India's Manufacturing Push Faces Hurdles

India is making progress in its 'China+1' manufacturing strategy, attracting foreign investment and seeing results from incentive programs. However, the transition is more gradual than a rapid shift away from China. This measured advance highlights the need for better policies to overcome structural barriers and geopolitical complexities, which are crucial for India to benefit from global supply chain diversification.

Manufacturing Growth and Investment

India has seen significant increases in foreign direct investment (FDI), reaching an estimated $81 billion in fiscal year 2024-25, a 14% rise. Production-Linked Incentive (PLI) schemes are proving effective, especially in pharmaceuticals. By March 2025, the pharma sector under PLI reported ₹2.66 trillion in sales and ₹1.7 trillion in exports, with 83.7% local value added. Regions like Tamil Nadu offer simplified approvals, attracting major suppliers such as Foxconn and Apple's partners. India's manufacturing Purchasing Managers' Index (PMI) was a healthy 54.7 in April 2026, showing strong domestic activity, while global PMI stood at 52.6. The Sensex stock index's P/E ratio of 21.1 suggests current valuations are reasonable compared to past trends.

Global Competition and India's Position

While India has strengths like a large consumer base, its 'China+1' strategy faces strong competition. Vietnam offers lower labor costs and proximity to China, though it relies on Chinese parts. Mexico benefits from nearshoring to the US via USMCA trade deals, despite higher wages. India's logistics costs, officially 7.97% of GDP, are theoretically lower than China's, but real-world delays make them more expensive for time-sensitive production. Policy changes like Press Note 3 in April 2020 initially restricted investment from countries sharing a border, like China, reducing Chinese FDI to $42 million in 2023. Amendments in March 2026 aim to allow more controlled investment, indicating a shift towards balancing economic goals with security. Other nations like Vietnam, Thailand, and Malaysia have often been more successful in attracting 'China+1' investment due to factors like cheaper labor and simpler tax systems.

Key Hurdles: Logistics and China Dependency

Despite investment and incentives, significant challenges hinder India's manufacturing growth. Key issues include slow bureaucratic processes, quality control measures, and tariffs that increase costs for exporters. A major problem is India's large $100 billion annual trade deficit with China, driven by dependence on Chinese machinery, raw materials, and precision parts for which alternatives are limited. This reliance creates strategic and commercial risks. Global supply chain disruptions and rising costs also affect Indian manufacturers. While the Nifty 50 index shows fair valuation, specific industries face pressures due to their dependence on Chinese supplies, making them vulnerable to global events. Logistics also remain a challenge, impacting efficiency compared to global standards.

Policy Adjustments for Growth

To fully benefit from global interest, India needs strategic policy changes. This involves balancing protection for new industries with competitive input costs for exporters. It also means creating clear guidelines for Chinese investment, allowing it in non-critical sectors while safeguarding sensitive ones. India's large domestic market is a key asset, justifying investment based on growth potential. Economic growth is projected to be strong, between 7.5% and 7.8% for fiscal 2025-26. The manufacturing sector is forecast to reach $2.47 trillion by 2031. However, achieving this growth depends on solving structural problems, improving logistics, and creating a reliable policy climate to attract ongoing investment.