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* Rs 2.16 Lakh Crore in PLI Investments Underpins India’s Push to Become a Global Manufacturing Hub

* Specialty chemicals, pharmaceuticals, electronics and auto components emerge as key areas of opportunity amid global supply chain realignment.

* India’s iPhone Exports Reach Rs 2 Lakh Crore as China+1 Opportunity Broadens

As Europe’s industrial base faces mounting cost pressures and global companies seek to diversify supply chains beyond China, India is emerging as a significant contender in the global manufacturing landscape. According to a new report by Nitya Shah, smallcase manager & Co- Founder KamayaKya Wealth Management, titled The Future of Manufacturing: India’s China+1 Opportunity, the convergence of European capacity closures, supply-chain diversification and India’s expanding manufacturing capabilities could create a substantial opportunity for Indian businesses over the coming decade.

The report highlights the scale of the shift: Europe announced 37 million tonnes of chemical capacity closures between 2022 and 2025, while Germany recorded 24,064 corporate insolvencies in 2025, its highest annual tally in 11 years. Meanwhile, India’s iPhone exports reached approximately Rs 2 lakh crore in FY26, and gross foreign direct investment (FDI) rose 17% to US$94.5 billion, signalling growing manufacturing momentum.

At the heart of this transition is the China+1 strategy. Rather than abandoning China, global companies are increasingly seeking additional manufacturing locations to reduce dependence on a single country for critical supplies. With China accounting for approximately 29% of global manufacturing and India around 3%, smallcase manager believes even a modest increase in India’s share could translate into a significant expansion of domestic manufacturing activity.

Nitya Shah, smallcase manager & Co- Founder KamayaKya Wealth Management said “The China+1 opportunity is not about replacing China overnight; it is about building resilient, diversified supply chains. India has the domestic market, engineering capabilities and manufacturing base to capture a larger share of global production. The opportunity spans sectors such as specialty chemicals, pharmaceuticals, auto components and electronics. However, translating this potential into sustained growth will depend on improving infrastructure, reducing input costs and ensuring faster execution of industrial policies.”

Europe’s industrial slowdown could open doors for Indian manufacturers

Europe’s manufacturing challenges are being driven by elevated energy costs, labour expenses and pressure on industrial competitiveness. Germany’s industrial electricity prices and labour costs remain significantly higher than those in competing manufacturing destinations, while chemical production and plant utilisation have weakened.

The European chemical industry has been particularly affected, with announced capacity closures equivalent to around 9% of the region’s existing capacity between 2022 and 2025. The report notes that the resulting supply gaps could benefit manufacturers elsewhere, particularly in sectors where Indian companies already possess established production capabilities and relationships with global customers.

India’s opportunity, however, extends beyond lower manufacturing costs. Its large domestic market, engineering and chemistry talent pool, and established industrial base in pharmaceuticals, chemicals, forgings, castings and auto components provide capabilities that can support more complex manufacturing and component sourcing.

Manufacturing momentum is building, but the opportunity remains underpenetrated

Manufacturing currently accounts for approximately 13% of India’s GDP, with the National Manufacturing Mission targeting a 25% share by 2035. Recent export and investment indicators point to progress towards this ambition. India recorded merchandise exports of US$441.8 billion in FY26, including US$122.4 billion in engineering goods and US$48 billion in electronics. Gross FDI rose to US$94.5 billion during the year, up 17%.

The government’s production-linked incentive (PLI) schemes have also supported capacity creation. By December 2025, the schemes had attracted Rs 2.16 lakh crore in investment across 14 sectors, with cumulative production and sales of Rs 20.41 lakh crore, exports of Rs 8.3 lakh crore and 14.4 lakh direct and indirect jobs. However, incentives paid out stood at Rs 28,748 crore against a total outlay of Rs 1.91 lakh crore, highlighting the need for more effective implementation and faster disbursements.

The report also identifies ambitious sectoral targets, including US$500 billion in electronics production by 2030 and an expansion of the auto component industry to US$200 billion from approximately US$86 billion today.

Five sectors positioned to benefit from global supply-chain diversification

smallcase manager identifies five manufacturing segments where Indian companies have established capabilities that could help them capture incremental global demand.

