Budget 2026 must catapult India’s manufacturing sector to new heights of scale, strength, global dominance

The article was first published in The Economic Times Online on January 27 2026. Please click here to read the article.

The Union Budget is an important financial instrument presented by the finance minister, which lays out the expected revenues, planned expenditures for different schemes, infrastructure, subsidies, etc. It also highlights the government’s priorities and policy directions for the next fiscal year

The Union Budget 2026-27 carries exceptional significance, arriving at a time of heightened geopolitical volatility, as India works to reposition itself as a preferred manufacturing destination across sectors. Hence, the expectation is that this Budget should unleash various policies and initiatives that provide a strong impetus to build on the ongoing momentum and propel the Indian manufacturing sector to new heights of scale, strength and global dominance.

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Key issues plaguing Indian manufacturing sector

While many interventions have been done over the last two decades to promote the manufacturing activity, the sector’s contribution to the country’s gross domestic product (GDP) has almost remained flat at around 13-15 per cent in recent few years against the desired 25 per cent due to some of the key issues

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Poor digital penetration in manufacturing

While most of the Indian CEOs are familiar with the importance of digital interventions to bring in scale and consistency, the number of smart factories in the country is only a handful. Digital is more seen as an investment-intensive intervention, and hence, the implementation is limited to some pilot lines only. Manufacturing still operates in the traditional way that affects quality consistency, global competitiveness, and scalability. Adoption of artificial intelligence (AI) is very limited in the sector

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Last-mile connectivity challenges

Last‑mile delivery is still one of the most expensive parts of the logistics chain for goods. Inadequate road networks, especially in rural areas and Tier II and Tier III cities; poor connectivity between ports and the last mile; cumbersome procedures at ports delaying shipments; the absence of a central platform for transporters; and a lack of real‑time tracking and visibility tools hamper supply chain transparency

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Supplier ecosystem not equipped to scale

The suppliers typically fall in the MSME category, and they are the backbone of the manufacturing economy. Many international companies are planning to increase sourcing from India, and domestic companies are localising. This presents a big opportunity for MSMEs. However, they are not fully equipped with the best manufacturing practices, skilled people, and technology-enabled processes to capitalise on that opportunity. Further, they lack the scale to supply huge volumes consistently

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Talent mismatch

Today’s workforce is not fully familiar with the nuances of the new technologies, such as EVs, semiconductors, electronics manufacturing, and advanced battery architecture, or aware of the granularities of leading digital technologies, such as AI and ML. The education curriculum and industry requirements are also not fully aligned, which warrants reskilling of graduates to suit deployment to industrial roles. Hence, the Budget should provide impetus for a structured mechanism to build talent among the masses at a faster pace, leveraging the educational infrastructure of India and some initiatives to align the educational curriculum to meet the changing needs

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No structured technical support for Hitech sectors

While there is significant focus on developing India as a key manufacturer of chips/semiconductors through the India Semiconductor Mission (ISM), the number of players investing in this sector is still limited, considering the perceived risk of success due to the newness of the sector itself and uncertainties associated with that. The investors need technical expert support throughout the investment-to commercialisation journey. Lack of this technical support will affect scaling of hi-tech sectors, which needs to be addressed

Building on the learnings from other global manufacturing economies, the Union Budget 2026-27 should unleash initiatives to address some of the above challenges. Some of the key focus areas of this Budget should be:

Accelerate digital penetration through investment support scheme and tax subsidies

Given the poor penetration of digital initiatives and AI in India’s manufacturing sector, this Budget should give a strong stimulus through a digital investment support scheme. This will be offered for companies that are planning to accelerate or embark on the digital transformation/AI journey in their manufacturing plants. Akin to the Production Linked Incentive (PLI) scheme, the disbursement under this scheme will be based on milestones achieved in the digital transformation journey. In addition, tax subsidies can be provided for start-ups that are helping organisations implement the digital journey
Prioritise capex allocation to strategic emerging sectors
- Identify sectors which have high export potential and emerging hi-tech industries, such as EVs, semiconductors, advanced battery systems, etc., that will position India’s manufacturing prowess in the global marketplace. While the Budget should benefit all the key sectors, capex allocation and incentive schemes can be prioritised for these strategic emerging sectors to invite more companies to participate
- This Budget should propose building a strong technical board with domestic and international experts who will handhold the investor companies throughout the journey and build confidence to address the perceived risk
Allocate subsidies for R&D and build common innovation infrastructure

This Budget should plan outlay to build design capability in India for manufacturing innovations as well as for building future products. Design-led incentives should be offered for more sectors to invite wider participation. To enable designing capabilities for MSMEs and start-ups, this Budget should plan outlays to build common design labs/infrastructure across the country near manufacturing clusters. These labs can be offered to MSMEs on a subscription basis.
Strengthen the supplier ecosystem to achieve world class competitiveness
- Given that more MNCs are turning to India for sourcing and that there is a drive from domestic companies to increase localisation, it is critical to upgrade the supplier ecosystem to meet world-class standards. Hence, the Budget should propose instituting a global competitiveness building programme for suppliers across various manufacturing clusters in the country. This programme can be anchored through industrial companies/regional industrial associations, who can assess the practices of registered suppliers against world-class manufacturing standards, identify gaps, and help build a roadmap for enhancing competitiveness
- A central platform can track the progress of these suppliers who are enrolled for this programme, and their competitiveness index progress can be published periodically. Data from this platform can be offered to MNCs/domestic companies that are evaluating capable suppliers for their components/products. Tax incentives and subsidies can be provided to industrial organisations that embrace/enrol their suppliers for these programmes
- To address the skill gaps, cluster-based skill development programmes to be organised for supplier groups on worldclass manufacturing methodologies, such as Lean, Six Sigma, TPM, Agile, etc., as well as on new-age digital methodologies, like IoT, artificial intelligence, etc

Build new sector specific manufacturing clusters around Tier 2 /3 cities

To promote manufacturing activity across the country, this Budget should plan capex allocation for building specific manufacturing parks in Tier II and Tier III cities that have qualified workforce availability. These parks can be focused on specific sectors, such as semiconductors or electronics, etc., with the product and supplier ecosystem companies present in the park. These parks should have the required utility infrastructure. Subsidies should be provided to companies setting up infrastructure in those parks. These parks should be prioritised for logistic connectivity
Structured industry-institute alliances to address talent gap

This Budget should propose formal mechanisms to promote industry-institute partnerships to address the workforce gaps emanating from new skill requirements from the industry, which can be addressed by leveraging the education institutional infrastructure in India. The respective industry bodies can play the role of nodal agencies in ensuring effective deployment of the planned skill development programmes. The progress against the skill development roadmap to be published and the number of skilled manpower trained should be tracked on a regular basis.
Setting up a manufacturing sector governance board

This Budget should define a central manufacturing sector governance board with representation from states to track the progress of different manufacturing initiatives that are launched as a part of this Budget. This board can meet at a defined cadence to track execution effectiveness, assess gaps, and drive the initiatives as per the timeline. They also publish the KPIs for each key initiative on a monthly basis on a central platform.

The above are some of the critical imperatives for the manufacturing sector. In addition to the above, the Budget should continue addressing the essential strategic pillars, such as simplifying ease of doing business, building more dedicated freight corridors, providing export-related incentives, and incentives for promoting green/sustainability to propel India’s manufacturing journey to new heights.