RBI Quarterly

No. 4/24

India's ascent:
A distinct story of growth
JANUARY 2025

AUTHORS Abstract

DAVID BORN
India's economic landscape has undergone significant shifts, positioning the
Senior Manager
country as a potential global economic powerhouse. We examine India's economic
trajectory in its historical context, its growth catalysts, followed by an analysis
STEFFEN GEERING
Senior Specialist of India's systemic challenges, and strategic recommendations for businesses.
The nation's demographic profile presents a unique economic opportunity, with
PETER VOGT a median age of 28 years and a large working-age population. Urbanization and
Senior Expert middle-class expansion are critical growth drivers. Emerging urban centers are
developing as innovation hubs, with technology and financial services, as well as
telecommunications driving sectoral growth. Long-term government initiatives
emphasize transportation, energy, and urban infrastructure.

There are, however, structural challenges in the labor market: around 88.8 % of
workers remain in the informal sector, youth unemployment is high, while labor
force participation of women is low. Services have boosted India's growth of
recent years, while the manufacturing sector's share has declined to 12.8 %.
Industrial development faces critical limitations, including regional disparities, low
R&D investment, stagnant foreign direct investment, layers of persistently complex
bureaucracy, and productivity significantly below global competitors. Prime Minister
Modi's "Viksit Bharat 2047" vision addresses some of these issues. Our analysis
highlights three key areas, the "3 Ls" – law, land, and labor – as crucial for the desired
growth trajectory: in these three areas, India's political system must become
more flexible and effective. The country presents significant challenges as well as
considerable opportunities for businesses prepared to navigate its economic
landscape: a nuanced approach that comprises strategic workforce planning,
local market adaptation, and operational excellence can unlock India's full
economic potential for investors and businesses.
 1. India's ascent: A distinct story of growth

As Narendra Modi was storming to victory in the election of 2014, he said "achhe din
aane waale hain" — good days are coming. Under Modi's predecessor Manmohan
Singh, the Harvard economist Lant Pritchett called India a "flailing state", meaning
that its political "head" was no longer connected to the "arms" and "legs" of political
1 Lant Pritchett, "Is India a Flailing State? implementation.1
Detours on the Four Lane Highway to
Modernization",
Ten years after Narendra Modi was first elected prime minister, India's economy
https://dash.harvard.edu/bitstream/
handle/1/4449106/Pritchett%20India%20 has roughly doubled in size. This is what happens when a country grows at 7 % a
Flailing%20State.pdf year, as India has done, on average, since it opened its markets to international
competition in 1991.

More recently, India overtook the United Kingdom to become the world's fifth largest
economy, and it is expected to surpass Japan and Germany to become the world's
third largest economy within the next few years.

"We see four key Amid a challenging global scenario, India has emerged as a significant economic

drivers for India's and geopolitical power in recent years. In December 2023, Indian Prime Minister
Modi announced the economic strategy of "Viksit Bharat 2047", the term 'Viksit
economic potential: Bharat' meaning 'Developed India'. Viksit Bharat 2047 represents the government's
India's "demo- vision to transform the country into a developed economy by the 100th anniversary

graphic dividend", of its independence in 2047. The vision encompasses multiple aspects of development,
including economic growth, social progress, environmental sustainability, and good
urbanization and governance. This ambitious pathway is as much a political and social aspiration as it
the corresponding is an economic mission.

expansion of the
Modi's announcement came at a time when the Indian economy had suffered
Indian consumer in significantly from the COVID-19 pandemic. In 2020, India's GDP shrank by more than
a rising middle 5 %. The following year, however, India grew again by an impressive 9.7 %, more than

class, and offsetting the decline in 2020. Projections for the second half of the 2020s point to
sustained robust growth, with average growth rates expected to exceed 7 % per
infrastructure
annum.
investments."
DAVID BORN Can India achieve its political and macroeconomic goals and realize its ambitions of
Senior Manager "Viksit Bharat"? What are the key drivers of India's growth trajectory in recent years?
And what are the main constraints on this trajectory? These are the core analytical
questions addressed in this edition of the Roland Berger Quarterly (chapters 2 and 3).
In the final chapter we will take a closer look at India's opportunities for investors
and as a future location for production and manufacturing (chapter 4).

