise the manufacturing sector’s share in India’s economic growth, employment and exports.
    2. How performance is judged: Its record is read off 12 metrics spanning growth, investment, employment and exports, rather than off a single headline target.
    3. Two statistical series: The output figures exist in an old series and a new series of both the national accounts and the Index of Industrial Production (IIP). A 12 year comparison therefore runs across both.

    Has the manufacturing sector actually gained ground in the economy?

    1. Growth against the whole economy: Manufacturing grew faster than the overall economy in only half of the 12 years under consideration on the old series.
    2. The new series reading: On the new series manufacturing outpaced overall growth in all three years for which data exists, from the 2023 to 2024 financial year through the 2025 to 2026 financial year. That gap is shrinking fast.
    3. Industrial production: Within the IIP, manufacturing outpaced the overall index in only three of the 12 years on the old series of that index.
    4. The new IIP series: Manufacturing growth matched the overall index in the 2023 to 2024 financial year and was slower in each of the next two years.
    5. Share of output, old series: Gross Value Added (GVA) data on the older series shows manufacturing’s share in overall GVA is lower in the 2025 to 2026 financial year than it was when the campaign was launched in 2014.
    6. Share of output, new series: The new series shows the sector’s share rising marginally, from 14.6 per cent in the 2022 to 2023 financial year to 15.6 per cent in the 2025 to 2026 financial year.

    What do the export numbers actually show?

    1. Growth since the launch: Non petroleum goods exports grew 53 per cent to $388.3 billion in the 2025 to 2026 financial year, from $253.5 billion in the year the campaign was launched.
    2. The preceding 12 years: The same exports grew more than 400 per cent over the 12 years before the launch, on a much smaller base.
    3. Base effect is only part of it: The smaller starting base accounts for only some of the difference between the two periods.
    4. Share of world trade: United Nations Conference on Trade and Development (UNCTAD) data shows India’s share in global merchandise exports rose from around 0.8 per cent in 2002 to 1.7 per cent in 2013. It has remained at 1.7 per cent in the 2025 to 2026 financial year.

    Is private investment backing the manufacturing push?

    1. Private capital formation: Gross fixed capital formation (GFCF) by the private sector, meaning its spending on real asset creation, formed a lower share of gross domestic product (GDP) in the 2023 to 2024 financial year, the latest on the old series, than it did in the 2014 to 2015 financial year.
    2. The new series trend: On the new series GFCF as a percentage of GDP has been falling since the 2022 to 2023 financial year.
    3. Foreign investment into factories: Foreign direct investment (FDI) into manufacturing grew slower than overall FDI in 7 of the 12 years. Its share in overall FDI rose from nearly 48 per cent in the 2014 to 2015 financial year to 55 per cent in the 2025 to 2026 financial year.
    4. Capacity utilisation: Reserve Bank of India (RBI) data on how intensively factories are being used shows the metric rising slowly over recent years. It remains below the 80 per cent mark treated as the level above which companies invest in fresh capacity.
    5. Credit without output: Bank credit to industry has grown strongly, led by credit to micro, small and medium enterprises. In the absence of sustained rapid growth in output, this points to borrowing for working capital rather than for new investment.

    How concentrated are the incentive gains?

    1. Scale of the schemes: The 14 Production Linked Incentive (PLI) schemes, launched across 2020 and 2021, have drawn a cumulative investment of Rs 2.4 lakh crore as of March 2026.
    2. Concentration in five sectors: Solar modules, pharmaceutical drugs, automobiles and their components, specialty steel and large scale electronics manufacturing together account for nearly 83 per cent of all investment under the schemes.
    3. Everything else in the schemes: The remaining covered sectors share a little over one sixth of the investment between them.

    Challenges to Make in India

    1. Tariff protection raises input costs: Duties placed on intermediate goods raise the cost of inputs for the assembly the same policy is trying to attract. Eg. The Phased Manufacturing Programme for mobile phones raised duties on imported components such as chargers and printed circuit board assemblies.
      The Fix: Hold intermediate inputs at low duty rates and apply protection only at the final assembly stage.
    2. Incentive design favours large incumbents: A subsidy paid on incremental sales above a threshold can only be claimed by firms already operating at scale. Eg. Under the PLI scheme for large scale electronics manufacturing, most approved incentive has flowed to a small group of mobile phone assemblers.
      The Fix: Add a lower turnover tier with simpler claim documentation so first time manufacturers can enter the scheme.
    3. Assembly without deepening: Incentives reward final assembly, so domestic value addition stays low where components continue to be imported. Eg. India’s electronics exports have risen alongside rising imports of components and sub assemblies.
      The Fix: Tie each incentive tranche to a rising domestic value addition threshold verified at the component level.
    4. Factor market constraints outlast incentives: Land, power reliability and labour regulation decide where a plant is built, and a subsidy changes none of them. Eg. The four labour codes passed in 2019 and 2020 took years to be brought into force.
      The Fix: Publish State level readiness on serviced industrial land, power availability and single window clearance timelines so investors can compare locations.

    Conclusion

    The instruments changed and the structural shares did not. A campaign judged on manufacturing’s place in output, employment and global exports has moved none of the three, and the one instrument that did pull investment pulled it into a narrow group of sectors. What has not been achieved is broad private capacity creation, and that is the condition the next phase has to meet rather than another incentive line. The marker to watch is whether private capital formation turns up as a share of output, since that is what builds new factories.

    Back2Basics: Gross Value Added

    1. What it measures: GVA is output minus the value of the intermediate goods and services consumed in producing it. It isolates the value added by each sector, which is why sectoral shares are read off GVA rather than off GDP.
    2. Relation to GDP: GDP at market prices equals GVA at basic prices plus product taxes minus product subsidies.
    3. Why the series matters: National accounts are periodically rebased on a more recent base year, so the same indicator in an old series and a new series is not directly comparable.

    Matching Previous Year Question

    “[2025, GS3, 15 marks] Discuss the rationale of the Production Linked Incentive (PLI) scheme. What are its achievements? In what way can the functioning and outcomes of the scheme be improved?”

  • [24th September 2026] The Hindu OpED: Quality control and India’s manufacturing growth

    [24th September 2026] The Hindu OpED: Quality control and India’s manufacturing growth

    Question (2023, GS3 – 10 Marks): Faster economic growth requires increased share of the manufacturing sector in GDP, particularly of MSMEs. Comment on the present policies of the Government in this regard.
    Linkage: This is the most direct parallel. While QCOs aim to elevate product quality, enforcing mandatory standards on basic intermediate inputs creates compliance burdens and supply bottlenecks for MSMEs. The recent relaxation via the Transition Facilitation Order, 2026 reflects a policy course-correction to protect MSME competitiveness and manufacturing growth.

