Budget 2026 should provide a fillip to sustain and grow manufacturing momentum

The article was first published on Moneycontrol.com on January 13 2026. Please click here to read the article.

Manufacturing sector score card for 2025 looks very promising based on what we have accomplished as a nation in the last 10 years over the previous decade. FDIs in manufacturing have grown by 60 per cent, manufacturing value added has almost doubled and so have exports. The Indian government’s focused initiatives on Make in India, PLI schemes for products and components, ISM Mission, PM Gati Shakti and the National Logistics Policy, to name a few, have facilitated this momentum. The Budget 2026 should provide a fillip to sustain and grow the manufacturing momentum, thereby strengthening India’s global position as a favourite manufacturing destination.

Challenges that impede manufacturing progress

In spite of many of the initiatives mentioned above, there are many challenges that impede progress towards achieving the desired state. The Budget should address some of the challenges below through initiatives and incentives to ensure the next leap of growth in manufacturing.

Digital divide

Many of the leading manufacturing economies like China and South Korea focused on digitalising manufacturing as a major lever to build competitiveness. In India, only the top 25 per cent of producers score high (4.3 out of 5) on the digital maturity index, while a significant portion of manufacturers still score 1.9 on a scale of 5. A strong push is required to ensure wider adoption of digitalisation
MSME maturity

MSMEs are the backbone of India’s manufacturing economy. While many steps have been taken to enable access to finance, still only 19 per cent of their financial demand is met through formal channels. MSMEs also need support in bringing in the right talent and best practices. While many multinationals are actively looking at India for localisation and increased sourcing, they often struggle to identify the right set of MSMEs owing to the lack of a structured national platform with MSME details and competitiveness scores
Logistics cost inefficiencies

While dedicated freight corridors, PM Gati Shakti and the National Logistics Policy have helped improve India’s Logistics Performance Index ranking from 54 to 38, more focus is still required to build additional dedicated freight corridors across lanes connecting Tier 2 and Tier 3 cities
Workforce skills mismatch

Given the emergence of new core technologies such as EVs, semiconductors and advanced battery architecture, along with enabling digital technologies such as AI, machine learning and IoT, the existing and new workforce needs to be trained and upgraded to meet employment needs. A focused initiative must be driven by industry and institutions to accomplish this task within a defined timeframe
Sustainability progress – still needs focus

While India has moved up the UN Sustainability ranking to 99th from 109th position, many industries still struggle to reach desired sustainability standards due to capex requirements. More focus is therefore needed on accelerating green financing options, incentivising the adoption of green initiatives and aligning corporate CSR spending towards areas of maximum impact

To promote India on the global map as a strong manufacturing destination, this Budget should enable the following:

Incentivising adoption of AI and digitalising manufacturing

This Budget should introduce stronger incentive schemes to increase the adoption of AI and digital initiatives in manufacturing. Start-ups play a key role in AI and digital transformation, and incentive schemes should benefit both the start-up ecosystem and industrial organisations. The incentivisation structure can ease access to finance for connecting machines, building data infrastructure for AI, and co-financing AI initiatives between a start-up and a company to build customised solutions.

Strengthening digital infrastructure and digital connectivity

While significant investments have been made to enhance physical infrastructure, this Budget should place strong emphasis on building digital infrastructure to match the growth of digital users in terms of connectivity and server infrastructure.

Connecting India digitally is as important as physical connectivity. Significant data is collected by various infrastructure elements such as ports, traffic systems, power grids and airports. The full potential of AI can be unlocked by securely connecting these databases with organisational data to achieve higher-order, end-to-end benefits. This Budget should allocate investments towards digitally connecting India.

Building competitiveness among MSMEs

MSMEs are the backbone of Indian manufacturing, as mentioned earlier. The Budget should enable greater competitiveness and scale among MSMEs through faster financing options for working capital as well as long-term institutional capacity-building initiatives.

To address skill gaps, cluster-based skill development programmes should be organised for MSMEs. OEMs should be incentivised to adopt MSMEs or MSME clusters for skill development and upgradation.

A central certification mechanism should be instituted to evaluate MSME competitiveness against global standards. A centralised platform registering MSMEs along with their details and competitiveness index is the need of the hour. This platform would enhance MSME visibility for MNC sourcing teams looking towards India for localisation and procurement.

Enabling the build-out of a component manufacturing ecosystem

This Budget should enable the development of component manufacturing ecosystems for products with strong domestic and export potential. While initiatives have begun for electronics and certain solar components under PLI schemes, more components should be covered. Tax incentives should be provided to companies setting up component manufacturing facilities
Formalising industry–institute alliances

The Budget should define formal mechanisms to promote industry–institute alliances for accelerated skill development and alignment of graduate skillsets with industry requirements. Institutes should also offer focused programmes for working professionals in emerging core technologies and digital domains
Building more manufacturing clusters around Tier 2 cities

This Budget should allocate investments to develop new manufacturing clusters and ecosystems with adequate utilities and transport infrastructure around Tier 2 cities, promoting industrial growth and employment generation

The above represent key asks from the manufacturing sector. In addition, the Budget should continue infrastructure investments, build new freight corridors and introduce new incentives for green and sustainability initiatives to enable India to progress further on its journey towards becoming the numero uno manufacturing destination.