2. Economic foundations and key growth catalysts

in India

Services as main pillar of India's growth

India's economic development is one of the most remarkable transformations of
modern times. Once an agrarian economy, with about half of its gross value added
(GVA) coming from agriculture and allied sectors at the time of independence in 1947,
 the country has emerged as a global hub for services in the 21st century. The services
sector, now accounting for roughly half of India's gross value added (GVA), has been
a key engine of growth. Industries such as information technology, financial services,
and telecommunications have positioned India as a global leader in outsourcing and
digital innovation. Between 2011 and 2023, the financial and professional services
sector grew at an impressive 7.6 % annually, supported by a skilled workforce and
a growing domestic demand for advanced services. In addition, sectors such as
tourism, healthcare, and education continue to expand, serving both domestic and
international markets. This above-average growth ensures that the services sector
is the main contributor to India's strong growth rates.

Services have been the largest contributor to India's

economic growth in recent years
Sectoral contribution to GVA growth [percentage points]

10 9.4
8.0 8.0
7.2 6.7 7.2
1.6 6.2 3.6
6.1 5.8
5.4 1.8 3.2 2.4
1.8 3.9 2.9
5 0.9 2.5 1.9
4.2
4.0 1.9 3.9
3.4 3.1
3.5 3.4 2.4 2.9
4.2
2.3 2.6 0.5 1.8
0.9 1.4 1.4 1.4 1.0 1.7
0.9
0
-1.0 -0.4
-0.5

-3.6

-5 -4.1
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

GVA growth Manufacturing Services Others

Source NITI Aayog, Roland Berger

Domestic demand as a key driver for India's economy

India's economic structure has long emphasized domestic consumption as the
primary engine of growth. Household consumption accounts for about 60 % of
India's GDP, significantly higher than, for example, China (37 %), which relies more
on investment and exports. Although India's export sector is rather modest (22 %
of GDP), exports play an important role for some sectors in India. Its export base
has expanded beyond traditional goods such as textiles and agricultural goods to
include pharmaceuticals, automotive parts, and IT services. In recent years, India
has also made significant inroads into technology-driven exports, such as software
and engineering services. A relatively low export dependence provides some
resilience to global trade disruptions and external shocks such as trade wars or
supply chain crises. However, to achieve its long-term growth ambitions, India is
also working to expand its export footprint through trade agreements and market
diversification, seeking a balanced approach that leverages both domestic
demand and global opportunities.
 Fundamental forces propelling India's future macroeconomic potential
After examining India's current macroeconomic landscape, it is clear that the
country has a firm foundation for sustained growth. To fully understand the
trajectory of India's future development, it is essential to identify the key levers
that will fuel its progress over the coming decades. Below, we discuss four key
drivers of India' vast macroeconomic potential: India's "demographic dividend",
urbanization and the corresponding expansion of the Indian consumer in a rising
middle class, and the Modi government's huge investments in infrastructure.

At the heart of India's growth story is its demographic strength, particularly

the world's largest youth population, which constitutes a unique "demographic
dividend."

Demographic development and human capital benefit India's

development
India's demographic profile represents a significant economic asset, often referred
to as a "demographic dividend". With a median age of about 28 years, the country
has one of the youngest populations in the world. This demographic advantage
provides India with a large working-age population that could contribute to
sustained growth and development over the coming decades. Its working-age
population is expected to continue to grow, providing a unique "demographic
dividend." While India's total population is set to continue its growth beyond 2050,
the working-age population is projected to peak in 2048 at 1.119 billion people aged
15-65, or 67 % of the total population.

At 67 %, India is well above the global average, where 63 % of the population is of

working age.