    Mentor Comment

    India’s Quality Control Order (QCO) regime has begun to contract, with several orders revoked or suspended since late 2025, particularly those covering intermediate goods. The Department for Promotion of Industry and Internal Trade (DPIIT) has notified the Transition Facilitation (Quality Control) Order, 2026, which lets an eligible firm source temporarily from an alternative class of certified supplier. A study by the Centre for Social and Economic Progress (CSEP) finds that QCOs on chemical inputs cut value addition in large user firms and profitability in small ones. Concerns over India’s QCOs and other non tariff barriers also surfaced at the World Trade Organization’s (WTO) eighth Trade Policy Review of India, held in July 2026. The contested point is whether a regime designed to raise product quality should be judged by the number of products it covers or by what it does to the scale and competitiveness of the firms that must comply.

    What is a Quality Control Order?

    1. Mandatory conformity to an Indian Standard: A QCO is issued by the administering ministry or department under the Bureau of Indian Standards Act, 2016. It makes conformity to a specified Indian Standard and a Bureau of Indian Standards (BIS) certification compulsory for the listed products.
    2. Application to domestic output and imports alike: Once a QCO is in force, a covered product cannot be manufactured, imported, stored for sale or sold without that certification. An import faces the same requirement as domestic production.
    3. Two certification routes: BIS Scheme-I is a licence to use the Standard Mark on a product, granted after factory inspection and testing. BIS Scheme-II issues a Certificate of Conformity for a consignment or a batch.
    4. Input orders versus output orders: A QCO on a finished good regulates what reaches the consumer. A QCO on an intermediate input regulates what a downstream manufacturer is allowed to buy.

    How far did the QCO net expand, and what remains to be reassessed?

    1. Rapid expansion after 2019: The number of products covered under QCOs rose from 88 in 2019 to 765 by the end of December 2024.
    2. The slowdown: The pace of expansion slowed considerably towards the end of 2025. Several QCOs were revoked or suspended, particularly those covering intermediate goods.
    3. What drove the shift: Mandatory certification on intermediates had raised concerns about input availability, costs and potential supply chain disruptions.
    4. The unfinished list: More than 600 QCO covered products remain to be reassessed. These include several critical intermediate inputs used across chemicals, steel, textiles, machinery and electronics, and rubber and plastics.

    What does the Transition Facilitation (Quality Control) Order, 2026 do?

    1. Issuing authority and date: DPIIT notified the order on 25 June 2026.
    2. The mechanism: An eligible firm facing difficulty in obtaining BIS Scheme-I certification may source products temporarily from BIS Scheme-II licensed suppliers.
    3. Sectors covered: The mechanism applies in specified sectors, including toys, footwear and air conditioners.
    4. Access conditions: Use of the mechanism is subject to prescribed eligibility criteria and to approval by a committee constituted by DPIIT.

    What does the CSEP study find about QCOs on chemical inputs?

    1. Why chemicals: Chemicals are critical intermediate inputs for downstream sectors such as rubber and plastics, pharmaceuticals and electronics.
    2. Growth of coverage: The first QCO for a chemical product was introduced in 2018. The number of chemical products covered rose to 52 by 2024.
    3. Growth of exposure: The share of chemical using firms exposed to regulation on the input side rose from 11.8 per cent in 2019 to 56.6 per cent in 2024.
    4. Effect on larger firms: Input QCOs are associated with a 9.6 per cent increase in production alongside a 37 per cent decline in gross value added (GVA), meaning output value minus the cost of bought in inputs. Larger firms sustain output at the cost of lower value addition.
    5. Effect on smaller firms: Input QCOs have no statistically significant effect on production or GVA among smaller firms. They are associated with a 47.6 per cent decline in profitability.
    6. What the size split shows: Larger firms can pass at least part of the higher input cost through to output prices. Smaller firms have a more limited ability to absorb rising input costs and the additional compliance costs.

    Why has the QCO regime become a trade question?

    1. The forum: The concerns were raised during the WTO’s eighth Trade Policy Review of India.
    2. Raised by major trading partners: The European Union and the United States raised them.
    3. Raised by partners in the same bloc: Fellow BRICS members, including Brazil, China and Indonesia, raised them as well, so the objection does not track a single trade bloc’s interest.

    Challenges to the Quality Control Order regime

    1. Compliance cost falls hardest on the smallest firms: Certification fees, testing, factory inspection and documentation are largely fixed costs, so they take a far larger share of a small firm’s turnover. Eg. Of India’s roughly 6.4 crore micro, small and medium enterprises (MSMEs), only about 14 per cent have access to formal credit, so certification costs come out of working capital.
      The Fix: Give smaller firms dedicated certification assistance, with designed exemptions or transition periods where compliance costs are particularly burdensome.
    2. Certification capacity does not scale with coverage: Recognised testing laboratory and inspection capacity limits how fast licences can be issued once a product is brought under an order. Eg. Waiting periods for foreign manufacturer licences have been a standing complaint from importers of intermediate goods.
      The Fix: Expand third party conformity assessment through accredited private laboratories, so licence issuance is not gated on the regulator’s own testing capacity.
    3. Input regulation transmits into sectors it was never aimed at: An order placed on an intermediate raises the input cost of every industry that buys it, whatever the order’s own purpose was. Eg. Standards on steel long products raise input costs for engineering goods, automotive components and capital goods producers at once.
      The Fix: Make a supply chain impact assessment a mandatory part of both the design of a new order and the reassessment of an existing one.
    4. A standard can operate as protection rather than quality assurance: A mandatory standard on an import heavy input restricts supply and raises the domestic price without improving what reaches the consumer. Eg. The WTO Agreement on Technical Barriers to Trade requires that a technical regulation not be more trade restrictive than necessary to fulfil a legitimate objective.
      The Fix: Publish the risk assessment and the stated objective behind each order at notification, so the instrument is testable against its own purpose.
    5. Quality regulation without surveillance produces paper compliance: A mandatory mark improves quality only where market surveillance detects and penalises non conforming goods actually on sale. Eg. Counterfeit standard marks on low value consumer goods remain a recurring enforcement problem.
      The Fix: Shift enforcement effort toward post market sample testing of goods on sale rather than toward licence issuance alone.

