Union Budget 2025: Four Key Areas For Boosting India's Struggling MSME Sector

The Make in India initiative was launched a decade ago with the goal of increasing the manufacturing sector's contribution to Gross Domestic Product (GDP) to 25 per cent and generating 100 million additional industrial jobs (up from about 60 million) by 2025.

A similar target was also set in the National Manufacturing Policy (NMP) introduced in 2011 by the then Indian government.

Although the target for the manufacturing sector's share of GDP has remained unchanged, its actual performance has deteriorated over time, with the percentage share declining from 17 per cent in 2010 to 13 per cent in 2023, reported the Business Standard..

Since 2020, the government has introduced several sector-specific production-linked incentive schemes, but despite these efforts, the manufacturing sector's contribution remains far below the intended targets.

A strong manufacturing sector is key to addressing the country's employment challenge. The Economic Survey 2023-24 highlights that India must create nearly 7.85 million jobs annually in the non-farm sector to accommodate the growing workforce.

While the services sector can absorb highly skilled professionals such as engineers and business analysts, a robust manufacturing sector is crucial for employing unskilled and semi-skilled labour migrating from agriculture.

For India to expand its manufacturing sector from 13 per cent of GDP to 25 per cent over the next decade, in a growing economy at 6.5 per cent annually, the sector must grow by about 13.6 per cent per year. This growth cannot rely solely on domestic demand but will require a stronger export performance.

Asian economies like South Korea, Japan, China, and Vietnam, which have thrived on their manufacturing sectors, have seen a significant contribution from manufacturing to global exports.

India, however, holds a very small share of global manufacturing exports (1.8 per cent in 2022), even less than smaller nations like Vietnam (2 per cent in 2022).

As the budget for FY25-26 is about to be announced, here are four key areas of focus for the Indian manufacturing sector:

1. Reducing Import Tariffs

High tariffs are a significant barrier to integration in global value chains, and India has some of the highest tariff levels globally. According to World Trade Organization statistics, India's average Most Favoured Nation (MFN) tariff stood at 17 per cent in 2023, compared to 5.6 per cent for Malaysia, 9.4 per cent for Vietnam, 9.8 per cent for Thailand, and 7.5 per cent for China. Additionally, Vietnam, through trade agreements with key economies like the US and EU, benefits from much lower preferential tariffs for imports. Lower tariffs on intermediate goods are crucial for strengthening global value chain integration, particularly in emerging sectors like green energy, where India has the opportunity to become a global leader. This year's budget should focus on liberalising imports of key manufacturing inputs.

2. Enhancing the Ecosystem for Quality Control

Quality control regulations have surged worldwide, affecting both domestic producers and importers. These regulations, aimed at sustainability, health protection, and labour safety, can hinder competitiveness. For example, some sustainability-driven EU regulations pose a risk to Indian exports, potentially putting $37 billion of exports at risk by increasing costs and reducing competitiveness. The Indian government should support capital investment in technology for testing and certification and facilitate capacity-building in this area.

3. Balancing Access to Land and Labour

Land is essential for setting up manufacturing units, but its availability remains a challenge due to its non-scalable nature. For a well-rounded manufacturing ecosystem, land needs to be complemented by adequate transport connectivity and available labour. Providing housing for industrial workers could address this issue by reducing attrition rates, increasing productivity, and ensuring workforce stability. The budget should allocate funds to continue developing this manufacturing ecosystem, including support for public-private partnership models for worker accommodation.

4. Promoting Research and Development (R&D)

India invests only 0.6 per cent of its GDP in R&D, a figure that is low compared to competitors like Malaysia (0.9 per cent), Thailand (1.2 per cent), and China (2.4 per cent). While the government offers a 100 per cent tax deduction for in-house R&D activities, this incentive has not driven substantial change. Measures announced in Budget 2024, such as the establishment of the Anusandhan National Research Foundation (ANRF) with a fund of Rs 50,000 crore, are unlikely to incentivise private sector R&D. To encourage more innovation, the budget should focus on facilitating foreign technology flows and introducing performance-linked incentives for private sector R&D.

Addressing the nation's job crisis through a vibrant manufacturing sector is essential, but developing the necessary manufacturing base is a complex challenge that requires sustained efforts from both the government and the private sector.

In this uncertain global environment, India has a unique opportunity to harness its demographic dividend and establish itself as a global manufacturing leader. This should be the focus of the 2025 budget.