In 2050, India will have the largest working age population on

the planet, making India one of the youngest countries globally

Population development in India [bn] Share of working age population [15-64, %]

1.8
1.67 80
1.6

1.4

1.2 1.06
70
1.0
67
0.8 65
63
0.6 Population in
67 % 60
0.36 working age1
0.4 58
60 %
0.2
59 %
0.0 50
1950 2000 2050 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

1 The working age population refers to the share of population aged between 15 to 64 years. Lower-middle income group China India World

Source UN Population Division

 However, translating this demographic advantage into economic gains will require
substantial investments in human capital-education, skills training, and healthcare.
Education remains a critical area. Despite impressive gains in literacy rates, the
quality of education and access to advanced skills training remains uneven across
regions. Urban centers tend to benefit from better educational infrastructure, while
rural areas often lack quality schools and teachers. This disparity has implications
for workforce readiness, as employers frequently cite a gap between the skills
school leavers and graduates possess and those required for modern jobs.

"India's economic When comparing literacy rates, India has made impressive progress in the recent

development is one decades. In the 1980s, the literacy rate for all adults (population 15 years and older)
was only 41 %, slightly lower than other lower-middle-income countries. Since then,
of the most India has caught up significantly, closing the gap with lower-middle-income
remarkable countries for the adult group and even closing the gap with upper-middle-income

transformations of countries for the youth group. The literacy rate for the population aged 15-24 has
reached 97 % in 2023.
modern times.
Once an agrarian India has also made great strides in higher education. The proportion of India's

economy, with population enrolled in tertiary education has risen from around 5 % in the 1980s
to over 33 % in 2023, which is significantly higher than the figure for lower-middle-
about half of its income economies (27 %). However, the gap with the upper-middle-income
gross value added economies (64 %) is still large. The majority of these students are graduating with

coming from STEM degrees. About 34 % of India's graduates are in this field. Although Malaysia
(43.5 %) and Tunisia (37.9 %) have even higher proportions, no other country has
agriculture and
a higher absolute number of STEM graduates per year.
allied sectors at
the time of Urbanization will fuel economic growth
Urbanization is another key driver of India's economic growth, with profound
independence in implications for its domestic market. As of 2023, approximately 35 % of India's
1947, the country population were residing in urban areas, and this figure is projected to rise to over

has emerged as a 47 % by 2050. This rapid urbanization is transforming India's economic landscape
by creating new hubs of economic activity, fueling industrial growth, and driving
global hub for demand for housing, infrastructure, and services. Cities such as Mumbai, Delhi,
services in the 21st Kolkata, and Bangalore are already economic powerhouses, while emerging urban

century." centers such as Pune, Hyderabad, and Ahmedabad are becoming important
contributors to regional and national growth.
PETER VOGT
Senior Expert
The agglomeration of industries in urban areas leads to economies of scale, greater
innovation, and more efficient use of resources. These productivity gains contribute
to overall economic growth, as urban economies tend to be more diverse and
specialized than rural ones. As urban centers become innovation hubs, they not only
contribute to India's economic growth, but also position the country as a global leader
in sectors such as information technology, biotechnology, and renewable energy.

Bangalore, also known as the "Silicon Valley of India", is a center for IT and software
development. The city attracts many technology start-ups and international
companies working in artificial intelligence, fintech and software solutions. Hyderabad
has also established itself as a major hub for IT and biotechnology companies. It is also
the most important city in India for the pharmaceutical industry. The city plans to
develop PharmaCity, a huge industrial complex that will significantly increase
 pharmaceutical production. More than 1,500 companies are expected to locate here,
which could make the city one of the largest pharmaceutical hubs in the world. Pune,
on the other hand, is known for its automotive and industrial manufacturing industries.
The city is attracting both local and international investors and benefits from a well-
developed infrastructure and its strategic location close to Mumbai.