    Conclusion

    The instrument under reassessment was designed to police what reaches the consumer, and its cost is landing instead on what a manufacturer is allowed to buy. That mismatch is what the reset has to correct, and a coverage count is the wrong measure of whether it has. The test worth applying is whether quality standards improve products without constraining the scale, efficiency and competitiveness of Indian manufacturing. The marker to watch is whether the reassessment of the remaining intermediate input orders carries a supply chain impact assessment and a separate track for smaller firms, or whether it proceeds product by product as before.

    Manufacturing in India

    1. Share and scale: Manufacturing contributes around 17 per cent of India’s GDP. Output is projected to reach approximately $1 trillion in FY 2025-26.
    2. Global standing: India holds around 2.8 per cent of global manufacturing output, against China’s roughly 29 per cent.
    3. Trade and investment: Merchandise exports reached around $437.7 billion in FY25, with non petroleum exports at a record $374.3 billion. Foreign direct investment into manufacturing rose 18 per cent to $19.04 billion in FY25.
    4. Structural concentration: Three states account for around 40 per cent of net value added. Only around 4.7 per cent of the workforce has formal skill training.

    Government Initiatives for the Manufacturing Sector

    1. National Manufacturing Mission: Launched in the 2025-26 Budget, it unifies manufacturing policy, execution and governance and prioritises clean and sustainable manufacturing. It targets a 25 per cent manufacturing share of GDP by 2035.
    2. Make in India: The programme promotes domestic manufacturing and investment across identified priority sectors, and is the umbrella framing under which the sector’s GDP share target sits.
    3. Production Linked Incentive (PLI) scheme: It offers output linked incentives across 14 sectors, including mobiles, electronics, pharmaceuticals, textiles and drones. It had drawn over ₹1.76 lakh crore of realised investment as of March 2025.
    4. India Semiconductor Mission: A ₹76,000 crore framework has approved 10 projects worth around ₹1.60 lakh crore, covering silicon fabs, silicon carbide units and advanced packaging.
    5. National Logistics Policy: It aims to cut logistics costs and improve supply chain efficiency for manufacturers.

    Back2Basics: WTO Trade Policy Review

    1. What it is: The Trade Policy Review Mechanism is a World Trade Organization process under which a member’s trade policies and practices are examined by the full membership.
    2. Basis: It was established under Annex 3 of the Marrakesh Agreement establishing the World Trade Organization, 1994.
    3. Frequency: The frequency of a member’s review depends on its share of world trade, so the largest traders are reviewed most often.
    4. What it is not: The review is a transparency exercise. It is not a dispute settlement proceeding and it enforces no obligation.

  • Soaring demand for AI chips: What ‘supercycle’ means

    Why in the News

    Semicon India, the flagship conference of the India Semiconductor Mission (ISM) under the Union IT Ministry, has been held in New Delhi. It met amid exceptional global demand for semiconductors, driven by artificial intelligence (AI) and the infrastructure AI requires. That demand is being described as a semiconductor supercycle. The contested point is where India sits in a surge concentrated in memory chips and advanced packaging, since India does not yet produce chips and is not capturing profits from advanced ones.

    What is a semiconductor ‘supercycle’?

    1. Definition: A supercycle is a multi-year period of investment and growth produced by a fundamental technology shift that alters the underlying structure of demand, rather than by an ordinary upswing in orders.
    2. Earlier instances: The same pattern was seen with computers in the 1990s and with smartphones in the 2010s.

    What is driving the current chip boom?

    1. Data centres: These are physical facilities housing equipment that stores and processes digital data, such as servers and computers, and they generate a large share of present demand. An AI data centre carries the specialised infrastructure needed to support AI technology.
    2. AI accelerators: The AI chip, or accelerator, undertakes the massive calculations needed to run AI models.
    3. The memory bottleneck: These processors must also receive data rapidly, and traditional memory hardware struggles to supply it because of its physical distance from the processor.
    4. High-bandwidth memory: High-bandwidth memory (HBM) chips stack layers of a computer’s working memory close to the processor, which allows large volumes of data to move rapidly between memory and processor.
    5. Advanced packaging: Processors and memory stacks are combined using highly advanced packaging techniques, so packaging is part of the performance rather than a finishing step.
    6. Market structure: The HBM market has three big players, SK Hynix and Samsung of South Korea, and Micron of the United States.

    How is demand being secured?

    1. Shift to business buyers: Memory manufacturers traditionally relied on consumer sales, and the AI buildout is moving the market towards business-to-business sales.
    2. Scale of committed spending: Microsoft, Amazon, Google and Meta plan to spend nearly $635 billion on AI infrastructure in 2026 alone, including data centres, on S&P Global data.
    3. Take-or-pay contracts: Chipmakers are entering long-term take-or-pay agreements, under which a customer must buy the agreed chips regardless of current demand or pay hefty penalties.

    Where does India fit in the supercycle?

    1. Projects approved: India approved 12 semiconductor projects under ISM 1.0, and some packaging facilities have begun production.
    2. Position in the chain: India does not produce chips, and has focused on establishing manufacturing capacity in assembly, testing and packaging.
    3. What that looks like in practice: Micron’s Sanand facility in Gujarat will process imported wafers used for chipmaking.
    4. Profit position: India is not capturing profits from advanced chips, so the demand surge passes through its facilities rather than accruing to them.

    What do ISM 2.0 and the design route offer?

    1. ISM 2.0: Launched in February, it aims to build on the existing base, and its packaging scheme offers financial support.
    2. Chiplet research: Another scheme will support research and development (R&D) in chiplet technologies. A conventional chip is made from a single piece of silicon, and chiplets combine smaller specialised chips to lower cost and waste.
    3. Design workforce: Nearly a fifth of the global chip workforce is based in India, which makes chip design a separate entry point from fabrication.
    4. Edge-AI design: Under the design-linked incentive scheme, the startup Netrasemi is developing edge-AI processors for cameras and drones. These perform AI computations on the device instead of sending data to the cloud, which speeds up responses and cuts data transmission over the internet.
    5. Value chain signal: Germany’s Infineon has acquired the Bengaluru-based fabless company C2i, a firm that designs and sells chips without manufacturing them.

