Budget 2026: A blueprint for manufacturing competitiveness

Over the past two decades, the manufacturing sector’s contribution to India’s gross domestic product has been stagnant at ~17%, underperforming the government’s target of ~25%. 

In contrast, the sector represents ~25% of GDP in China and Vietnam, highlighting a structural gap in India’s industrialisation and value creation. While global supply chains are mitigating risks from higher tariffs and geopolitical uncertainties to become more resilient by diversifying geographically, India’s ability to capitalise on this shift is constrained by scale, input dependencies, regulatory burden and high logistic costs. 

On scale, micro, small and medium enterprises (MSMEs) account for ~35% of the manufacturing output as of FY25 but over 98% of these are micro units, indicating a fragmented production structure with limited capacity to achieve economies of scale. 

Secondly, India grapples with import dependency. In emerging sectors such as electronics, the ecosystem remains nascent. For instance, in the manufacture of mobile phones, 40-45% of the bill‑of‑materials value lies in display assemblies, camera modules and mechanical sub‑systems, indicating a significant import dependence for these high-value stages of the value chain. Domestic players are concentrated in lower‑value‑addition activities such as assembly. Logistics cost in India remains elevated at 8% of GDP on account of a modal share tilted towards roads at 64% as of fiscal 2025.

The budget outlines seven key pillars to enhance India’s global competitiveness across sectors, enabling greater participation in value chains and positioning itself as a global manufacturer for the selected sectors under these pillars. 

While the first pillar focuses on direct fiscal support for textiles and pharmaceuticals, the second pillar stresses on semiconductors, electronic components, rare earths, critical minerals and batteries. The third pillar focuses on the performance of the production linked incentive (PLI) scheme, The fourth on capital goods, a crucial enabler for improving manufacturing across sectors and fifth to strengthen the existing 200 manufacturing clusters while also developing a new industrial corridor in the northeast. The sixth pillar addresses regulatory challenges and logistics cost by adjusting customs duty and special economic zone (SEZ) norms by developing a new dedicated freight corridor, providing incentives for local container manufacturing and enhancing waterways. Finally, the seventh pillar emphasises sustainability by introducing support for carbon capture, utilisation and storage (CCUS).

The expected impacts of the key budget announcements across pillars are:

Pillar 1 – Chemicals, pharmaceuticals and textiles 

Chemicals

• States can leverage existing industrial facilities and streamline infrastructure through the challenge route on cluster-based plug-and-play models

• Enhancement of product-level identification for precursor chemicals, enabling stronger regulatory oversight and reducing risks of misclassification

• More targeted compliance measures and facilitation of data-driven policy interventions

Pharmaceuticals

• Biopharma Strategy for Healthcare Advancement through Knowledge, Technology & Innovation (referred to as Biopharma SHAKTI) will boost India’s fight against non-communicable diseases

• Improvement in quality and credibility of clinical research in India, acceleration of drug discovery and development, and better access to cutting-edge therapies 

• Improved quality of Indian drugs, reduced approval timelines of global regulators and higher competitiveness of Indian companies

Textiles

• Self-reliance in natural, man-made and new-age fibres through the National Fibre Scheme

• Capital support for machinery and technology upgrades to modernise traditional textile clusters 

• Establishment of common testing and certification centres for MSMEs

• Samarth 2.0 to modernise the skilling ecosystem 

• Higher global visibility of Indian handicrafts

• Development of a skilled talent pool to support manufacturing and export of high-value apparel

Pillar 2 – Electronic components, semiconductors and rare earth

Electronics and semiconductors

• Uninterrupted subsidy payouts by doubling the allocation for the Electronics Component Manufacturing Scheme that are aligned with scaling capacities, enabling India to leverage its strong export of mobile phones while moving up the value chain and raise domestic value‑addition from the current ~15%

• Strengthening India’s semiconductor ecosystem beyond assembly and testing towards end-to-end capability creation by building a pathway to advanced nodes (7 nanometre (nm), then 3 nm/2 nm by 2035) under the India Semiconductor Mission 2.0

Rare earths

• Streamlined logistics, lower transportation costs and localised ecosystems to support the value chain from ore extraction to magnet fabrication

• Higher traction for exploration and mining auctions

• Modest strengthening of incentives for domestic separation or refining rather than importing higher-value rare earth element intermediates

Pillar 3 – PLI sectors 

Disbursals under the PLI scheme rose to Rs 10,132 crore in fiscal 2025 and Rs 15,637 crore in the revised estimate for fiscal 2026 from Rs 1.2 crore in fiscal 2022. Although the budget estimate for fiscal 2027 is ~4% lower than the revised estimate for this fiscal at Rs 14,991 crore, it reflects a sustained high level of annual spending. Cumulatively, Rs 48,172 crore has been spent or provisioned against an outlay of Rs 167,049 crore, yielding ~29% utilisation. This marks a substantial deployment of incentives across the economy, consistent with a multi-year rollout where a large share of the budget is earmarked for later years.

Pillar 4 – Capital goods

•  Domestic execution of the entire product development lifecycle, including rigorous testing and large‑scale production of high‑precision components, at a significantly lower unit cost compared with importing them

• Domestic manufacture of high‑value, technologically sophisticated construction and infrastructure equipment

Pillar 5 – Manufacturing clusters

• Lowering production costs, increasing productivity and boosting export competitiveness for legacy industrial clusters

• Bridging the gap between academia and industry, strengthening regional skills and research ecosystems, and improving employability

Pillar 6 – Ease of doing business and logistics

• SEZ units to benefit from easing of export-led capacity stress, improved liquidity and flexibility to redirect a portion of output to the domestic market

• Decongestion of customs terminals and reduction in export processing time, thus enhancing export efficiency

• Proposed east-west rail freight corridor and operationalisation of 20 national waterways to promote expeditious movement of bulk commodities to reduce reliance on mixed-traffic routes and improve the overall rail freight network

• Assistance in setting up a strong and globally competitive domestic container manufacturing industry

Pillar 7 – Sustainability

• Augment initiatives on CCU test beds in real industrial environments for power, steel and cement, leveraging innovative public-private partnership models

• Promote CCUS through an emphasis on research and development and capacity-building of human resources as well as infrastructure

Conclusion

By complementing the existing incentive frameworks with infrastructure, financing and ecosystem-level interventions, the budget for fiscal 2027 strengthens the policy architecture required for manufacturing-led growth. Effective implementation will be critical in translating these measures into improved global competitiveness and moving India towards the targeted ~25% of manufacturing contribution to GDP.

(Authors Pushan Sharma and Mohit Adnani are director and associate director respectively at Crisil Intelligence. Views are personal.)