Manufacturing did not make India's post-reform growth story

Context:

The Anomaly of the 1991 Story

While the 1991 LPG reforms were expected to spark a manufacturing revolution similar to East Asian tigers (China, Vietnam, South Korea), the reality was quite different:

• Services as the Engine: Since the early 2000s, the service sector has been the dominant driver, contributing nearly 54-55% of India’s GDP (as of 2025-26).
• Manufacturing Stagnation: The share of manufacturing in India’s GDP has remained stubbornly range-bound between 14% and 17% for over three decades, despite the "Make in India" (2014) and "National Mission on Manufacturing" (2025) targets of reaching 25%.
• Jobless Growth: The service sector growth, led by IT and finance, is high-value but low-volume in terms of mass employment. Manufacturing, which should have absorbed the unskilled labor migrating from farms, failed to scale.

Why Manufacturing Bypassed India?

Several structural and policy bottlenecks prevented a manufacturing-led boom post-1991:

1. The Skill-Capital Paradox

India’s reforms coincided with the global Third Industrial Revolution (Digital). India leveraged its English-speaking, college-educated pool to become a "global back office," while the lack of basic vocational training for the masses hindered factory-scale productivity.

2. Regulatory Hurdles (The "Cage")

• Labor Rigidities: Until recent consolidations into the Labour Codes, complex laws discouraged firms from growing beyond 100 employees, leading to a "missing middle"—a sea of tiny, informal units that could not compete globally.
• Factor Market Issues: High costs of land acquisition and delayed infrastructure projects made Indian manufacturing uncompetitive. As of 2024-25, logistics costs in India remained at 13-14% of GDP, compared to 8% in developed economies.

3. The "Inverted Duty" Structure

Post-1991, India slashed import duties on finished goods faster than on raw materials in some sectors. This made it cheaper to import a final product (e.g., from China) than to manufacture it domestically using imported components.

4. High Input Costs

Domestic manufacturers have historically faced higher costs for electricity and credit.

Current Status (2025-2026)

The tide is beginning to turn with the Production Linked Incentive (PLI) schemes.

• Electronics Boom: Mobile phone production grew six-fold in the last decade, reaching approximately $133 billion in 2024-25.
• New Base Year: The Ministry of Statistics (MoSPI) recently revised the GDP base year to 2022-23, which captures a more robust growth in manufacturing value-added (GVA) at 11.5% for FY 2025-26.