    Challenges to India’s position in the chip supercycle

    1. Concentration of the buyer base: Predictable order books rest on a handful of buyers, so a spending pause by one of them resets demand for the whole memory market. Eg. Nearly all of the 2026 AI infrastructure outlay tracked by S&P Global sits with four companies.
      The Fix: Tie capacity commitments to the revenue AI services actually generate rather than to announced infrastructure budgets.
    2. Participation limited to the back end: Approved Indian capacity sits in assembly, testing and packaging, so the margin on an advanced chip is earned before the part reaches India. Eg. Wafers processed at the Sanand facility are imported.
      The Fix: Convert the design workforce advantage into Indian ownership of chip designs rather than design services performed for foreign firms.
    3. Input costs rising before returns arrive: The AI surge raises prices for every Indian buyer of servers and devices while India earns nothing from the surge itself. Eg. A parliamentary reply in July recorded that demand for AI servers and data centres was tightening memory supplies and raising prices.
      The Fix: Prioritise memory packaging capacity in the ISM 2.0 pipeline, so part of the price increase is captured domestically.
    4. Capital drawn to established hubs: Investor interest follows existing semiconductor depth, and India competes for that capital without the same base. Eg. Some foreign investment withdrawals from Indian markets in 2026 have been linked to interest in the semiconductor-heavy markets of Taiwan and South Korea.
      The Fix: Sequence incentives towards capability milestones that shift India up the chain, so the investment case rests on capacity rather than on announcements.

    Conclusion

    The demand shift the supercycle describes sits in memory and in packaging, which is the part of the chain India has chosen to build. India remains a processor of imported wafers and a supplier of design labour, so the surge raises its input costs before it raises its earnings. The unresolved question is whether the packaging and chiplet schemes move India from assembly towards value it can retain. The markers to watch are whether an Indian facility begins producing rather than processing, and whether the industry’s order books hold once AI service revenue is measured against the infrastructure already contracted.

    Matching Previous Year Question

    “[2025, GS3, 15 marks] India aims to become a semiconductor manufacturing hub. What are the challenges faced by the semiconductor industry in India? Mention the salient features of the India Semiconductor Mission.”

  • Electronics Components Manufacturing Scheme (ECMS)

    Electronics Components Manufacturing Scheme (ECMS)

    Why in the News?

    The Electronics Components Manufacturing Scheme (ECMS) is being implemented to deepen India’s domestic electronics ecosystem, reduce import dependence and increase domestic value addition in the electronics supply chain.

    Key Highlights

    • ECMS notified: 8 April 2025
    • Initial outlay: ₹22,919 crore
    • Tenure: 6 years, with optional 1-year gestation period
    • Union Budget 2026-27: outlay increased to ₹40,000 crore
    • Capex incentive available for 5 years
    • As of August 2026:
      • 106 projects approved
      • Across 15 States
      • Covering 30 electronic domain products
      • Approved investment: ₹69,548 crore

    What Does ECMS Support?

    The scheme promotes domestic manufacturing of:

    • Electronic components
    • Sub-assemblies
    • Supply-chain products
    • Related capital goods

    Critical Import-Dependent Components

    • Printed Circuit Boards (PCBs)
    • Camera modules
    • Display modules
    • Connectors
    • Capacitors
    • Lithium-ion cells
    • Rare-earth magnets
    • Core objective: Move India beyond electronics assembly towards deeper domestic manufacturing and value addition.

    Progress Under ECMS

    • Production has started at 38 approved plants.
    • 16 projects are at advanced construction or machinery-installation stages.
    • Expected production: ₹5.34 lakh crore
    • Expected employment:
      • 74,628 direct jobs
      • 2.5 lakh indirect jobs

    SEMICON India 2026

    • Theme: “Silicon to Systems: Building the Ecosystem”
    • Venue: Yashobhoomi, New Delhi
    • Dates: 17-19 September 2026
    • Focus: strengthening India’s semiconductor ecosystem across the value chain.

    Other Government Initiatives

    National Policy on Electronics 2019 (NPE 2019)

    • Aims to make India a global hub for Electronics System Design and Manufacturing (ESDM).

    Production Linked Incentive (PLI) for Large-Scale Electronics Manufacturing

    • Performance-linked incentives of 4%-6% on incremental sales for eligible segments.

    SPECS [Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors]

    • Provided 25% capital expenditure incentive for eligible components, semiconductor/display fabrication, ATMP units, sub-assemblies and capital goods.

    EMC 2.0

    Modified Electronics Manufacturing Clusters 2.0

    • Provides manufacturing infrastructure, common facilities and Plug-and-Play capacity.

    PLI for IT Hardware

    • Promotes domestic IT hardware manufacturing and investment.

    Semicon India Programme

    • Semicon 1.0: ₹76,000 crore
    • Semicon 2.0: ₹1,27,500 crore, approved in July 2026
    • Supports fabs, packaging, testing, design and related semiconductor capabilities.

    Electronics Manufacturing Clusters (EMC) Scheme

    • Financial assistance up to 50% of project cost
    • Ceiling of ₹50 crore per 100 acres for greenfield projects.

    Phased Manufacturing Programme (PMP)

    • Uses a structured tariff approach to deepen domestic value addition in mobile phones and key sub-assemblies.

    Electronics Development Fund (EDF)

    • A Fund of Funds investing through venture funds to provide risk capital for innovation, product design and startups in ESDM and IT.

    India’s 2030 Target

    • India is targeting $500 billion domestic electronics manufacturing ecosystem and $150 billion electronics exports by 2030.

  • PM pitches India as trusted base for chip manufacturing

    Why in the News

    The Prime Minister has said the world needs “new and trusted locations” for semiconductor manufacturing and that India is readying itself to meet that requirement, while inaugurating SEMICON India 2026 in New Delhi. He said India has entered the second phase of its semiconductor journey, moving beyond policy announcements and plant construction toward commercial production of chips. The pitch answers a specific market condition, that chip companies are looking to diversify their global supply chains away from a narrow set of manufacturing locations. The tension is between the pitch and the base it rests on. India’s semiconductor demand is projected at $110 billion by FY30, while domestic manufacturing remains at a nascent stage and imports have grown at a compound annual rate of 23%.

    What is the India Semiconductor Mission?

    1. What it does: It is the central programme that provides fiscal support to semiconductor projects in India, covering fabrication, packaging and other parts of the chip value chain.
    2. Phase one scale: Twelve semiconductor projects were approved under the first phase, spanning fabrication, packaging and other value chain segments.
    3. Phase two scope: The programme has moved to Semicon 2.0, a Rs 1.27 lakh crore programme that widens the focus beyond large chip factories.

    Why is India pitching itself as a trusted location now?

