Schedule a Call Back
Building India’s Manufacturing Strength in a VUCA Environment
Articles- Jan 26,26
The 2021 chip shortage exposed structural weaknesses in India’s manufacturing model, underscoring the urgent need to shift from scale-led assembly to resilient, innovation-driven industrial ecosystems, points Ayush Patodia, Associate Vice President, and Utpal Kaushik, Consultant, Avalon Consulting.
Key Takeaways:
- India’s COVID-era chip disruption exposed a core gap: manufacturing scale without ecosystem depth, leaving industry vulnerable in a VUCA world where reliability and resilience matter more than low cost.
- India continues to win assembly but lose value, constrained by import dependence, MSME fragmentation, high logistics costs and weak R&D and design capabilities.
- China+1 and policy incentives offer momentum, but without deep clusters and supplier ecosystems, investments risk becoming assembly islands.
- The article argues for a focused shift towards mega-clusters, industrialised skills, MSME technology adoption and R&D-led manufacturing to secure long-term competitiveness.
In 2021, as India began reopening after COVID’s second wave, Maruti Suzuki’s Gurgaon plants were forced to pause production. The cause was not labour or logistics related issues, but a shortage of semiconductor chips. Mahindra reduced output. Tata Motors delayed deliveries. A disruption thousands of kilometres away in Taiwan wiped out billions of dollars in domestic output.
This episode was a stress test, and India failed it.
The global chip shortage exposed a fundamental weakness in India’s manufacturing model. We have built scale in assembly, but lack depth in industry ecosystems. In today’s volatile, uncertain, complex, and ambiguous (VUCA) world, India needs to play by a differentiated playbook. The next decade won’t reward countries that can simply manufacture cheaply. It will reward those that can manufacture reliably, flexibly, cleanly, and at speed.
India’s manufacturing baseline: Scale, informality, and weak capture
India is the world’s fifth-largest manufacturer with roughly $490 billion output, yet manufacturing’s share of GDP slipped from about 17 per cent in 2010 to near 13 per cent in 2024. In contrast, China is at ~25 per cent and Vietnam at ~24.5 per cent of GDP respectively.
India’s share in global merchandise exports has improved to ~1.8 per cent (2024) with exports cited around ~$443B. It is a reminder that India is not yet a top-tier export manufacturing superpower.
Logistics is one of the biggest silent killers of manufacturing competitiveness. In 2023, India ranked 38th on the World Bank’s Logistics Performance Index (LPI).
Sectorial snapshots are mixed. Electronics, automotive, pharmaceuticals are growth engines for the economy yet large volumes of components / raw materials are imported. Textiles are losing share to regional rivals like Bangladesh and Vietnam. The pattern is consistent: India wins entry-level assembly and scale, but under captures design, IP and high-value components.
Employment statistics underline the structural imbalance: manufacturing employs roughly 45 million people yet about 70 per cent remain informal. Micro-units (averaging roughly 1–2 workers) account for a large share of employment but contribute a small fraction of gross value added. Formal firms generate most GVA; jobs remain precarious.
The VUCA Reality: Structural disruptions reshaping manufacturing
VUCA is an operational reality in today’s world. Manufacturing is now being redesigned around it. Each element magnifies India’s structural weaknesses.
Volatility: Access to major markets and margins are losing stability due to geopolitical tensions, causing fluctuations in commodity and energy prices, aggressive trade policies, and the proliferation of non-tariff barriers (such as carbon levies and due diligence requirements). At the same time, demand volatility has become normal with high number of SKUs, shorter order cycles, lower forecast confidence.
Uncertainty: Trade restrictions, technology controls, and “friend-shoring” are forcing global companies to diversify capacity. Supply-chain weaponisation is coupled by the fast-paced technological change, in industries like EV automotives and semiconductors have shortened investment horizons and increased the risk of stranded assets.
Complexity: A modern product is built through multi-country supply chains and multi-layer compliance. India’s internal complexities with regulatory variation across states, patchy enforcement, and jurisdictional delays add an estimated 8-10 per cent to costs versus East Asian competitors. Logistical and infrastructural bottlenecks are also resulting in lack of agility or sluggish pace of operations.
Ambiguity: Companies are India strategic stance towards China is still unclear. We want reduced dependence, but the transition is difficult without deep domestic ecosystems. As Shashi Tharoor has also highlighted, this ambiguity is rooted in a consistent R&D deficit that leaves India reacting, instead of proactively building capabilities. Even in the emerging areas of green transition, the talk is often limited to sustainability targets. Several mechanisms like carbon reporting, procurement standards, etc. are still evolving.
VUCA therefore does what it must: it exposes shallow systems. Countries with dense local ecosystems endure; those without do not.
Key constraints holding back Indian manufacturing
A notable, practical advantage has been a broadly depreciating rupee over recent years. This movement has been relatively gradual and predictable, effectively providing a modest, one-directional competitiveness tailwind for exporters (especially labour- and price-sensitive segments like textiles, certain auto components and basic electronics assembly). Predictable depreciation allows firms to hedge and price contracts with more confidence than a volatile regime would.
But the currency tailwind is limited. It increases input costs for import-dependent industries, disproportionately benefits low- and mid-value exports, and can conceal rather than address productivity flaws. Time is purchased with money; permanence is purchased with capability.
Manufacturing dominance is increasingly being built on innovation, rather than scale of factories. Process innovation, material science, design, and engineering capabilities are key to success. In electronics, autos, and machinery, labour can be a relatively small percentage of total cost. That changes the competitive logic from “labour cost arbitrage” to factors like yield, quality, reliability, etc.