Additionally, urbanization is driving significant growth in the real estate sector, as

demand for housing, office space, and commercial properties increases. Large-
scale urbanization leads to the development of new residential areas, business
districts, and commercial hubs, spurring construction and real estate activity.
This sector creates jobs, attracts investment, and contributes to GDP growth.

The expansion of the Indian middle class

Urbanization is also closely tied to the expansion of India's middle class, which is
expected to account for about 46 % of the population by 2030 and more than 60 %
by 2047. By 2047, the group considered "rich" is expected to reach more than a
quarter of the total population. Moreover, India's middle class is young — 65 % of
the population is under the age of 35. As people migrate to cities, they typically
experience higher wages, better access to education and healthcare, and an
improved standard of living, which in turn increases their purchasing power. This
growing middle class is a major driver of consumption across a wide range of
sectors, including housing, retail, automobiles, and services such as healthcare
and education. The growing demand for goods and services fosters new business
opportunities, which in turn creates a cycle of economic growth. The growing urban
middle class also creates new markets for innovative products and services, from
tech gadgets to healthcare solutions.

India's middle class is expected to grow significantly, while

the destitute households are likely to decrease
Distribution of households by annual household income [2020/21 prices]

"Rich"
37 56 169 437
(> USD 35,400)

"Middle class"
349 432 715 1.015
(USD 5,900-35,400)

"Aspirers"
735 732 568 184
(USD 1,475-5,900)

"Destitutes"
209 196 79 25
(< USD 1,475)

2015/16 2020/21 2030/31 2046/47

Source People Research on India's Consumer Economy

 Infrastructure as a catalyst for growth
Infrastructure development is a cornerstone of India's growth strategy, playing a
critical role in enhancing productivity, facilitating trade, and improving the quality of
life for its citizens. As cities grow, they require significant investment in infrastructure
to support their expanding populations and industries. This includes investments in
transportation (roads, railways, metros), energy (power plants, renewable energy,
grids), and public services (water, waste management, healthcare).

"The push to Recognizing its transformative potential, the Indian government has prioritized

diversify global infrastructure investment through flagship programs such as the National
Infrastructure Pipeline (NIP) and Gati Shakti. These initiatives aim to modernize
supply chains India's transportation, energy, and urban infrastructure while encouraging private
places India in a sector participation. The National Infrastructure Pipeline, launched in 2019,

strategic spotlight, envisages an investment of over USD 1.4 trillion by 2025, covering key sectors such
as roads, railways, airports, ports, and energy. As of December 2024, just over a
offering both quarter of the approximately 13,000 announced projects have been completed,
opportunities and with around USD 330 billion having been spent. The Gati Shakti program focuses

challenges. India's on multimodal connectivity aims to reduce logistics costs, improve supply chain
efficiency, and integrate domestic and international markets. For instance, the
vast demographic development of industrial corridors and freight corridors is designed to enhance
dividend and a trade competitiveness and spur regional economic development.

rapidly urbanizing
Energy infrastructure is another key focus area, with investments targeting
population offer renewable energy capacity, transmission networks, and energy storage solutions.
unparalleled India is working towards ambitious renewable energy targets, including achieving

opportunities for 500 GW of non-fossil fuel capacity by 2030. These efforts not only address energy
security but also support India's commitments to global climate goals.
growth."
STEFFEN GEERING Urban infrastructure development is also closely tied to the government's Smart
Senior Specialist Cities Mission, which aims to create sustainable and technologically advanced urban
spaces. Investments in public transportation, water supply, and waste management
are transforming urban areas into engines of growth, while affordable housing
projects are addressing the needs of the growing urban population. Private sector
participation is being actively encouraged through public-private partnerships (PPPs)
and policy reforms. Improved ease of doing business, streamlined regulatory
approvals, and innovative financing mechanisms, such as infrastructure investment
trusts (InvITs), are attracting significant domestic and international investment.
Despite these advances, challenges remain, including land acquisition hurdles,
project delays, and financial constraints. Addressing these issues will be critical
to realizing the full potential of India's infrastructure ambitions.