1. Auto components and precision engineering

India’s auto component industry recorded turnover of Rs 7.6 lakh crore in FY26 and exports of US$24 billion, with Europe emerging as its fastest-growing export destination. German automotive supplier ZF aims to quadruple its India sourcing to €2 billion by 2030. Indian manufacturers of bearing cages, precision forgings and steel castings are already supplying global customers, creating a foundation for further sourcing opportunities. However, India’s auto component imports of US$25.4 billion still exceed its exports.

2. Pharmaceuticals and contract manufacturing

As global pharmaceutical companies reassess supply-chain concentration and geopolitical risks, India’s contract research and manufacturing capabilities could gain importance. The report projects that India’s contract research and manufacturing market could nearly double from US$7.3 billion in FY23 to US$14.1 billion by FY28. Once a manufacturer is incorporated into a drug filing, switching suppliers can take two to four years, making successful vendor qualification particularly valuable.

3. Specialty chemicals

Europe’s chemical capacity rationalisation could create opportunities for Indian manufacturers with differentiated products and established customer relationships. The report highlights capabilities in specialty chemical intermediates and monomers, alongside examples of Indian companies expanding capacity to fulfil long-term contracts. It cautions, however, that Chinese overcapacity and imports could intensify pressure on commodity chemicals, making specialty products and contract manufacturing more attractive areas of opportunity.

4. Electronics and semiconductors

India’s iPhone exports rose to approximately rs 2 lakh crore in FY26, representing around three-quarters of the country’s US$29.4 billion in smartphone exports. The next phase of growth will depend on increasing domestic component manufacturing and value addition. The report points to semiconductor assembly and testing facilities entering commercial production, the Tata wafer fabrication project at Dholera and the enhanced Rs 40,000 crore electronics components scheme as important developments in the sector’s evolution.

5. Defence and capital goods

India’s defence production reached a record Rs 1.78 lakh crore in FY26, while defence exports increased 63% to Rs 38,424 crore, reaching more than 80 countries. The report sees opportunities for manufacturers with capabilities in precision machining, forgings and electronics, as these skills can serve both automotive and defence supply chains.

Manufacturing growth could create a wider industrial investment opportunity

The report also highlights businesses that support manufacturing expansion but may receive less attention than the manufacturers themselves. Industrial buildings, logistics, capital goods, power and grid equipment, water treatment, recycling and engineering services are essential to setting up and operating new factories.

Private investment announcements nearly doubled to Rs 14.6 lakh crore in the first half of FY26, creating potential demand for the infrastructure and industrial services required to convert investment plans into operational capacity.This creates a broader opportunity across the manufacturing ecosystem, where suppliers of factory infrastructure, machinery, utilities and logistics can benefit from capacity additions across multiple industries rather than depending on the success of a single end-product category.

Execution will determine whether India captures the opportunity

Despite its advantages, India faces structural challenges that could constrain its ability to win global manufacturing orders. These include delays in land acquisition and approvals, relatively high duties on imported inputs, uneven infrastructure, industrial power costs and continued dependence on China for critical components and raw materials.

The report notes that India imports roughly 70% of its bulk drug ingredients from China, alongside a substantial share of its electronic components. It also cautions that surplus global capacity, particularly in chemicals, steel and solar, can place pressure on Indian producers.

India does not need to replace China to gain from the shift

Smallcase manager believes the opportunity lies in capturing a greater share of incremental global manufacturing and supply-chain diversification, rather than attempting to replace China’s scale and integrated industrial ecosystem.

Moving India’s share of global manufacturing from approximately 3% to 5%, the report estimates, would represent an expansion comparable in scale to Mexico’s entire manufacturing sector. For businesses and investors, the report emphasizes the importance of distinguishing between announced capacity and proven manufacturing capability. Companies that have already qualified with demanding global customers, established reliable delivery records and demonstrated the ability to generate cash flows may be better placed to benefit as sourcing decisions evolve. The report also highlights the potential importance of specialty manufacturing over commoditized production, and of suppliers to new factories alongside the manufacturers themselves.

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