Union Budget FY 2026-27: Manufacturing Sector Driving India’s Next Growth Phase
Union Budget FY 2026-27: Manufacturing Sector Driving India’s Next Growth Phase
Key Takeaways
Introduction
India has emerged among the fastest-growing industrial economies, demonstrating resilience amid uneven global industrial performance. While global manufacturing output expanded modestly by 0.7% in the third quarter of calendar year 2025 , India recorded manufacturing output growth of 1.3% during the same period. This performance reflects the strength of domestic fundamentals and sustained policy support for industrial expansion.
Manufacturing today sits as the engine of growth for India’s ambition to become a $35 trillion economy by 2047, with reforms, sectoral initiatives, and resilient supply chains. Recognising this importance, the Union Budget 2026-27 has reinforced support for manufacturing through targeted measures focusing on investment incentives , innovation , infrastructure development , and industrial ecosystem strengthening .
Building on the three defined Kartavyas , the manufacturing sector is poised to drive India’s growth, employment generation, export competitiveness, and long-term economic transformation.
Performance of India’s Manufacturing Sector
Manufacturing sector is emerging as a key pillar of India’s growing industrial momentum. With capital support and policy-led reforms, recent data across production, investment, and business sentiment indicators point to sustained strengthening in industrial and manufacturing activity.
India’s Industrial and Manufacturing Momentum Strengthens
India’s industrial activity continues to gain strength, with real Industry GVA growing at 7% year-on-year in the first half of FY 2025-26. This momentum carried further into the year as industrial production rose 7.8% in December 2025, the strongest expansion in over two years, after registering a high growth of 7.2%(RE) in November 2025.
This expansion, also reflected in the Index of Industrial Production (IIP), is primarily driven by the manufacturing sector registering a growth of 8.1% in December 2025. Within this, strong growth was recorded in computer and electronic products (34.9%), motor vehicles and trailers (33.5%), and other transport equipment (25.1%).
Manufacturing performance has strengthened further in recent quarters, with GVA growth of 7.72% in Q1 and 9.13% in Q2 in FY 2025-26 , supported by a gradual shift towards higher-value production, improved industrial infrastructure, and wider adoption of technology and formalisation, together reflecting rising industrial capability across the sector.
Confidence Builds as Demand and Business Expectations Improve
Forward-looking indicators continue to reflect optimism in India’s industrial sector, with the manufacturing Purchasing Managers’ Index (PMI) remaining firmly in expansion zone (well above the 50 mark) since March 2023. In January 2026, PMI stood at 55.4 , above its long-run average, indicating continued improvement in the sector’s health.
RBI’s Industrial Outlook Survey of the Manufacturing Sector
Industrial Expansion Supported by Core Sectors
On the output front, sectoral trends indicate that both heavy industry and light manufacturing are supporting overall growth. The Index of Eight Core Industries (ICI) stood at 175.7 in December 2025 , recording a provisional growth of 3.7% compared to December 2024 , with cement, steel, electricity, fertilizer, and coal registering positive production growth during the month.
Cement: India remains the world’s second-largest cement producer, with production reaching around 453 million tonnes in FY25 , supporting infrastructure and construction expansion.
Steel: India ranks as the world’s second-largest crude steel producer, with crude steel production rising by 11.7% during April-October FY 2025-26 compared to last year. Finished steel production also increased by 10.8% during this period.
Coal: India’s coal industry reached historic heights in FY25, producing 1,047.52 MT of coal, a 4.98% increase from the previous year.
Chemicals & Petrochemicals: With production of major chemicals and petrochemicals reaching 58,617 thousand tonnes in FY25 , the sector continues to support industrial development through strong linkages and multiple downstream industries.
Table 1: India’s Core Input Industries Show Strong Decadal Growth (Val in million tonnes)
Core Input Industries
FY15
FY25
Cement
270.00
453.00
Finished Steel
81.86
146.69
Coal
609.18
1,047.52
Source: Economic Survey 2025-26
India’s Manufacturing Sector Expanding its Global Presence
The Economic Survey 2025-26 highlights that medium- and high-technology industries now contribute 46.3% of India’s manufacturing value added, signalling a gradual shift towards more sophisticated production structure. This transition places India among a smaller group of middle-income economies steadily advancing up the manufacturing value chain. Reflecting these gains, India’s global industrial competitiveness has improved, with the country’s ranking in the Competitive Industrial Performance (CIP) index rising to 37th in 2023 from 40th in 2022.
Manufacturing has also contributed in strengthening India’s export performance. In FY26 each of the first three quarters recorded their highest-ever export levels. Further, during April-December 2025, exports amounted to USD 634.3 billion, marking a further 4.3% year-on-year growth , emphasizing sustained resilience in external trade performance.
Role of MSMEs in Manufacturing
Micro, Small and Medium Enterprises (MSMEs) remain central to India’s industrial economy, contributing about 35.4% of manufacturing output, 48.58% of exports, and 31.1% of GDP, while employing over 32.82 crore people across 7.47 crore enterprises, making them the second-largest employer after agriculture.
As India’s manufacturing integrates further with global markets, MSMEs play a vital role in strengthening supply chains, promoting local value addition, and supporting inclusive regional development.
Budget 2026-27: Major Initiatives to Boost Manufacturing
The Union Budget 2026-27, unveiled a comprehensive set of measures aimed at accelerating economic growth through promoting manufacturing in strategic and frontier sectors. These announcements build on the government’s agenda and address both immediate needs (like tax reliefs and customs reforms) and long-term capacity development (like new industrial missions and cluster schemes).
Strategic Sector Initiatives and Industrial Ecosystem Development
The Budget launched new schemes and programmes focusing on high-impact and emerging industries to drive the next phase of industrial growth, with a focus on scaling up manufacturing across seven strategic and frontier sectors.