3. Obstacles and challenges in achieving India's

ambitious vision

India faces several hurdles in its ambitious journey to become a developed nation.
From economic challenges to social and structural barriers, these obstacles pose
significant risks to achieving inclusive and sustainable growth.
 India's labor market: Structural challenges to inclusive growth
India's labor market grapples with deep-rooted structural issues that impede
effective labor force integration despite dynamic economic growth. Key challenges
include high unemployment, gender inequality, widespread informal employment,
skills mismatches, and regional disparities.

India's labor market: Low female participation, dominance

of the informal sector, and high youth unemployment

Share of unemployed educated Labor participation rate Share in total employment

youths in total unemployed persons by gender [%] 8%
8.4 %
Current total
87 unemployment
83 rate
78 77 2012
66
59
92 %

11 %
33
27

2023

Share of Share of youth Male Female 89 %

all youth educated
secondary+
2012 2022 2012 2023 Informal sector Formal sector

Source World Bank, ILO, CMIE

Suffering from "jobless growth"

Unemployment remains a significant challenge, underscoring structural deficiencies
in India's labor market. The current unemployment rate is 8.4 %, with young people
disproportionately affected. This is an increase from 2012, when the unemployment
rate was 5.9 %. In 2022, 83 % of all unemployed people were young people, a share
that has decreased by 4 percentage points since 2012. However, the proportion of
young people with secondary or higher education among the unemployed has risen
significantly. From 2012 to 2022, their share of the total unemployed has increased
by 7 percentage points, from 59 % to 66 %.

India's economic growth, driven by sectors such as IT, business services, and heavy
industry, is primarily benefitting the wealthy and failing to create enough jobs for
the broader society. Structural issues such as a weak manufacturing sector and
restrictive regulations hinder job creation, while policies favor large corporations with
subsidies and tax breaks. This leaves small businesses burdened by bureaucracy and
taxation, exacerbating inequality. Moreover, growth is concentrated in a handful of
regions, and limited investment in education and healthcare increases financial
pressure on lower-income groups.

Over the past two decades, the employment elasticity of growth — the responsiveness
of employment to economic expansion — has averaged only 0.2 and thus close to
zero. In developing countries on average, however, it has averaged about 0.56.
Thus, economists have referred to India's combination of GDP growth and stagnant
employment growth as "jobless growth".

In addition, India's labor force is predominantly informal, with 88.8 % of workers

employed in the informal sector as of 2023. This is only a marginal decline of
2.4 percentage points from 92.2 % in 2012, underscoring the limited progress in
reducing informality over the past decade. Even within the formal sector, the rise
of temporary and casual employment has created precarious working conditions,
especially for young people. Informality exacerbates economic vulnerability,
leaving workers without social protection or stable incomes. The situation is
worse for women, who are over-represented in informal roles. Many are involved
in unpaid or low-paid work, which not only undermines their economic security
but also perpetuates wider labor market inequalities.

Low labor force participation rate of women

A major obstacle to inclusive growth is the persistently low labor force participation
rate (LFPR) of women. In 2023, only 33 % of women participated in the labor force,
compared to 77 % of men, placing India among the lowest-ranked countries in the
world. This stark disparity reflects cultural norms, safety concerns, and inadequate
support systems, such as childcare and transportation. Although women comprise
nearly 49 % of the population, efforts to increase their labor force participation have
met with modest success over the past decade. In 2012, the LFPR for women was
27 %, having since increased by 6 percentage points by 2023. In contrast, the LFPR
for men decreased slightly from 78 % to 77 % over the same period, representing
a decrease of 1 percentage point.

Despite the growing number of young people pursuing higher education, a significant
skills mismatch continues to challenge India's labor market. While many graduates
have formal qualifications, their skills often fail to meet the specific needs of
employers. As a result, many face prolonged unemployment or take on jobs far below
their educational level, highlighting that their education is not adequately aligned
with market needs.