    1. Supply chain diversification: Chip companies are looking to spread manufacturing across more countries, which creates an opening for a location that is not already in the established set.
    2. The trust framing: The pitch was made as a claim about reliability rather than cost, on the stated ground that the world’s trust in India is increasing alongside its economic growth.
    3. The supporting economic markers: The claim was anchored on 7.8% quarterly GDP growth, a recent sovereign rating upgrade by a Japanese credit rating agency, and the New Delhi Declaration adopted at the BRICS Summit India hosted this month.
    4. The stated pace: India has achieved in about four years what generally takes countries around a decade to build, though semiconductor manufacturing was described as a journey with no end point.

    What has the first phase actually delivered?

    1. Projects in production: Five of the twelve approved projects have already started commercial production, which is the marker separating phase one from phase two.
    2. Memory output from Gujarat: Micron Technology has begun shipping DRAM (Dynamic Random Access Memory) and NAND memory products to customers globally from its Sanand facility in Gujarat.
    3. The scale up path there: The plant is expected to assemble and test tens of millions of chips this year, scaling to hundreds of millions next year.
    4. Design and engineering presence: Infineon Technologies, a German chipmaker, now has over 2,800 employees in India, and has said India has potential to strengthen its position across the global semiconductor value chain as its domestic market and technology capabilities expand.

    What does Semicon 2.0 change about the approach?

    1. Beyond the fab: The programme extends support to semiconductor equipment, materials, design, research and development, supply chains and skilled manpower, rather than to large chip factories alone.
    2. The ecosystem logic: A fabrication plant depends on a surrounding base of tool makers, chemical and gas suppliers and trained engineers, which the first phase did not fund directly.
    3. Project count: The next phase is expected to see the number of approved projects increase further.

    How large is the demand gap the mission is chasing?

    1. Projected demand: India’s semiconductor demand is projected to reach $110 billion by FY30 and to exceed $200 billion by FY35.
    2. The import bill so far: The country spent almost $150 billion on semiconductor product imports between FY17 and FY25.
    3. The trajectory if nothing changes: Imports grew at a compound annual growth rate of 23% over that period, and on the same trend annual imports could reach $240 billion by 2035.
    4. The policy conclusion drawn: Building a comprehensive semiconductor ecosystem has been identified as an urgent national priority on the strength of that gap.

    Challenges to the India Semiconductor Mission

    1. Utility reliability at fab sites: A fabrication plant needs continuous ultrapure water and uninterrupted power, and an interruption of either scraps the wafers in process. Eg. Taiwan’s chip plants cut water use and trucked in supplies during the 2021 drought when the island’s reservoirs fell to record lows.
      The Fix: Ring fence dedicated water recycling plants and captive power capacity for each approved site as a condition of disbursal.
    2. Fabrication workforce depth: India’s semiconductor engineers sit in design centres rather than in fabrication and process engineering, which is a different skill base. Eg. Design centres of global chipmakers have operated in Bengaluru and Hyderabad for over two decades without a commercial fabrication plant alongside them.
      The Fix: Tie a share of the incentive to process engineer placements trained through partnerships with operating fabs abroad.
    3. Equipment and materials import dependence: The tools and high purity inputs a fab consumes come from a handful of global suppliers, so domestic assembly does not by itself reduce external exposure. Eg. Extreme ultraviolet lithography machines are produced by a single company, ASML of the Netherlands.
      The Fix: Anchor equipment and materials suppliers in India through long term purchase commitments from the approved plants rather than through subsidy alone.
    4. Competition at mature nodes: India’s approved capacity targets older process nodes, where large capacity additions elsewhere can push prices below the level a new entrant needs. Eg. Sustained capacity expansion in China at 28 nanometre and older nodes has driven down prices for legacy chips.
      The Fix: Condition support on secured long term offtake contracts rather than on installed capacity alone.

    Conclusion

    The pitch is that trust and diversification, rather than cost, are what bring chip manufacturing to India. The measurable claim behind it is narrower, five plants in commercial production against a demand curve heading for $200 billion. Semicon 2.0’s widening into equipment, materials and skills is the part that decides whether the fabs have a supply base around them, and the count of projects approved under it is the next thing to watch.

    Matching Previous Year Question

    “[2025, GS3, 15] India aims to become a semiconductor manufacturing hub. What are the challenges faced by the semiconductor industry in India? Mention the salient features of the India Semiconductor Mission.”

  • A blueprint to create productive jobs, a lesson from Tiruppur

    Why in the News

    The Prime Minister’s Independence Day address placed manufacturing power first among the seven Saptadhara streams meant to carry India towards a Viksit Bharat, and tied that effort to harnessing the potential of India’s youth. Research at the Indian Council for Research on International Economic Relations (ICRIER) answers the question that follows, which is which manufacturing sector can actually deliver jobs at the scale India needs, and its answer is textiles and apparel. The evidence offered is the Tiruppur knitwear cluster, an organically grown ecosystem that supports over a million livelihoods, set against the PM MITRA parks announced in 2021 to replicate it, of which only one appears operational. The tension is that India has closed its tariff gaps with competitors and still cannot convert that access into exports, because the binding constraint is not market access but the absence of the cluster ecosystem around the factory.

    Why is India’s job problem one of composition and of job quality?

    1. The size of the workforce: India had 61.6 crore employed persons aged more than 15 years in 2025.
    2. Agriculture’s share of employment: Agriculture still accounted for 43 per cent of employment against 12.1 per cent in manufacturing, per PLFS 2025.
    3. The arithmetic of any shift: Even a 1 percentage point shift in employment from agriculture to manufacturing would involve moving a large number of workers.
    4. The stated target has not been met: The governing alliance had promised to create 2 crore jobs every year, and the outcome is nowhere near that.
    5. Youth unemployment: Unemployment among those aged 15 to 29 was 9.9 per cent, rising to 13.6 per cent in urban areas, per PLFS 2025.
    6. Youth outside employment, education and training: 25 per cent of that age group were neither in employment nor in education or training.
    7. The gender gap in participation: Female labour force participation was 40 per cent, against 79.1 per cent for men.
    8. Student agitations over paper leaks: The recent student agitations over paper leaks reflected the underlying position that respectable formal sector jobs remain scarce even after a basic education.
    9. The PLFS usual status measure: The PLFS usual status measure counts people who worked for a long part of the year and also those who undertook economic activity for at least 30 days during the year.
    10. The limit of the employment count: Being counted as employed does not mean holding a regular or formal job.
    11. Regular formal employment with social security: Economic security requires regular formal employment carrying social security benefits such as the Employees’ Provident Fund (EPF) and Employees’ State Insurance (ESI).