Semiconductor Mission 2.0: Building on earlier initiatives, the programme focuses on production of semiconductor equipment and materials, designing of full stack Indian IP, fortifying supply chains, and creation of industry-led research and training centres.
Tax and Customs Reforms to Promote Manufacturing
To complement the above sectoral interventions, The Union Budget 2026-27 introduced a series of tax incentives and customs duty reforms fine-tuning the tax regime to make it more manufacturing-friendly and export-supportive. Key measures include:
All these measures are rooted in Government’s sustained push to make India a globally competitive manufacturing hub; one that can create jobs, innovate in frontier technologies , and integrate successfully into global value chains.
Sustained Government Initiatives Driving Manufacturing Growth
India’s manufacturing expansion is being reinforced by a combination of targeted incentive schemes, mission-driven reforms, infrastructure development, and innovation-led initiatives creating a strong foundation for the next phase of manufacturing growth.
Performance Linked Incentive (PLI) scheme
The Production Linked Incentive (PLI) scheme, aligned with the Aatmanirbhar Bharat vision has emerged as a major catalyst for industrial growth across 14 sectors. Key gains under the Scheme are visible in sectors like electronics, pharmaceuticals, and automobile manufacturing, strengthening India’s global manufacturing competitiveness:
PLI scheme for automobile and auto-components has attracted cumulative investments worth ₹35,657 crore, resulting in creation of 48,974 jobs, until September 2025.
National Manufacturing Mission
Announced in Budget 2025-26, the National Mission on Manufacturing (NMM) serves as a key catalyst for industrial growth, targeting a rise in manufacturing’s GDP share to 25% by 2035, creation of 143 million jobs, and expansion of merchandise exports to USD 1.2 trillion by through deeper global value chain integration. The following key steps have been taken under National Manufacturing Mission Implementation:
Investments Fueling Industrial Expansion
Investment momentum continues to support economic growth in FY26, with the share of gross fixed capital formation (GFCF) estimated at 30% and expanding by 7.6% in the first half of the year compared to last year.
This investment push is reflected in both public and private spending, with government capital expenditure rising from ₹3.07 lakh crore in FY19 to ₹11.21 lakh crore in FY26 , while private corporate investment announcements surged to ₹14.6 lakh crore in first half of FY26, higher than ₹7.9 lakh crore during same period in FY25.
Initiatives Strengthening India’s Innovation Ecosystem
Impact of Innovation-Led Manufacturing Growth
India’s innovation ecosystem has strengthened significantly, supporting its move towards higher-value manufacturing. India’s Global Innovation Index ranking improved from 66th in 2019 to 38th in 2025, the highest among lower middle-income country group.
India also ranks 4th globally in trademarks, 6th in patents, and 7th in industrial designs in 2024. The World Intellectual Property Organization (WIPO) ranks India 12th globally, for its entrepreneurship policies and entrepreneurship culture.
India ranks among the top four globally in critical technology research output, including defence, space, robotics, quantum computing, AI, biotech, advanced materials, energy, and communications.
Infrastructural Reforms Driving Manufacturing Expansion
Government-led infrastructure and logistics reforms are enabling manufacturing expansion through continued investments in connectivity, industrial infrastructure, and skilling support.
PM GatiShakti has transformed infrastructure planning through a unified platform integrating over 1,700 data layers across 57 ministries and departments, while PM GatiShakti Public and the Unified Geospatial Interface now provide 230 datasets for investment and logistics planning. At the state level, 27 States have notified State Logistics Policies, and 28 Aspirational Districts are already using GatiShakti District Master Plan Module for area planning, which will then extend to all 112 districts Aspirational Districts.
Complementing this is the National Logistics Policy (NLP) under which logistics integration is strengthened through Unified Logistics Interface Platform (ULIP). It connects 44 systems across 11 ministries, covering 2,000 data fields, supporting over 1,700 companies, and enabling 200 crore API transactions.
Meanwhile, industrial corridor projects have operationalised cities such as Dholera and Greater Noida, with 350 industrial plots allotted and investments of ₹2.02 lakh crore, supporting new manufacturing hubs beyond major metros.
These initiatives reflect a coordinated push to strengthen manufacturing competitiveness in the country. As implementation progresses, these measures are expected to deepen industrial capacity, enhance global competitiveness, and support sustained manufacturing-led economic growth.
Conclusion
India’s manufacturing sector is entering a new phase of expansion, guided by the Government’s vision of Atmanirbharta and the Sankalp anchored in the three key Kartavyas outlined in the Union Budget 2026-27 . Continued focus on competitiveness, technology adoption, supply chain integration, and skill development is helping position manufacturing as a sustainable engine of growth.
Together, these efforts place manufacturing at the heart of India’s journey towards becoming a globally competitive, resilient, and self-reliant economic powerhouse in the years ahead.
References
Ministry of Finance
https://www.indiabudget.gov.in/economicsurvey/doc/echapter.pdf
https://www.indiabudget.gov.in/doc/budget_speech.pdf
https://www.indiabudget.gov.in/doc/impbud2025-26.pdf
Ministry of Commerce & Industry
https://eaindustry.nic.in/eight_core_infra/eight_infra.pdf
https://www.pib.gov.in/PressNoteDetails.aspx?id=155242&NoteId=155242&ModuleId=3®=3&lang=2
Ministry of Statistics & Programme Implementation
https://www.pib.gov.in/PressReleasePage.aspx?PRID=2219602®=3&lang=2
Reserve Bank of India
Other Releases
https://www.pmi.spglobal.com/Public/Home/PressRelease/cf844f6598f24d3d97639f641b315fca