This mismatch stems from systemic issues in the education system, including
inequitable access and outdated curricula that fail to prepare students for the
realities of a rapidly changing labor market. Inadequate funding for education,
particularly in rural and marginalized communities, exacerbates the problem
by limiting access to quality learning and increasing dropout rates.

Furthermore, technological advances have amplified the demand for highly

specialized skills in sectors such as IT, telecommunications, and financial services.
Graduates in these fields often find their education insufficiently practical or relevant,
while those with low- and medium-level skills encounter even fewer opportunities,
forcing many to revert to subsistence agriculture. This dual challenge of over-
qualification in some areas and under-preparation in others increases economic
inequality and reduces the economy's ability to effectively utilize its workforce.

Economic disparities across regions and social groups

Economic disparities across regions and social groups further complicate India's
labor market challenges. In underdeveloped areas, particularly in eastern and central
 India, formal employment opportunities are scarce, and informal work dominates.
These regions are often characterized by lower educational outcomes due to
inadequate infrastructure and resources, further limiting access to stable employment
opportunities. Marginalized communities, such as Scheduled Castes and Scheduled
Tribes, face higher rates of unemployment and underemployment, even when they
have higher levels of education. These disparities reflect systemic barriers that
exacerbate labor market inefficiencies and limit social mobility.

India's labor market faces interconnected challenges that hinder the potential of
its workforce. High unemployment, low female labor force participation, informality,
skill mismatches, and regional disparities collectively undermine inclusive growth.
Without targeted interventions to address these systemic issues, India risks serious
implications for long-term economic and social stability.

"Make in India" weakens, while services increase

Amid India's ongoing jobs crisis, the industrial sector has struggled to drive
employment and growth, despite being one of the fastest growing major economies
in recent years. Since 2012, the industrial sectors share of GDP has decreased from
29% to 25% in 2023, while the services sector has increased by 2 percentage points to
50%. A closer look at the industrial sector reveals that the manufacturing sector, which
is usually a key driver of exports and economic growth, has struggled in particular.

Manufacturing's share of GVA has fallen even more pronounced to just 12.8 % in recent
years, a steep decline from over 17 % in 2010. This trend has persisted despite high-
profile initiatives such as the aforementioned "Make in India," reflecting policy
shortcomings under the Modi government, as manufacturing output and exports
have failed to improve, limiting India's global competitiveness.

The industrial sector slumps, while the service sector's share

of GVA rises

GVA [% of GDP] Exports of goods and services [% of GDP]

Manufacturing Services
18 52 30

17 49.8 50
25
16
48 22.1
20
15
46
14 15
44
13 12.4
10
12.8 42
12 9.7

Narendra Modi 5 Narendra Modi

11 40
takes office in takes office in
2014 2014
10 38 0
2000 2005 2010 2015 2020 2025 2000 2005 2010 2015 2020 2025

Manufacturing Services Goods & Services Goods Services

Source World Bank, Oxford Economics

 Meanwhile, the services sector has been expanding steadily, with its share of GVA
increasing from 42.7 % in 2000 to 49.8 % in 2023. This divergence between services and
manufacturing is also reflected in export trends. Over the past decade, the share of
exports in GDP has stagnated at around 22 %, with services exports gaining in
importance while goods exports have lost some ground. Specifically, goods exports
fell from nearly 17 % of GDP in 2013 to just over 12 % in 2023. Structural issues such as
inadequate infrastructure, excessive bureaucracy, and limited access to capital have
further stifled manufacturing and goods exports, leaving India behind other emerging
economies in terms of industrial performance.

Infrastructural deficits in India's industrialization

One of the most pressing issues is the lack of investment in manufacturing, especially
in research and development (R&D). India invests less than 0.7 % of its GDP in R&D,
compared to China's 2.4 %. Investment in technological modernization also remains
subdued. This underinvestment can hinder the upgrading of machinery, which is
essential to adopt advanced production technologies and achieve global
competitiveness. As a result, productivity remains low, even though it has increased
by nearly 350 % since 1995, when it stood at just USD 2 in GDP per hour worked (PPP).
Today, India's productivity is USD 9, well below China's USD 18 and a staggering
USD 87 in the United States. This productivity gap limits the sector's ability to compete
globally and stifles the growth of high-value manufacturing.