However, India’s Gross R&D expenditure hovers around 0.6–0.7 per cent of GDP, with low private-sector participation. By contrast, China and advanced East Asian economies invest multiple percentage points of GDP, driven primarily by private industry. The result: India imports critical inputs (chips, speciality chemicals, APIs), while domestic firms remain weak in design, materials science and translational engineering.
This capability gap is amplified by MSME fragmentation. MSMEs employ a large share of manufacturing labour but lack access to affordable credit, precision tooling, certification and digital processes; many face high certification costs that are beyond reach. Logistics and compliance costs remain high. With private R&D constrained (~0.25 per cent of GDP in some measures), India assembles but rarely innovates at scale.
Why the next decade offers a different map
Three shifts change the calculus. First, China+1 is real: electronics FDI has accelerated, and India now assembles a meaningful share of global smartphones (Apple’s India output is an important signal). Second, policy levers (PLI schemes, MITRA parks, logistics investments) have unlocked substantial committed capital (PLIs alone attracting tens of billions). Third, domestic demand is growing fast: a large consumption base allows firms to scale before exporting.
These shifts matter, but they are conditional. They magnify returns for firms and regions that already possess ecosystem depth. Absent capability-building, inflows will create assembly islands, not integrated value chains.
Emerging trends that will define winners
Clusters are the practical unit of transformation. Countries like China and Vietnam won by building clusters with dense supplier ecosystems. Tamil Nadu’s EV ecosystem and Gujarat’s emerging semiconductor corridor demonstrate how anchor firms, suppliers, labs, skills and logistics compress lead times and reduce logistics costs by 30-40 per cent, while circulating tacit knowledge locally. Shared testing and certification accelerate iteration and export readiness.
Productivity is being unlocked using digital tools, Industry 4.0 investments in India are expanding quickly, and expected to be a multibillion-dollar landscape (estimates like $5.5 billion to $27 billion by 2033 show the direction). AI, IoT, cloud MES, and digital quality tools enable selective automation for mid-sized businesses, increasing uptime and yields without completely displacing workers.
Green rules are reshaping competitiveness. The EU’s CBAM makes coal-intensive production commercially risky (cost penalties of 20–30 per cent for exposed exporters). Early decarbonisers secure market access and pricing resilience.
Services are fusing with manufacturing. India’s chip-design, software and systems capabilities can underpin a “design here, make here” model, capturing higher value across validation, design and system integration, not only assembly.
Finally, buyers now value proximity and predictability: many pay 5–10 per cent premiums for suppliers within short flight times. In this environment, capability arbitrage overtakes cost arbitrage.
Strategic imperatives: What government and industry must do
The policy prescription is straightforward and prioritised.
Create 8 to 10 mega-clusters. Each cluster should pair 3-4 global anchors with MSME networks, shared testing labs, bonded logistics and skill hubs. Evidence shows common facilities can cut MSME operating costs substantially, unlocking export readiness.
Industrialise skills. A 2 per cent payroll contribution can fund industry-run academies and scaled apprenticeships; convert selected colleges into vocational powerhouses with majority shop-floor learning.
Enable MSME technology. Subsidised cloud ERP/MES, expanded tech-loan guarantees, and shared testing / certification facilities raise quality and traceability.
Ensure regulatory predictability. Digital single-window clearances, 30-day approvals and harmonised state rules are not administrative niceties; they are competitiveness levers.
Raise R&D ambition. Use public funds to crowd in private R&D, target translational centres in clusters, and tie PLI disbursements to supplier development and measurable technology transfer.
Conclusion
In today’s VUCA world, manufacturing competitiveness is not built on labour cost arbitrage. Rather, it requires the building blocks of ecosystems, resilience, productivity, and R&D-led innovation. India cannot industrialise by reassembling another country’s playbook. The decisive edge lies in ecosystems, clusters that combine skills, suppliers, labs, logistics and R&D. The rupee’s depreciation offers a helpful wind, but only capability and coordinated institutions will turn that breeze into sustained industrial flight. The world needs a trusted manufacturing alternative at scale, and India needs to develop the building blocks fast.
About the authors:
Ayush Patodia is the Associate Vice President at Avalon Consulting. A trusted advisor to his clients, he is a seasoned consultant with 10 years of experience excelling in delivering strategic solutions that drive measurable results. His track record spans diverse sectors and cross-cultural engagements, fostering collaborative relationships with stakeholders at all levels.
Utpal Kaushik is a Consultant at Avalon Consulting, with experience as a management consultant across manufacturing, consumer goods, renewables, and public-sector transformation. He has worked closely with Indian and global organisations on operational excellence, PMO enablement, and go-to-market strategy, with a strong interest in how industrial policy translates into on-ground manufacturing capability.
India manufacturing
VUCA manufacturing
industrial ecosystems
Industry 4.0 India
manufacturing clusters
MSME competitiveness
R&D investment India
Ayush Patodia
Utpal Kaushik
Avalon Consulting
Related Stories
Electrical & Electronics
A stronger Indian value chain drives our vision: Eswararao Nandam
Polymatech is strengthening India’s semiconductor ambitions through automation and global capacity building. Eswararao Nandam, Managing Director, Polymatech Electronics Limited, in an interaction ..
Read moreAutomation & Robotics
Cognite Expands Industrial AI Focus Across Indian Manufacturing
Cognite’s India expansion will support manufacturers with industrial data and AI, aligning with Make in India, Digital India and INDIAai initiatives.
Read moreMachine Tools & Accessories
Power tools : From productivity enabler to strategic industrial lever
Vivek Singla, MD & Co-Founder, Xtra-Power Tools, highlights how India’s power tools market is shifting from utility-led demand to strategic manufacturing growth.
Read moreRelated Products
latest News
Subscribe to iNoW
For Industry News on WhatsApp, Give a Miss Call on: +91 84228 74016
