The government has started internal discussions on ways to revitalise the manufacturing sector, with a new set of incentives, as the preparations for Budget FY26 is under way.
While investments in a clutch of sectors are already being promoted via production-linked incentives, what is being looked at now is a broader scheme, where government assistance would be linked to employment generation and fresh investments, sources said.
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Over the last two decades and more, India has been taking several policy steps with a view to increasing the share of manufacturing in its gross domestic product (GDP) to 25%. However, the share of the sector in GDP hasn’t risen and been hovering around 16% since FY12.
“The government will do something for the manufacturing sector. It may not be a production-linked (scheme), but one based on capital expenditure and employment creation,” an official said, adding that the discussions are at a preliminary stage and details would take time to work out.
In recent months, the government has been nudging India Inc. to invest to expand its capacity to serve India’s growing needs by taking advantage of the government’s employment promotion schemes, PLIs and the cut in corporate tax rate announced in 2019.
Three schemes for ‘Employment Linked Incentive’ were announced in Union Budget 2024-25 as part of the Prime Minister’s package of five schemes and initiatives to facilitate employment, skilling and other opportunities for 41 million youth over a 5-year period with an outlay of Rs 2 lakh crore. Since the Budget was delayed to July due to general elections, the schemes are yet to be rolled out.
The government lost a little over Rs 1 trillion in 2020-21 in revenues on account of a cut in corporate taxes, and similar amounts in subsequent years. The pace of corporate tax revenue growth has slowed since the tax cut, without commensurate increase in corporate investments.
In September 2019, the government announced a cut in base corporate tax for then-existing companies to 22% from 30%; and for new manufacturing firms, incorporated after October 1, 2019, to 15% from 25%.
“Industry is now telling us that to step up investment in manufacturing, the government has to extend some more incentives,” another official said.
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