India's manufacturing sector is hampered by a complex regulatory environment and

weak integration into global value chains. Excessive bureaucratic red tape, frequent
changes in tax policies, and inconsistent coordination between central and state
governments create uncertainty for investors. Approval processes remain
cumbersome, and wide regulatory disparities between states further discourage
both domestic and foreign investment.

India's stagnant FDI inflows reflect limited integration into global

value chains, driven by regulatory complexity and inconsistency
Foreign direct investment, net inflows

[USD billion] [% of GDP]

65 4.0
60
3.5
55
50 3.0
45
40 2.5
35
2.0
30
25 1.5
20
15 1.0
10
0.5
5
0 0.0
2000 2005 2010 2015 2020 2023
% of GDP USD billion

Source World Bank, Macrotrends

These challenges are reflected in India's poor performance on the OECD's FDI
Regulatory Restrictiveness Index, where it ranks 42nd out of 45 countries. India's
foreign direct investment (FDI) inflows have stagnated, amounting to just 0.8 % of
GDP in 2023, compared to 3 % in Brazil and 4.3 % in Vietnam. Absolute FDI inflows have
plateaued at USD 28 billion, significantly below their 2008 levels. High import tariffs
on intermediate goods and capital equipment further discourage global investors
and undermine India's competitiveness.

India's industrial potential is further hampered by infrastructure deficiencies. Unreliable

power supplies, inadequate logistics networks, and limited digital connectivity inflate
production costs and hinder efficiency. These challenges make it difficult to establish
large-scale manufacturing facilities that meet global benchmarks. Additionally,
regional disparities in industrial development create a fragmented economic
landscape. While western states such as Maharashtra and Gujarat lead in industrial
productivity, other regions lag significantly, perpetuating economic inequality and
limiting nationwide industrial growth.

Social and economic consequences of a stagnating manufacturing sector

The consequences of a stagnant manufacturing sector are far-reaching. Without
robust industrial growth, India remains overly dependent on its services sector,
making the economy vulnerable to global market fluctuations in the services sector.
It also delays the transition to a high-income economy, as resources are diverted
from manufacturing to less productive sectors such as agriculture. Furthermore,
limited industrial growth threatens economic stability by restricting diversification
and innovation, both of which are critical for sustained progress.

India's manufacturing sector reflects a complex web of regulatory, infrastructural,

and technological challenges. Addressing these issues requires a holistic strategy
that fosters innovation, streamlines governance, and enhances global
competitiveness. Without decisive action, India risks falling behind in the global
economic landscape. A vibrant, modern manufacturing base is essential to drive
India's economic transformation and secure its position as a leading global economy.

4. Conclusion

In the early 1990s, as China accelerated market reforms, it roughly followed the
template of other economies in the region – Japan, South Korea, Taiwan – and
became a champion of export-driven manufacturing. It built an economy that
is now more than five times the size of India's.

Western countries are now rushing to embrace India as an alternative to China.

Indeed, as we have argued in chapter 2, India has significant potential to become
a global manufacturing hub: favorable demographics, a large and growing
domestic market, and new public initiatives to promote industrial growth.

On the other hand, India's complex and overly bureaucratic political system has
three damaging consequences for the country's industrial development. We call
these obstacles the three L's: In areas of law, land, and labor, India's political system
must become more flexible and effective.
 The three L's as main obstacles for growth of the industrial sector
To become a successful manufacturing hub and thus sustain the robust growth rates
to achieve India's ambitious economic plans, three types of policy reforms must occur
in sync. This is a considerable political challenge, and the Modi administration's
success in implementing these three reforms at both the state and federal levels will
determine whether India's current economic growth can be fueled by the development
of its industrial sector – or not.

