Manufacturing makeover: Clusters near infra hubs, tax reforms likely in Budget 2025

New Delhi: The Union government is looking to fire up manufacturing activity—a crucial engine of economic growth that’s significantly slowed—by announcing factory clusters near major infrastructure projects and changes to tax and customs duties in the upcoming Budget.

Two officials familiar with the government’s thinking said the manufacturing clusters would strategically align with key infrastructure projects in logistic sectors such as roads, railways, and ports, generating significant employment. These hubs are meant to enhance the manufacturing’s contribution to India’s overall gross domestic product, they said, declining to be identified.

India’s manufacturing sector, which represents about a sixth of the country’s GDP, is expected to grow at a more modest pace of 5.3% year-on-year in 2024-25, down from 9.9% in FY24, according to the first advance estimate released by the Ministry of Statistics and Programme Implementation on Tuesday.

“There have been discussions on boosting the manufacturing sector, with plans for strategically placed clusters near infrastructure hubs, not only creating jobs but also positioning the country as a global manufacturing hub," one of the officials said.

“By aligning manufacturing clusters with key infrastructure projects, the aim is to create seamless value chains that can attract both domestic and foreign investments, giving a significant boost to the economy."

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The second official mentioned above said the government may also look to ease procedural hurdles, rectify tax anomalies, and recalibrate customs duties in the Budget for 2025-26.

“The government is looking into measures (from a policy perspective) to help expand and deepen domestic production, reduce reliance on imports, and promote value addition in sectors currently dominated by assembling imported components, aligning with the broader push to strengthen India’s manufacturing ecosystem," this official said.

Clusters: A boost for small businesses

Reviving manufacturing activity—which fell to a 12-month low in December—is crucial to revitalising India’s economic growth. The government expects India’s GDP growth to decelerate to 6.4% in FY25—the slowest in four years—from FY24’s blistering pace of 8.2%.

The production-linked incentive (PLI) scheme—one of the government’s key initiatives to boost domestic manufacturing apart from ‘Make in India’—faces a slowdown with companies struggling to meet production targets that will entitle them to receive the benefits.

A cluster approach to manufacturing where firms and industries are part of a holistic system has strong theoretical underpinning and robust cross-country empirical evidence, said an industry expert, adding that micro, small and medium enterprises (MSME) would benefit the most from this.

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“Clustering can encourage division of labour among firms with geographical proximity among numerous competing producers, thereby fostering innovation," said Manoranjan Sharma, chief economist at Infomerics Ratings and former chief economist at Canara Bank.

“A full-service approach to diverse MSME needs requires extending banking services to clusters by adopting a 4-C approach—namely customer focus, cost control, cross-sell, and containment of risk," he added.

“Identifiable locations/product clusters (are typically) developed based on the historical accumulation of skills and the availability of a low-cost abundant resource endowment—e.g., handloom, carpet weaving, coir, pottery, cane, bamboo, metal, leather," Sharma said.

A spokesperson of the Ministry of Finance didn’t respond to emailed queries.

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A focus on ports

Among sectors, industrial clusters along ports would be developed as key manufacturing centres that will produce various goods apart from shipbuilding factories.

Some of the new manufacturing clusters proposed are near ports on the eastern and western coasts, such as Kandla and Deendayal port in Gujarat, the Jawaharlal Nehru–Vadhavan port cluster in Maharashtra, Kamarajar port in Tamil Nadu, and Haldia port in West Bengal.

In September, Mint reported that the government was also preparing to deploy a comprehensive strategy to position India among the world’s top maritime powers. Under this plan, the Centre will develop mega shipbuilding parks on both sides of the Indian coast.

The shipbuilding initiative will involve developing industrial corridors on ports and create grounds for developing other manufacturing facilities as these areas would also have multimodal connectivity.

One such initiative involving an investment of ₹30,000 crore includes the construction of a mega shipbuilding project at Kandla Port in Kutch, Gujarat. A new cargo terminal is also being set up outside the Kandla creek at an investment of ₹27,000 crore, which will add an additional 135 million tonnest per annum (mtpa) capacity to the Kandla Port.

Similar developments are being considered around other major ports in the country with a focus on manufacturing a wide array of products.

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State clusters

Mint reported on 8 January that the Union government was working on a blueprint for developing manufacturing hubs in underdeveloped northern states, including by incentivizing industrial areas.

India’s top five industrialized states—Maharashtra, Gujarat, Tamil Nadu, Karnataka, and Uttar Pradesh—contributed more than 54% of the total manufacturing gross value added (GVA) of the country in 2022-23.

At present, India has manufacturing clusters across states covering sectors ranging from automobiles and textiles to pharmaceuticals and electronics.

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Some of India’s major auto clusters are near Chennai, Pune, Gurugram-Manesar in the National Capital Region, and Sanand in Gujarat. The main textile hubs are at Tiruppur (Tamil Nadu), Ludhiana (Punjab), Surat (Gujarat), and Bhiwandi (Maharashtra).

India’s electronics and IT hardware manufacturing clusters are chiefly near Bengaluru, Noida, Chennai and Sriperumbudur (in Tamil Nadu), while the major chemical and petrochemical clusters are concentrated in Vadodara, Jamnagar, Ankleshwar, and Vapi (all in Gujarat), and Mumbai.

Leading manufacturing clusters for the gems and jewellery sector are in Surat, Mumbai, and Jaipur, while engineering goods and machinery industries thrive in Coimbatore, Rajkot (Gujarat), and Pithampur (Madhya Pradesh).

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