    Why does apparel fit the gap better than the frontier sectors?

    1. Labour absorption in apparel: The apparel sector is labour intensive and employs women in large numbers.
    2. Training time for production roles: Workers can be trained in short periods, about 60 days for specific production roles, which is what allows a cluster to scale its workforce quickly.
    3. Fit with India’s skill distribution: Chip making, artificial intelligence and other advanced technologies serve a highly skilled workforce, while the majority of India’s labour force is at the bottom end of the skill distribution.
    4. The cost of a job is lower: Textiles and apparel offer higher employment intensity at relatively low cost, which is the path China, Bangladesh and Vietnam followed.

    Is the $100 billion export target achievable, and what do the international comparisons show about market access?

    1. The headline target: India has set a target of $100 billion in textiles and apparel exports by 2030, from $36 billion today.
    2. The apparel share of the target: $40 billion of that is for apparel exports specifically, from $15.7 billion today.
    3. Exporters do not accept the date: Interactions with exporters suggest the targets are not grounded in current realities and are more likely to be achieved by 2035, not 2030.
    4. The capacity gap behind the target: Closing it means building capacity of a scale that does not exist, not raising utilisation at existing units.
    5. The tariff gap has already closed: India has recently closed the tariff gaps with competitors such as Bangladesh and Vietnam in major markets including the EU and the UK.
    6. The India Japan agreement of 2011: Under the India Japan agreement of 2011, India’s apparel exports to Japan fell from $229 million in 2013 to $203 million in 2024.
    7. Market access without capacity: Market access alone does not ensure exports, and India needs the scale and capacity to tap free trade agreements before a concession converts into shipments.

    What made Tiruppur work, and what did its environmental crisis show about collective capacity?

    1. Tiruppur’s knitwear exports: Tiruppur’s knitwear exports rose from $3.3 billion in 2020-21 to $5.3 billion in 2024-25, per the Tiruppur Exporters Association in 2026.
    2. Share of India’s knitwear exports: The cluster accounts for about 68 per cent of India’s knitwear exports.
    3. The cluster’s employment base: It supports the livelihoods of more than a million workers, around 70 per cent of them women.
    4. The whole chain sits in one place: Within roughly 20 km, yarn, knitting, dyeing, printing, stitching, finishing, packaging and dispatch are woven into one production ecosystem, with nearly 20,000 units operating across the different stages.
    5. The ecosystem effect of density: Firms specialise, workers specialise, and thousands of jobs are created around a common market, which is the ecosystem effect the argument rests on.
    6. Institutions and common infrastructure built over decades: Entrepreneurs, industry associations and government built the institutions and common infrastructure over decades. The Tiruppur Exporters Association and the South India Hosiery Manufacturers Association built collective capabilities, and infrastructure such as the Netaji Apparel Park supported expansion.
    7. The Madras High Court’s 2011 zero liquid discharge order: The Madras High Court’s 2011 order applied to units failing to meet zero liquid discharge (ZLD) norms, meaning norms requiring that no effluent leave the unit as liquid waste.
    8. The response was collective, not firm by firm: The cluster invested more than Rs 850 crore in common effluent treatment infrastructure.
    9. Collective financing of the effluent plant: A single firm could not have financed that plant, which is the clearest demonstration that the cluster’s value lies in what its firms can do jointly.

    What is a cluster ecosystem?

    1. The cluster ecosystem: A concentration of firms in one trade inside a small geography, together with the suppliers, contractors, traders and service providers each of them draws on. A single factory then operates inside a supply chain it does not have to own.
    2. Why proximity lowers cost: Each stage of production is bought from a neighbouring specialist rather than built in house, so a firm carries only the stage it is good at. The cost and the time of moving material between stages fall close to nil.
    3. The shared labour pool: A workforce trained in that trade accumulates in one place, so a unit can add or shed capacity without training workers from scratch, and a worker can change employer without changing town.
    4. Collective capability: Facilities no single firm could finance become viable once the cost is spread across thousands of units. Eg. Tiruppur’s common effluent treatment infrastructure, built by the cluster after a court order.

    What still constrains Tiruppur?

    1. Dependence on migrant labour: The cluster depends heavily on migrant workers from Odisha, Jharkhand, Bihar and elsewhere.
    2. Housing is the retention problem: Worker housing and retention are named as the important challenges in taking the cluster to its next million jobs.
    3. The cluster’s planned upgrade path: The cluster plans to move into man made fibres, technical textiles and high value sustainable manufacturing to expand both exports and employment.

    Why has the national attempt to replicate it stalled?

    1. The seven PM MITRA parks announced in 2021: The government announced seven PM MITRA parks in 2021 as the instrument for creating more such clusters.
    2. Operational status of the parks: Only one park appears operational, at Warangal, and the others are still in the planning stages.
    3. The execution pace against the export target: Such a pace in the execution of even good ideas does not inspire confidence that the $100 billion export target can be reached, and it limits the speed at which jobs can be created.
    4. One cluster cannot carry a national target: Tiruppur alone cannot deliver the target, and India needs many more clusters of the same kind.

    Challenges to the PM MITRA parks model

    1. A greenfield park has to create the ecosystem a cluster inherits: Tiruppur’s advantage is the density of specialised units around a common market, and a new park begins with land and utilities alone. Eg. Nearly 20,000 specialised units in one cluster took decades to assemble.
      The Fix: Anchor each park on an existing textile concentration so tenants arrive with supplier relationships already in place, rather than siting parks to distribute them across states.
    2. Land and clearances drive the timeline more than the incentive does: The scheme’s outlay is committed at announcement while state level land transfer, environmental clearance and utility connection decide the commissioning date. Eg. Roughly 70 per cent of infrastructure project delays in India stem from complex land acquisition processes.
      The Fix: Make the release of central assistance conditional on dated state milestones for land handover and clearances, so delay has a financial consequence.
    3. Common effluent capacity is the binding utility for textiles: Dyeing and processing are the stages that cannot start without treatment capacity, and they are also the stages that create the most jobs per unit of investment. Eg. Tiruppur had to build more than Rs 850 crore of common effluent treatment infrastructure after a court order, long after the cluster had grown.
      The Fix: Commission the zero liquid discharge plant before tenant allotment rather than after, so processing units can begin operating from the first year.
    4. Worker housing is treated as outside the park: A labour intensive park draws migrant workers who need housing at the same moment the units need staff, and housing is rarely part of the industrial park’s own scope. Eg. Worker housing and retention are the named constraints on Tiruppur’s next million jobs.
      The Fix: Include rental worker housing within the park’s own master plan and viability gap funding, treating it as production infrastructure rather than welfare.