Land records need to be modernized for the acquisition of land for the construction
of manufacturing units. The Digital India Land Records Modernization Programme
(DILRMP) is a first step in the right direction. Providing easy access to land records
through online platforms and integrating cadastral maps with land records would
go a long way in attracting investors and businesses. Not only the transparency of
the land records, but also the land acquisition process needs to be improved.

India's labor laws are currently fragmented across 44 states. Rigid regulations, a large
informal workforce, a skills mismatch, and low female labor force participation are
key challenges. Labor law reforms in India should aim to create a win-win scenario:
giving businesses the flexibility to scale operations and innovate while ensuring that
workers receive fair wages, social security, and opportunities for growth. By focusing
on simplification, flexibility, worker welfare, and technology-driven compliance,
India can create a labor ecosystem that supports its vision of becoming a global
manufacturing hub.

India's bureaucracy is often criticized for being inefficient, hierarchical, and resistant
to change. Multiple, overlapping regulations create confusion and compliance
burdens for businesses. Many court cases take years to resolve. Bureaucratic
inefficiency and corruption increase red tape, thus digitizing workflows to minimize
paperwork and using a single-window clearance system for approvals in areas such
as business licensing and land use, is part of making public institutions more
responsive, transparent, and accountable.

Realizing business opportunities in India

Despite the significant challenges outlined in our report, we believe India is too
attractive a market for international investors to dismiss – or simply overlook. Too
attractive in terms of market size, economic growth, and labor market. However,
companies must have the right strategies and the best approach to succeed in
the Indian market. We consider three recommendations to be crucial for realizing
business opportunities in India.

1 Strategically manage your workforce

Although India has an above-average proportion of people of working age, the
supply of talent is hampered by structural challenges within the education system.
Outside of urban centers, finding qualified talent is challenging. Even in urbanized
areas, where highly skilled individuals are available, their skills often do not match
the needs of employers. Put simply, capitalizing on India's demographic dividend
is easier said than done.

Therefore, companies need to engage in strategic workforce planning, starting with

creating a target based on a comprehensive 360-degree assessment of the market,
 competition, customer expectations, and internal operations. This approach helps
identify workforce and skills gaps that need to be addressed. It includes proactively
filling recruiting pipelines for high-demand skills and establishing programs to upskill
employees when the necessary qualifications are not readily available in the labor
market.

2 Adapt to local markets

Markets vary widely not only globally but also within regions. These differences
include regulation, labor markets, and consumer preferences. Across Asia, for
example, international brands are no longer the default choice. As a result,
international companies seeking to enter the Indian market must adapt to its unique
characteristics. This adaptation includes working with local suppliers and retailers
to source regionally and offer brands and products tailored to local consumer
preferences. It also requires engaging with an even more diverse set of customers,
suppliers, and employees.

3 Push operational excellence

Entering the Indian market to capitalize on its potential as a sales market or a new
sourcing hub - or both - requires prudent investment. To be successful, companies
must first ensure they have the right financing structure and maximize their capital
efficiency. Furthermore, companies must continually ensure operational excellence
and profitability through AI-driven transformation and various continuous
performance improvement measures.

Further reading

The global productivity challenge

G lobal South: Beyond BRICS

The rise of Southeast Asia

CONTACT: DAVID BORN

Senior Manager
Roland Berger Institute
[email protected]

STEFFEN GEERING
Senior Specialist
Roland Berger Institute
[email protected]

This publication has been prepared

PETER VOGT
for general guidance only. The reader Senior Expert
should not act according to any
information provided in this publication Roland Berger Institute
without receiving specific professional
advice. Roland Berger GmbH
[email protected]
shall not be liable for any damages
resulting from any use of the information
contained in the publication.
We thank Michaela Wedel, Christian Gschwendtner, and León Krafft
© 2025 ROLAND BERGER GMBH. ALL
RIGHTS RESERVED. for their contribution to both research, data, and storyline.