India’s Industrial Growth: Challenges, Drivers, and the Road Ahead

India’s industrial output has dipped to a four-year low of 4% in 2025, reflecting growing headwinds from global uncertainties, a slump in manufacturing, and stagnation in goods exports. This slowdown is particularly concerning for India’s micro, small, and medium enterprises (MSMEs)—a sector that has expanded fourfold since FY21 and now accounts for nearly 50% of the country’s exports and supports over 250 million livelihoods. As India deepens trade engagement with partners like the United States, safeguarding and strengthening its MSME backbone is critical to achieving resilient and inclusive industrial growth.

What Drives Industrial Expansion in India?

1. Government-led Industrial Reforms and Incentives:
Programs such as Make in India and the Production-Linked Incentive (PLI) schemes are reshaping the industrial landscape by bolstering manufacturing capacities and drawing significant foreign capital. The PLI scheme alone has led to a 69% surge in FDI into manufacturing over the past decade, reaching ₹14.45 lakh crore (US$165.1 billion). Meanwhile, the National Manufacturing Mission aims to elevate the sector’s GDP share to 25% by 2025 by promoting innovation and enterprise development.

2. Investment Momentum from Domestic and Global Players:
India has witnessed a sharp uptick in both domestic and foreign investment—₹37 lakh crore (US$428 billion) in FY24 alone—especially in strategic sectors like automobiles, pharmaceuticals, and electronics. This momentum reflects strong investor confidence, driven largely by favorable policies and expanding infrastructure.

3. Technology Integration and Industry 4.0 Adoption:
The transition to smart manufacturing, marked by increased deployment of automation, AI, and IoT, is boosting productivity and output quality. For instance, India’s HSBC Manufacturing Purchasing Managers’ Index (PMI) hit a 16-year high of 59.1 in March 2024, signifying robust industrial momentum driven by tech adoption. Electronics manufacturing alone has grown at a CAGR of 17.5% between FY15 and FY24.

4. Expanding Domestic Market and Consumption Trends:
India’s rapidly expanding middle class—poised to become the world’s second-largest consumer base by 2030—is fueling demand across key industries such as consumer goods, electronics, and automobiles. The consumer durables sector grew to 8% in FY25, while non-oil merchandise exports rose 6% year-on-year from April to December 2024.

5. Infrastructure Growth and Urban Transformation:
Massive investments in transport, housing, and smart city projects are generating demand for core materials like steel and cement. Steel production grew 3.3% during April–November FY25, while cement consumption continues to rise in line with highway and rail development.

6. Trade Connectivity and Global Market Integration:
India’s strategic position and expanding export infrastructure—strengthened through policies like PM Gati Shakti and the National Logistics Policy—are unlocking global markets. Mobile phone exports surged 92%, touching US$5 billion by August FY24, showcasing India’s growing export competitiveness.

7. Green Growth and Sustainable Manufacturing:
With climate concerns at the forefront, India is pivoting towards clean and renewable industrial practices. The Union Budget 2025-26 earmarked ₹20,000 crore for renewable projects, supporting the expansion of electric mobility and clean energy industries under programs like PM E-DRIVE.

What Hinders Sustained Industrial Growth?

1. Global Economic Volatility:
External shocks—from inflation and geopolitical conflicts to disrupted supply chains—continue to weigh on India’s export-led sectors. IMF’s revised projection of 6.2% GDP growth for FY26 underscores the external risks, including an estimated export revenue loss of US$14 billion due to retaliatory tariffs from the US.

2. Weak Rural Demand:
Despite strong urban indicators, rural consumption remains fragile. High food inflation (8.65% in December 2024) in rural areas is eroding purchasing power, prompting households to cut back on discretionary spending and slowing demand for FMCGs and agri-linked industries.

3. Infrastructure Gaps and Logistical Inefficiencies:
India still grapples with high logistics costs—14–18% of GDP—compared to 8–10% in advanced economies. While progress has been made in corridors and smart city projects, bottlenecks in freight movement and multimodal transport infrastructure continue to hamper industrial efficiency.

4. Regulatory Complexity and Bureaucratic Delays:
Although India has improved its business rankings, the regulatory maze remains a major pain point—particularly for MSMEs. Lengthy clearances, fragmented compliance norms, and limited access to institutional credit inhibit enterprise expansion.

