The capital goods sector sits at the core of India’s manufacturing ecosystem, supporting infrastructure, energy, mobility, and industrial capacity-building. As per DPIIT’s August 2025 updates, it contributes nearly 12% to India’s manufacturing GVA, underscoring its role as a multiplier for long-term capex cycles. Over the past decade, the sector has expanded steadily—production has risen from USD 27.6 billion in FY2014–15 to USD 51.7 billion in FY2023–24, while the machinery and equipment segment has seen its GVA grow 1.6x to about USD 90 billion.
With 1.4 million direct and nearly 7 million indirect jobs, the sector anchors both employment and industrial capability. Export performance, though still evolving, shows clear pockets of strength: process plant equipment (~USD 1 billion in FY2023–24), followed by earthmoving and mining machinery (~USD 700 million) and textile machinery (~USD 445 million). Despite this progress, persistent bottlenecks continue to temper the sector’s momentum, making 2025 a crucial year for policy and industry recalibration.
Structural Challenges
One structural challenge is orderbook cyclicality—a function of public infrastructure spending, private capex sentiment, and commodity cycles. Firms continue to experience elongated delivery schedules, with working capital locked for longer periods due to milestone-linked payments. From a financial viewpoint, this creates pressure on borrowing lines and impacts interest cost management, especially in a high-capex, depreciation-heavy industry.
Import Dependence and Margin Volatility
Another drag comes from import dependency in precision components, robotics, and advanced automation systems. Despite multiple Quality Control Orders (QCOs) issued by the Ministry of Heavy Industries, localisation remains uneven, exposing manufacturers to forex-linked cost swings. Industry disclosures aligned with recent MHI updates indicate 8–10% cost uncertainty in Q2 FY26, largely driven by currency movement affecting high-precision imported subsystems.
The tariff environment in 2025 has added another layer of variability. Customs duty rationalisations in the 2025–26 fiscal cycle eased duties on key intermediates but raised rates on selected finished equipment. This benefits manufacturers attempting deeper assembly in India while temporarily increasing costs for integrators still reliant on imported FBUs.
Simultaneously, ongoing FTA discussions with the EU and UK have influenced sourcing decisions. Anticipatory tariff resets have led to tactical inventory build-ups in mid-2025, adding short-term working-capital pressure but reducing long-term uncertainty for exporters of industrial machinery, particularly where QCO requirements overlap with EU standards.
From a financial viewpoint, these tariff shifts and FTA transitions now sit alongside forex volatility as a key determinant of margin planning. Until localisation strengthens—an emphasis consistent with the capital goods regulatory landscape —landed-cost forecasting, hedging discipline, and supplier-contract alignment will remain central to stabilising profitability across the sector.
Technology and Productivity Gaps
Labour productivity and technology adoption gaps add another layer of friction. While automation is expanding, adoption remains concentrated in large firms, leaving MSMEs struggling with the upfront capital required for robotics and Industry 4.0 systems.
The Policy Push
Policy responses in 2025, however, are increasingly targeted. The government’s renewed push under the PLI for capital goods, updated in July 2025, prioritises domestic manufacturing of CNC machinery, robotics, and heavy electrical equipment. Simultaneously, DPIIT’s August 2025 industrial deep-tech framework aims to blend R&D incentives with market-linked manufacturing support—signalling a policy shift from generic industrial subsidies toward capability-building across automation, precision engineering, and advanced materials.
Alongside these flagship interventions, several legacy but strategically important schemes have been recalibrated in 2025 to reduce cost disabilities and improve competitiveness. The SECC (Scheme for Enhancement of Competitiveness) continues to be a critical backbone, particularly through technology-upgradation support and the expansion of Common Engineering Facility Centres (CEFCs), which provide shared testing, calibration, and high-end prototyping infrastructure. These centres increasingly complement the industry’s automation priorities noted by the Ministry of Heavy Industries, especially in segments such as machine tools and process equipment.
Export-linked mechanisms remain relevant as well. The EPCG Scheme, offering duty-free import of capital goods against export obligations, is being leveraged by manufacturers scaling precision tool exports. Similarly, the RoDTEP Scheme, which rebates embedded duties and taxes, stabilises pricing for exporters operating on thin margins—crucial in a sector where depreciation-heavy asset structures and long working-capital cycles are common. The Duty Drawback Scheme continues to support cost competitiveness by refunding duties on inputs used in export production, aligning with the broader focus on value-chain localisation.
From a customs-duty standpoint, the MOOWR Scheme gained traction in 2025 because of its deferred-duty benefits for imports stored in bonded warehouses. For capital goods players with uneven order cycles and project-linked dispatch schedules, MOOWR helps smooth out cash-flow volatility—a recurring industry concern. The broader duty rationalisation introduced in the 2025–26 fiscal cycle further seeks to correct inverted duty structures affecting machine tool imports, thereby reducing the landed cost gap vis-à-vis domestic manufacturing.
Finally, the PM Gati Shakti Mission underpins these policy measures by integrating planning across 16 ministries to strengthen multimodal industrial connectivity. For the capital goods sector—where logistics inefficiencies often inflate both procurement lead times and dispatch cycles—the mission’s corridor-level planning (rail connectivity to industrial clusters, optimised road-port linkages, synchronised power and logistics infrastructure) is expected to unlock meaningful productivity gains. In my view, this integrated approach is particularly important because the sector’s growth is tightly interlinked with infrastructure-driven demand cycles—a theme consistently highlighted in the Capital Goods sector metadata.
Collectively, these measures indicate that policy in 2025 is moving beyond headline incentives and into the domain of granular competitiveness: easing import frictions, lowering compliance and logistics costs, supporting R&D, and expanding shared industrial capacity. From a financial standpoint, the alignment of these schemes reduces working-capital strain, improves order-book execution timelines, and supports long-term capex planning—three levers that materially shape sectoral profitability and investment appetite in the years ahead.
The Road Ahead
With public capex rising in FY26 and infrastructure pipelines expanding, demand visibility remains strong. What stands out is the increasing alignment between industrial policy, trade policy, and technology adoption. For finance and compliance professionals, the focus will continue to be on managing long receivable cycles, evaluating technology investments, and strengthening supplier-quality controls.
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