As Budget FY26 preparations begin, the government has begun internal deliberations on how to revitalize the industrial sector with a new set of incentives.
Although production-linked incentives are already being used to encourage investment in a few industries, a more comprehensive plan is currently being considered, in which government support would be connected to the creation of jobs and new investments.
India has implemented several policy measures during the past 20 years in an effort to raise the manufacturing sector’s contribution to the country’s GDP to 25%. But since FY12, the sector’s GDP share has been stagnant, averaging 16%.
The government has been encouraging India Inc. to invest to increase its ability to meet India’s expanding demands in recent months. This is done by utilizing the government’s employment development programs, PLIs, and the 2019 corporation tax rate reduction.
A reduction in corporate taxes cost the government slightly more than Rs 1 trillion in 2020–21 in lost revenue, and comparable sums were lost in succeeding years. Without a corresponding rise in corporate investments, the rate of growth in corporation tax revenue has decreased since the tax cut.
The government announced in September 2019 that base corporation taxes for manufacturing enterprises that were incorporated after October 1, 2019, would be reduced from 25% to 15%, and for companies that were already in operation, the tax would be lowered from 30% to 22%.
India is home to an estimated 565 million people, of whom only 11.4% work in manufacturing and over 45% labor in agriculture. To boost manufacturing, the government introduced PLI plans in 2021 that covered up to 14 sectors and allocated Rs 1.95 lakh crore in incentives. The plan’s results have been conflicting.