5. Skill Deficit in Emerging Technologies:
Despite numerous skilling programs, India faces a shortage of over 29 million skilled workers in manufacturing and engineering. The PMKVY and other vocational schemes have yet to align with the rapidly evolving demands of Industry 4.0, hindering industrial modernization.

6. Environmental Sustainability Constraints:
India’s heavy dependence on coal—still powering over half of its electricity—clashes with global clean energy goals. The shift to sustainable manufacturing is sluggish due to high upfront costs and slow adoption of green technologies, despite dedicated clean-tech PLIs.

7. Global Competition and Value Chain Disparities:
India’s manufacturing footprint globally is modest—just 2.8%. Countries like China and Vietnam continue to outpace India in labor efficiency and supply chain agility. Moreover, India’s raw material export-heavy trade structure limits value addition domestically, as seen in its reliance on iron ore exports and finished goods imports.

8. Startup Focus on Low-Yield Sectors:
India’s startup ecosystem, while vibrant, tends to prioritize consumer-centric, low-impact services (e.g., instant delivery) over transformative industrial innovation. There is an urgent need to reorient this focus toward frontier sectors like AI, semiconductors, and precision engineering.

Policy Priorities to Revitalize India’s Industrial Engine

1. Accelerate Tech Adoption in Manufacturing:
Wider implementation of smart technologies—AI, robotics, IoT, and big data—can drastically enhance efficiency and reduce costs. Incentivizing digital upgrades, particularly in MSMEs, through tax reliefs and infrastructure grants will create a robust, scalable industrial base.

2. Streamline Logistics and Build Industrial Clusters:
Integrated logistics parks, improved digital supply chains, and multimodal corridors must be scaled up via public-private partnerships. These efforts can reduce transport time, lower costs, and make Indian industries more competitive globally.

3. Tailor Skill Development to Future Industries:
New-age training models—focused on areas like AI, cybersecurity, green tech, and industrial automation—must be embedded into vocational curricula. Collaboration between academia, government, and industry can ensure alignment with job market requirements.

4. Boost R&D and High-Tech Startup Ecosystems:
India should aim to raise R&D spending to at least 2% of GDP. By fostering innovation hubs, offering startup grants, and easing patent processes, India can stimulate high-impact industries such as clean tech, electronics, and life sciences.

5. Stimulate Demand through Rural and Urban Policy Levers:
Policy thrusts like higher rural infrastructure spending, enhanced MGNREGA outlays, and direct support to small farmers can uplift rural demand. Meanwhile, urban consumption can be strengthened through incentives in sectors like housing, consumer goods, and e-mobility.

6. Green Industrial Transformation:
Encouraging circular economy models, promoting energy-efficient industrial practices, and enforcing emission standards will ensure sustainable growth. India must also expand fiscal and regulatory support for green startups and clean-tech innovators.

7. Simplify Regulatory Processes:
A unified, digitized single-window clearance system can reduce compliance burdens. Rationalizing tax structures and improving dispute resolution mechanisms will create a friendlier business environment, especially for MSMEs.

8. Unlock Finance for MSMEs:
Expanding the reach of credit guarantee schemes, promoting alternate financing like invoice discounting, and leveraging fintech tools can bridge the capital gap. Programs like the 59-minute loan scheme should be expanded with robust monitoring for transparency.

9. Expand Global Trade Integration:
Active pursuit of trade deals—with the EU, EFTA, and others—can open new markets for Indian goods. These agreements must address key concerns like IP rights, investment protections, and labor standards to ensure mutually beneficial outcomes.

10. Promote Rural Manufacturing and Agri-Processing:
Decentralizing industry by encouraging agro-based clusters and rural enterprises (echoing Dr. A.P.J. Abdul Kalam’s PURA vision) can bridge regional inequalities. Agri-processing and allied sectors offer scalable opportunities for job creation and rural industrialization.

Conclusion

To ensure long-term industrial resilience, India must align its growth strategy with global sustainability goals, particularly SDG 8 (Decent Work and Economic Growth) and SDG 9 (Industry, Innovation, and Infrastructure). Revamping policies to empower MSMEs, scaling digital transformation, and shifting toward sustainable, technology-driven manufacturing will be key to positioning India as a formidable industrial power in the coming decades.