    Conclusion

    The evidence assembled here says the binding constraint on labour absorbing manufacturing is executional rather than strategic. India already has a demonstrated model, a closed tariff gap with its competitors and a stated national target, and the one instrument built to convert all three into jobs has produced a single operating park in five years. Whether the remaining six parks reach commissioning, and on what dated schedule, is the marker that will decide whether the $100 billion target slips to the exporters’ 2035 or fails altogether.

    Manufacturing Sector in India

    1. Share of GDP: Manufacturing contributes around 17 per cent of GDP, against a policy target of 25 per cent.
    2. Share of global manufacturing output: India holds about 2.8 per cent of global manufacturing output, compared with China’s roughly 29 per cent.
    3. The size of output: Manufacturing output is projected to reach approximately $1 trillion in FY 2025-26.
    4. What incentives have drawn: The Production Linked Incentive (PLI) scheme had drawn over Rs 1.76 lakh crore across 14 sectors as of March 2025.

    Government Initiatives for Manufacturing

    1. Make in India (2014): Seeks to raise manufacturing’s share of GDP from around 17 per cent toward 25 per cent through ease of doing business reforms.
    2. Atmanirbhar Bharat (2020): Promotes self sufficiency, local industry and reduced import dependence without closing the economy off to the world.
    3. Production Linked Incentive Scheme (2020): Covers 14 sunrise and strategic sectors, including textiles, with outcome linked financial incentives paid on incremental production.
    4. National Manufacturing Mission: A Budget mission targeting a 25 per cent GDP share and 143 million jobs by 2035, unifying policy across clean and sustainable manufacturing.
    5. National Logistics Policy: Aims to cut logistics costs and improve supply chain efficiency, which is a direct input into export competitiveness.
    6. Industrial corridors: Eleven approved corridors bundle infrastructure to support clustered industrial development, with 12 new industrial nodes approved in 2024.

    Back2Basics: PM MITRA Parks

    1. What the name stands for: Pradhan Mantri Mega Integrated Textile Region and Apparel parks, administered by the Ministry of Textiles.
    2. The design idea: Each park brings spinning, weaving, processing, dyeing, printing and garmenting onto a single site, so a garment can be produced end to end within one location.
    3. The vision it implements: The 5F vision, meaning Farm to Fibre to Factory to Fashion to Foreign, which treats the textile value chain as a single continuum from cotton to export.
    4. How they are built: Each park is developed by a Special Purpose Vehicle owned jointly by the central and the concerned state government, with central support for development capital and for the first units to begin production.

    Matching Previous Year Question

    “[2025, GS3, 15 marks] Discuss the rationale of the Production Linked Incentive (PLI) scheme. What are its achievements? In what way can the functioning and outcomes of the scheme be improved?”

  • Elephant in the room in meetings with Xi, Putin: India’s manufacturing challenges

    Why in the News

    India’s manufacturing base, and not its diplomacy, is the binding constraint on the economic agenda of this weekend’s BRICS summit in New Delhi. The Prime Minister meets the Russian President ahead of the summit and the Chinese President over the weekend, and the consequential part of both conversations is bilateral and economic. India’s difficulty in each case is not the size of its trade deficit. It is the narrowness of what India is able to sell.

    What does the trade profile with Russia reveal about what India can sell?

    1. Exports are a fraction of imports: India’s exports to Russia remain below $5 billion against imports of $63.8 billion in the year to March 2025.
    2. The gap and its composition: The deficit is nearly $59 billion, and Russian oil and other natural resources dominate what India buys.
    3. The market is not the limitation: Russia is a substantial market for manufactured goods, so the shortfall lies on the supply side.
    4. Industrial promotion is under way: The first India Russia international industrial trade fair was held in Delhi this week, and both leaders are to visit it.

    What does China’s export record to Russia show about the size of the gap?

    1. The scale of the comparison: China exported about $103 billion of goods to Russia in 2025.
    2. The composition is the real point: Those exports run from cars and machinery to electronics and industrial equipment, which are exactly the categories India cannot supply at comparable scale.

    How does the same weakness appear in the trade with China?

    1. A larger deficit on a larger base: Bilateral trade reached about $151 billion in the year to March 2026, and India’s deficit rose to roughly $112 billion.
    2. The asymmetry is reversed: China sells manufactured goods, and increasingly the intermediate and capital goods that Indian manufacturers themselves need.
    3. The policy response so far: Delhi is responding to Beijing’s demand that India end its restrictions on commerce with China.

    Why does the goal of economic security collide with what Indian industry needs?

    1. Chinese inputs are embedded in Indian production: They run through electronics, machinery, chemicals, auto components and pharmaceutical inputs, and they feed India’s own exports of manufactured goods.
    2. The two objectives pull apart: The political aim of cutting dependence runs against the commercial need for cheap and increasingly sophisticated inputs at scale.
    3. One weakness, two symptoms: Limited manufacturing strength shows up as an inability to export to a large market in one relationship, and as import dependence in the other.

    Can diplomacy compensate for weak manufacturing?

    1. What negotiation can actually deliver: Payment mechanisms, investment targets and trade agreements are all negotiable, and political warmth cannot substitute for competitive products.
    2. The older ambition against the present agenda: India’s call to democratise the global economic order dates to the Cold War years. The immediate bilateral ask is that Russia and China buy more, invest more and help build Indian productive capacity.
    3. What closing the gap requires: Sustained economic reform, simpler regulation, greater competitiveness, less corruption, deeper domestic supply chains and a stronger manufacturing ecosystem.
    4. Investment follows attractiveness, not persuasion: The world is not short of capital or technology, and India is not near the top of the destinations they go to.
    5. Why the bilateral overshadows the multilateral: BRICS, like the Shanghai Cooperation Organisation (SCO), has become a venue for high level political engagement and bilateral problem solving.

