For three decades, India has chased a manufacturing miracle. On paper, it possesses every prerequisite for success: a vast domestic market, a young workforce, improving infrastructure and a government increasingly willing to subsidise industrial investment. Yet despite successive waves of reform, manufacturing has struggled to gain ground. The sector accounted for roughly 16-17% of GDP two decades ago and remains near that level today. It employs barely one in eight Indian workers, while more than 40% of the workforce remains dependent on agriculture.
That should not Have Happened.
Countries typically become rich by moving workers from farms into factories and from factories into higher-value industries; a path followed with extraordinary success by Britain, Germany, Japan, South Korea and China. Manufacturing was not merely another sector of the economy; it was the bridge between poverty and prosperity. Instead, India moved millions of workers towards services before building a deep manufacturing base. The country built globally competitive software firms before it built globally competitive industrial ecosystems. In a twist of historical irony, India’s entrepreneurs only truly flourished when they escaped the physical world altogether; having spent decades suffocating under the “Licence Raj”, they discovered that the bureaucratic red tape was far easier to bypass when it was converted into digital code. That produced growth, but not industrial depth. India’s manufacturing problem is not that it failed to attract factories, but that it failed to create the thousands of firms, skills and supplier networks that make them productive. The result is one of the great puzzles of the modern economy: a country trying to become an industrial power without ever fully industrialising.
The country That skipped a step
The conventional explanations of labour, land, infrastructure and bureaucracy contain some truth and successive governments have spent decades trying to address them. Yet the deeper puzzle remains: manufacturing has failed to become the employment engine policymakers once expected. The conventional diagnoses explain why factories hesitate to come, not why industrial ecosystems fail to emerge after they arrive. Factories are projects. Manufacturing is a system. That distinction matters because successful manufacturing economies are built by dense networks of suppliers, engineers, technicians, logistics providers, toolmakers and production specialists whose capabilities compound over time. India has become increasingly good at attracting projects. It remains far less successful at building systems.
The scaling penalty
The clearest evidence sits in what economists call the missing middle. India has world-class conglomerates at one end of the spectrum and millions of tiny enterprises at the other. What it lacks is a dense layer of medium-sized manufacturing firms employing dozens or hundreds of workers and specialising in components, tooling, machine parts, industrial processes and precision engineering. Yet industrial capability lives in such firms. The deeper problem is not a shortage of entrepreneurs, but a shortage of firms that successfully scale. More than 99% of Indian enterprises remain micro or small businesses. Few invest heavily in technology, process improvement or workforce training. Banks remain more comfortable lending against property than productivity. Many family-owned firms prioritise retaining control over raising external capital. Furthermore, regulatory obligations become more complex as businesses grow, creating powerful incentives to remain small.
Consider a typical tier-2 automotive supplier in Pune’s industrial belt, employing 45 workers to stamp out clutch plates: crossing the 50-employee threshold triggers a labyrinth of rigid labor compliance and inspection regimes, rendering a growth The most persistent misunderstanding about China’s rise is that it was driven by cheap labour. Cheap labour helped; capability mattered more. China’s real achievement was using factories as learning machines to accumulate industrial knowledge at an extraordinary scale. strategy less an ambition than a regulatory penalty. While New Delhi rolls out the red carpet for foreign tech giants at the top, local entrepreneurs at the bottom still find themselves tangled in the lingering threads of the “Inspector Raj.” For a mid-sized firm, success does not bring economies of scale; it merely attracts the predatory attention of local compliance officers armed with archaic rulebooks. The prevailing bureaucratic mindset remains rooted in suspicion rather than supervision, viewing expanding enterprises not as national champions to be nurtured, but as suspects to be monitored. Consequently, the specialized mid-sized manufacturers that form the backbone of global supply chains remain comparatively scarce.
Germany’s manufacturing strength rests on thousands of medium-sized firms collectively known as the Mittelstand. China and Japan similarly built dense supplier networks around their industrial champions. These unsung companies absorb labour, train supervisors, solve production problems and, most importantly, transform production into capability. Industrial power is built not by flagship factories but by thousands of firms nobody outside the industry has heard of.
Learning Machines
Suppliers, engineers and manufacturers progressively moved from assembly to components, machinery and eventually entire industries. That is why China moved from toys to electronics, and onward to telecom equipment, electric vehicles and advanced manufacturing. China did not merely build factories; it built industrial cities. The true product of Chinese manufacturing was never the goods leaving the factory gate, but the capability remaining behind.
Screwdriver Economies
Critics make a valid point: China, South Korea and Taiwan also began with assembly, relying heavily on imported technology, foreign capital and overseas markets while industrial ecosystems emerged gradually. India’s recent gains are significant; electronics exports have surged and multinational manufacturers increasingly view the country as an alternative to China. The question is not whether assembly matters. It does. The question is whether assembly is generating enough domestic learning to create globally competitive local suppliers and engineers. Assembly was the starting point, never the destination. Confusing that starting point with industrial mastery is dangerous.
An iPhone assembled in India represents progress, but it also illustrates the challenge ahead. India has become a vital manufacturing location for Apple, yet much of the product’s value still originates elsewhere. Advanced semiconductors come largely from Taiwan; display technologies from South Korea and Japan; precision manufacturing equipment is imported from Europe and America. Many specialised components continue to arrive through supplier networks built over decades outside India. The challenge is whether domestic firms can progressively capture a larger share of this value chain. Shenzhen became an industrial powerhouse not because it put electronics together, but because thousands of local suppliers learned to produce the components, machinery and expertise that assembly required. Assembly generates output; industrial power emerges only when local firms capture a growing share of design, components, engineering and production know-how.
Ecosystems or Outposts
India has become far better at attracting manufacturing. That is genuine progress, but the harder challenge begins after the factory arrives. Can local suppliers emerge? Can engineers move up the value chain? Can medium-sized manufacturers scale into globally competitive firms? Can production evolve into capability? Those questions remain unanswered. They matter because manufacturing was never supposed to be about production alone; it was supposed to be the bridge.
As New Delhi aggressively courts multinational supply chains, the scramble to secure factories risks obscuring a deeper weakness. Factories can be imported; industrial ecosystems cannot. Until India builds the industrial middle it has long neglected, it may continue to achieve what once seemed impossible: becoming a premier manufacturing location without becoming a manufacturing power. For a country seeking to employ millions and climb global value chains, that distinction is not semantic. It is the difference between assembling prosperity and creating it.
*Prof. Vikas Singh is an economist covering India’s political economy, growth, finance and public policy.
