The Union Budget 2026–27 has renewed its emphasis on boosting manufacturing, particularly through cuts in basic customs duties (BCD) to correct inverted duty structures and encourage domestic production. However, despite these measures, analysts argue that the budget largely reflects policy continuity rather than a strategic shift. As a result, the long-standing gap between manufacturing growth and employment generation remains unresolved.
This gap matters because manufacturing was expected to deliver two critical outcomes: higher productivity and large-scale job creation. While output has grown in phases, employment has not kept pace. India’s organised manufacturing sector employs fewer than two crore workers, and most manufacturing jobs remain informal, low-productivity, and insecure.
Manufacturing Growth Without Structural Transformation
India’s manufacturing sector illustrates a familiar pattern. Output expands, but the economy does not structurally transform. Jobs are created, but not in sufficient numbers to absorb workers exiting agriculture and informal services. Productivity gains remain uneven, and wages lag behind.
According to the Annual Survey of Industries, organised manufacturing employed about 1.96 crore workers in 2023–24, adding roughly 57 lakh jobs over the past decade. The unorganised manufacturing sector employed around 3.48 crore workers, bringing total manufacturing employment to approximately 5.44 crore.
However, only about one-third of manufacturing workers are employed in organised factories. The majority remain trapped in informal units with low productivity. Even within organised manufacturing, output growth has outpaced employment growth, as firms rely more on capital deepening and automation than on labour expansion. As a result, manufacturing has failed to absorb surplus labour at scale.
Why India’s Manufacturing Growth Has Lagged
For over three decades, manufacturing’s share in India’s GDP has remained broadly stagnant. This signals a failure of industrialisation rather than a lack of policy effort. One key constraint is the structural cost of the economy. Rising wages in public sector and organised services have raised wage expectations without matching productivity gains in manufacturing.
Indian manufacturing firms, operating at relatively low productivity levels, struggle to remain competitive. Unlike East Asian economies where rising wages pushed firms to invest in skills and technology, India has largely remained in a low-skill, low-wage equilibrium.
Private sector growth has further reinforced this trend. Expansion has increasingly shifted toward services and platform-based work, which absorb labour but do not significantly raise productivity. Meanwhile, automation in manufacturing has often been labour-replacing rather than labour-augmenting, especially in the absence of skilled workers.
Lessons From East Asia
East Asian economies such as South Korea followed a different path. As manufacturing expanded, firms invested heavily in shop-floor training, upgrading skills alongside technology adoption. The state supported this by sharing training costs and setting standards, while firms remained responsible for workforce development.
Rising wages encouraged innovation rather than stagnation. Automation complemented labour instead of displacing it. Productivity, wages, and employment grew together.
India’s experience contrasts sharply. Firms relied on abundant cheap labour and invested little in training. Skill development was pushed into fragmented public programmes, weakly linked to industry needs. The result has been growth without deep industrialisation.
Budget 2026 and the Manufacturing Push
The Union Budget 2026 continues to rely on Production Linked Incentive (PLI) schemes as the central manufacturing strategy. Across 14 sectors, PLIs have attracted about ₹2 lakh crore in investment and generated incremental production exceeding ₹18 lakh crore. Electronics manufacturing, pharmaceuticals, and auto components have seen notable gains.
However, employment creation under PLIs remains modest. Total direct and indirect jobs are estimated at around 12.6 lakh, small relative to India’s labour force. The reason lies in design: PLIs prioritise scale, efficiency, and capital intensity, leading to output growth without proportional job creation.
Support for MSMEs in Budget 2026 focuses largely on credit expansion. While this improves liquidity, it does not address deeper constraints such as technology adoption, skill formation, and supply-chain integration. As a result, MSMEs survive rather than scale.
Continuity, Not Course Correction
Budget 2026 reinforces stability, infrastructure investment, and investor confidence. But it leaves core challenges unaddressed. Employment absorption remains weak, skill mismatches persist, and firm-level training receives limited attention.
The assumption that growth will automatically create jobs has not held true in India’s manufacturing experience. Without stronger links between incentives, skills, and employment, manufacturing will continue to grow without absorbing surplus labour at scale. Budget 2026, therefore, signals continuity—not a course correction—in India’s manufacturing strategy.