    Challenges to widening India’s manufacturing base

    1. Firms stay small, and stay small for long: A size distribution dominated by tiny units leaves few producers able to take on a large export order. Eg. Most registered manufacturing units in India employ fewer than ten workers.
      The Fix: Make support conditional on growth in employment and turnover rather than on staying below a small unit threshold.
    2. Duties on inputs tax the exporter: Tariffs on intermediate goods raise the cost of the components a finished goods exporter has to buy. Eg. Duties on electronic components have been cut in successive Budgets precisely because they raised assembly costs.
      The Fix: Move to a single low duty band on intermediate and capital goods, and reserve protection for finished goods alone.
    3. Logistics cost eats the margin: Dependence on road freight and long dwell time at ports raise the delivered price of Indian goods. Eg. The National Logistics Policy of 2022 was framed around bringing logistics cost as a share of output closer to competitor levels.
      The Fix: Tie port and freight corridor funding to published turnaround and transit time targets.
    4. Assembly has grown faster than component making: Incentives have drawn in final assembly without a domestic base in parts, so import content stays high. Eg. Mobile phone exports have risen sharply, with display panels and battery cells still largely imported.
      The Fix: Condition incentive payouts on a rising schedule of domestic value addition rather than on output value alone.

    Conclusion

    The agenda for this week is bilateral, and the constraint on it is domestic. Persuasion can open a market, and it cannot supply the goods that would fill one. What India’s economic diplomacy is worth therefore turns on decisions taken by its own economic policymakers rather than on commitments extracted from partners. The test worth watching is whether the industrial reform agenda moves at all once the summit season ends.

    Matching Previous Year Question

    “[2025, GS3, 15 marks] Discuss the rationale of the Production Linked Incentive (PLI) scheme. What are its achievements? In what way can the functioning and outcomes of the scheme be improved?”

  • The gap in manufacturing sector GVA

    Why in the News

    An alternative estimate of India’s manufacturing output puts gross value added (GVA, the value a sector adds after the cost of the inputs it consumed is deducted) at Rs 27.4 lakh crore for 2023-24. The National Statistical Office (NSO), in the new National Accounts Statistics (NAS) series, puts the same figure at Rs 38.6 lakh crore. The official number is higher by 40.9 per cent.

    How is manufacturing GVA estimated?

    1. The sector is measured in two parts: The organised part covers registered factories employing 10 or more workers with power, or 20 or more without power, including registered companies. The other part covers unincorporated workshops and household units outside the corporate and factory sector.
    2. One survey covers each part: The ASI reports the production accounts of the factory sector. ASUSE covers the unincorporated sector.
    3. The two surveys together are near complete: Their combined output represents almost the whole of manufacturing GVA, so their sum is a usable independent estimate.
    4. Corporate filings partially replace the factory survey: The official series uses company balance sheet data from MCA-21 for organised manufacturing. The practice began with the 2011-12 base revision and continues in the latest revision with minor modifications.

    Why is the gap traced to organised manufacturing?

    1. The official estimate exceeds the survey based one by 40.9 per cent: Rs 38.6 lakh crore against Rs 27.4 lakh crore for 2023-24 at current prices. The official figure is 14.7 per cent of GDP.
    2. The informal segment cannot explain the divergence: ASUSE is the source for the unincorporated sector in both estimates. That segment contributes 13.9 per cent of manufacturing GVA.
    3. Only the corporate route is left: The divergence must therefore arise in the estimation of organised manufacturing output, where the balance sheet data replaces the survey.

    Does the employment check close the gap?

    1. A large body of workers is unaccounted for: The Periodic Labour Force Survey (PLFS, the official household survey that measures employment and unemployment) estimated 697.5 lakh manufacturing workers in 2023-24. The ASI and ASUSE datasets together captured 532.9 lakh.
    2. The residual is 164.6 lakh workers: These workers produce output that neither survey records, and they are the first candidate for explaining the gap.
    3. Companies outside the survey frame are added too: 2,72,534 MCA companies sit outside the 78,618 private companies captured in ASI data. Most of them are likely to be non factory private companies.
    4. Their potential output is small: Applying technical ratios, meaning output per worker ratios derived from unit level ASI and ASUSE data, the residual workers and companies add Rs 3.6 lakh crore. The alternative estimate rises to Rs 31.0 lakh crore.
    5. A fifth of the official figure stays unexplained: Rs 31.0 lakh crore is 24.5 per cent below the official estimate, at 80.3 per cent of it. Rs 7.6 lakh crore, or 19.7 per cent of official manufacturing GVA, remains unaccounted for.

    Why is the official explanation contested?

    1. The stated official defence: The ASI is establishment based, so it does not capture value addition that occurs inside an enterprise but outside factory premises, in head office, marketing and distribution, or research and development functions.
    2. The evidence cited against it: A 2018 study in the Economic and Political Weekly found that the available evidence does not support that view, so the missing head office value addition cannot carry a gap of this size.
    3. The alternative suspicion is the scaling method: The official procedure scales up sample estimates of active companies to the full universe of registered companies. The size and composition of that universe are unverified.

    Challenges to the official manufacturing GVA estimate

    1. The company universe is unverified: Scaling a sample of active filers onto the full corporate register counts companies that have stopped operating. Eg. The Ministry of Corporate Affairs struck off more than 2 lakh companies from the register in 2017 for failing to file returns.
      The Fix: Publish an annual active company frame reconciled against Goods and Services Tax filings before it is used for scaling.
    2. The unit of measurement changes between sources: The ASI counts factories and MCA-21 counts companies, so one firm with several plants enters the two datasets on different terms. Eg. The 2011-12 base revision inserted the company based route into a series that until then rested on the factory based survey alone.
      The Fix: Publish a factory to company concordance so the two frames can be matched establishment by establishment.
    3. The methodology is not open to outside checking: Neither the MCA data nor the scaling procedure is available for independent replication, so a disputed figure cannot be settled by evidence. Eg. The National Statistical Commission’s 2018 back series report was withdrawn from the public domain shortly after its release.
      The Fix: Release anonymised unit level MCA-21 data and the full estimation procedure to researchers on a fixed schedule.
    4. Informal manufacturing is measured least well: ASUSE misses the smallest own account units, so the segment most exposed to shocks is estimated rather than enumerated. Eg. Output of unincorporated units after the 2016 demonetisation and the 2020 lockdown was inferred from indicators rather than counted.
      The Fix: Run ASUSE at a higher frequency and link it to the Udyam registration database for a live enterprise frame.

    Conclusion

    Whether the official figure is a fuller description of ground reality or an overestimate of output cannot be settled from outside the statistical system. The dispute has moved from arithmetic to access. Opening the corporate filings and the estimation procedure to independent verification is the only step that would close it. Every downstream number built on manufacturing GVA, from sectoral growth to the investment rate, carries the same doubt until that happens.

    [2023, GS3, 10 marks] Faster economic growth requires increased share of the manufacturing sector in GDP, particularly of MSMEs. Comment on the present policies of the Government in this regard.