In Depth: India’s Sputtering Efforts to Boost Manufacturing Investment

India’s Prime Minister Narendra Modi has set ambitious goals to transform the country from a large aviation market into a leading global aviation hub, with a particular focus on making India a value chain leader in all aspects, from aircraft design to manufacturing. At the 81st International Air Transport Association Annual General Meeting in New Delhi, Modi emphasized the country's growing maintenance, repair, and overhaul (MRO) sector, stating India’s aim to become a $4 billion global MRO center by 2030. This vision aligns with the broader “Made in India” initiative, which since 2014 has worked to encourage companies to develop and assemble products within the country. However, despite these aspirations and an increase in foreign direct investment, India’s manufacturing sector has not grown as planned, with manufacturing's share of GDP at only 14.3% in 2024, falling short of the government’s 25% target for 2022 and below the prior five-year average of 15.3%[para. 1][para. 2][para. 3][para. 4].

A significant factor limiting the growth of India’s manufacturing sector is an infrastructure deficit. According to a government survey, infrastructure is the second most critical consideration for investors deciding on further investment in India. Infrastructure constraints are evident: India has only one deep-water transshipment port, causing logistical inefficiencies as large cargo ships must offload in neighboring countries. Additionally, most of India's freight moves by road, resulting in logistics costs that are two to three times higher than in China, undermining the nation’s natural labor cost advantage. Even in major cities like New Delhi, logistical challenges such as traffic congestion and poor road conditions persist[para. 5][para. 6][para. 7][para. 8][para. 9][para. 10][para. 11].

To address these issues, the government launched the National Infrastructure Pipeline (NIP) in 2019, planning to invest 111 trillion rupees ($1.3 trillion) in infrastructure from 2020 to 2025, primarily focusing on transport, energy, and urban development. The government allocated 11.1 trillion rupees to infrastructure in the 2024/2025 fiscal year (about 3.4% of GDP, up from 1.7% in 2019/2020), but only a marginal increase to 11.2 trillion rupees (3.1% of GDP) is planned for 2025/2026. This slow growth reflects persistent financial issues. A World Bank report indicates India’s infrastructure financing gap exceeds 5% of GDP, with almost 80% of infrastructure funds from 2019-2023 coming from government sources rather than the private sector. Furthermore, the IMF projected India’s debt-to-GDP ratio would reach 82.3% in 2024/2025, exacerbating financing challenges, and most state governments have fiscal deficits over 3% of GDP, further constraining infrastructure investment[para. 12][para. 13][para. 14][para. 15][para. 16][para. 17].

In response to limited progress on “Made in India,” the Modi government introduced the Production-Linked Incentive (PLI) scheme in 2020, giving financial incentives to companies in 14 key sectors. The 2025/2026 budget significantly increased PLI allocations, particularly for electronics and IT hardware (up 55.8% to 90 billion rupees) and several other industries. As a result, India's export of electronics has enjoyed three consecutive years of growth. Chinese smartphone companies have shifted about 66% of local assembly to PLI-linked Indian manufacturing partners, and Apple aims to assemble most U.S.-bound iPhones in India by 2026, largely through Foxconn and Tata Electronics[para. 18][para. 19][para. 20][para. 21][para. 22][para. 23].

Still, the value-added in India remains low, as most key components are imported from China. Heightened regulatory scrutiny since 2020’s border skirmishes has also led Chinese firms to reconsider Indian operations. Companies such as Xiaomi, Huawei, and Oppo have faced audits, fines, and asset seizures, and firms like SAIC Motor and Haier are scaling back or reconsidering their presence in India, partly due to regulatory complexities and unpredictable enforcement[para. 24][para. 25][para. 26][para. 27][para. 28][para. 29][para. 30][para. 31][para. 32][para. 33][para. 34][para. 35][para. 36][para. 37].