Industrial policy and manufacturing

The first principle

Manufacturing is where a poor country's workers can most quickly become more productive, because factories absorb people with modest skills, use machines that embody foreign know how and sell to a world market with no ceiling on demand. Industrial policy is the state's attempt to speed that up, and the real question is never whether the state acts but how: by deciding who may produce, as India did until 1991, or by lowering the cost of producing for everyone and paying for results, as it tries to do now.

The core

From the state as producer to the state as enabler

• Industrial Policy Resolution, 1948. It set out a mixed economy: arms, atomic energy and railways were for the state alone, new units in six basic industries such as coal, iron and steel and shipbuilding were for the state, and the rest was open to private firms under regulation.
• Industries (Development and Regulation) Act, 1951 (IDR Act). It made a licence necessary to set up, expand or move a factory, which became the legal basis of the licence raj.
• Industrial Policy Resolution, 1956. Following the Second Five Year Plan's stress on heavy industry, it reserved 17 industries in Schedule A for the state, placed 12 in Schedule B where the state would progressively lead, and left Schedule C to private firms. It made the public sector the commanding height of the economy.
• Industrial Policy Statement, 1977. The Janata government stressed small and tiny units, widened the list of items reserved for small industry and created District Industries Centres to support them at the district level.
• Industrial Policy Statement, 1980. It sought efficiency and fuller use of capacity, and it began the cautious relaxations that grew through the 1980s.
• New Industrial Policy, 1991. It abolished licensing for all but 18 industries (now five), cut the list reserved for the public sector to eight, removed the asset limit on large firms under the Monopolies and Restrictive Trade Practices (MRTP) Act and opened automatic approval of foreign investment, as the reforms note explains.

The present toolkit

• Make in India (25 September 2014) set out to raise manufacturing growth to 12 to 14 per cent a year, its share of the economy to 25 per cent and to create 100 million jobs, across 25 sectors, through easier rules for investment and business.
• Production linked incentive (PLI) schemes, approved for 14 sectors in 2020 and 2021 with about Rs 1.97 lakh crore, pay a firm a percentage of its additional sales over a base year for four to six years, provided it also invests a minimum amount. The sectors include mobile phones and electronic components, pharmaceuticals, medical devices, automobiles, telecom equipment, textiles, food products, solar modules, advanced chemistry cell batteries, specialty steel, white goods and drones.
• Why pay on output. A subsidy on investment rewards building a plant whether or not it sells, while a payment on incremental sales rewards only production that finds a market, and it is capped and time bound. The worked example shows the arithmetic.

Dimensions

• Economic. Manufacturing raises productivity across the economy through scale, learning and links to suppliers, and it is the main route to exporting goods rather than only services.
• Employment. Labour intensive industries such as garments, leather, footwear, toys and food processing employ many workers per crore invested, while capital intensive ones such as chemicals and steel employ few, so the mix of industry matters as much as its size.
• External. Imports of electronics, machinery and chemicals make up a large part of India's trade deficit, so domestic manufacturing also eases the balance of payments.
• Strategic. Dependence on one country for active pharmaceutical ingredients, solar cells or electronic components became a security concern after the supply shocks of 2020, which is why the science and technology note on indigenisation treats Make in India as technology policy.
• Federal. Land, power, water and most inspections are State subjects, so States compete for factories through land banks, single windows and their own incentives.
• Environmental. Factories need clean energy and must handle waste and water, so green manufacturing standards are part of competitiveness for exports to markets with carbon border taxes.

