India's share of manufacturing in its economy could easily expand

Price effects hide a performance that can be strengthened by a strategic path that grants this sector global indispensability

- V. ANANTHA NAGESWARAN & ROSE MARY ABRAHAM

For years, India has worried about the declining share of manufacturing in its economy. Two decades ago, the sector contributed nearly 18% of gross value added (GVA). Today, that number has slipped below 14%. At first glance, this decline is both puzzling and disheartening, especially when set against the country's ambition of lifting manufacturing's share in GDP to 25%. After all, the share of manufacturing in the country's gross value of output (GVO) has held steady at around 38%—almost the same as services. So, why is the manufacturing share of GVA low?

The answer lies not so much in output, but in prices. In GVA terms—which measure a sector's 'net contribution' after subtracting inputs—manufacturing looks far smaller than its share of 38% in GVO because intermediate consumption is very large in the manufacturing sector. Secondly, unlike agriculture, where prices have risen sharply due to the prevalence of government support, which sees an annual guaranteed price increase, or services, which enjoy more pricing power, manufacturing is usually characterized by global competition, cost-cutting technologies and narrower margins. For instance, by fiscal year 2024-25, the agricultural price deflator (current price GVA/constant price GVA) stood at 2.17 from the base year value of 1, compared to just 1.41 for manufacturing and 1.75 for services.