In practice

• The share of manufacturing. Manufacturing produces about 14 to 15 per cent of gross value added (GVA) on the new national accounts series with base year 2022-23, released by the National Statistics Office (NSO) in February 2026, and on the older series its share hovered between about 14 and 17 per cent for three decades. Its real GVA grew 10.7 per cent in 2025-26 (NSO, June 2026), yet the share has not risen towards the target. Manufacturing employed 12.1 per cent of workers in 2025 (Periodic Labour Force Survey, PLFS, 2025).
• PLI outcomes. By March 2025 the schemes had drawn actual investment of over Rs 1.7 lakh crore, generated production and sales of over Rs 16 lakh crore and paid incentives of over Rs 21,000 crore, with about 12 lakh direct and indirect jobs reported (data of the Department for Promotion of Industry and Internal Trade, DPIIT, released through the Press Information Bureau, 2025), and the totals have kept rising since. Electronics, mainly mobile phones, has received the largest part of the payments.
• The mobile phone case. India moved from importing most of its phones to making almost all it uses, and smartphones have become one of its largest exports. Critics note that value addition is still mainly assembly and that components are imported, which is why the Electronics Component Manufacturing Scheme of 2025 followed.
• Uneven schemes. The advanced chemistry cell PLI had paid out almost nothing by 2025 because the winning bidders' cell factories were delayed, which shows that output based schemes work best where firms can scale existing production quickly.
• Ease of doing business. India rose from 142nd in 2014 to 63rd in the World Bank's Doing Business 2020 ranking, before the World Bank discontinued the report in 2021 after irregularities in its data. The Business Reform Action Plan ranks States, and the National Single Window System, launched in 2021, brings Central and State approvals onto one portal.
• Decriminalisation. The Jan Vishwas (Amendment of Provisions) Act, 2023 decriminalised 183 provisions in 42 Central Acts, replacing jail terms for minor lapses with penalties. A second Jan Vishwas Bill, introduced in the Lok Sabha in August 2025, extends decriminalisation to more Acts and provides advisories or warnings in place of penalties for many first offences.

Issues and way forward

• Premature deindustrialisation. India's manufacturing share peaked at a much lower income than it did in East Asia, because capital intensive industry, rigid labour law and costly land and power held back labour intensive factories. The labour codes in force from 21 November 2025 ease the labour rules, and land banks with clear titles and power tariffs without a cross subsidy loaded on industry are the remedies most often proposed for the rest.
• Small firms stay small. Most manufacturing workers are in tiny, informal units with low productivity, so policy that helps firms grow, through credit, formalisation and access to buyers, matters as much as policy for large plants; the note on micro, small and medium enterprises (MSMEs) carries this.
• Cost of logistics and inputs. High logistics costs and tariffs on intermediate goods make Indian exporters less competitive, and raising tariffs to protect final goods raises the cost of inputs for others. The National Logistics Policy of 2022 and lower, stable tariffs on inputs address this.
• Subsidy without capability. Incentives can buy assembly without building suppliers, design or research, so the test of PLI is rising domestic value addition, not only sales. Linking support to local value addition and to research, as the note on indigenisation discusses, is the way forward.
• Regulatory burden. Thousands of compliances with criminal penalties deter entry and growth, and the Jan Vishwas Act of 2023 and the second Bill are a start; States have to follow with their own decriminalisation and time bound approvals.

Common confusions

• Licensing and small scale reservation. Licensing controlled whether anyone could set up or expand a factory, while reservation barred larger firms from making listed products, such as many garments and toys; licensing was largely ended in 1991, but the last reserved items were freed only in 2015.
• Make in India and Aatmanirbhar Bharat. Make in India (2014) aims at investment and manufacturing in general, while Aatmanirbhar Bharat (2020) stresses self reliance in critical and strategic sectors.
• PLI and an investment subsidy. PLI pays on additional sales after production begins, while an investment subsidy pays on the cost of building a plant whether or not it produces.
• Manufacturing and industry. Industry in the national accounts includes mining, electricity, gas, water supply and construction as well as manufacturing, so the share of industry is much larger than that of manufacturing.
• GVA share and employment share. A sector can produce a large share of output with a small share of workers, as capital intensive manufacturing does, so the two shares answer different questions.

For the exam

• Keyword bank: Industrial Policy Resolution 1956, licence raj, IDR Act 1951, New Industrial Policy 1991, Make in India, production linked incentive, incremental sales, domestic value addition, premature deindustrialisation, labour intensive manufacturing, ease of doing business, Jan Vishwas, National Single Window System, global value chains.
• Previous year questions: Practise the previous year questions on this topic →
• Use in an answer:
  • Introduction with data: Manufacturing produces only about 14 to 15 per cent of India's GVA on the new national accounts series and employed 12.1 per cent of workers in 2025, well short of the 25 per cent share Make in India aimed at.
  • Introduction with a source: The Industrial Policy Resolution of 1956 made the public sector the commanding height of the economy, and the New Industrial Policy of 1991 reversed it by abolishing licensing for all but 18 industries.
  • Conclusion: India's industrial policy has moved from controlling who may produce to paying for what is produced; its success will be judged by domestic value addition and jobs, not by sales alone.
  • Conclusion: Cheaper land, power and logistics, flexible labour rules and trust based regulation will do more for manufacturing than any single subsidy.