India's manufacturing sector has achieved a record high performance in the third quarter of FY26, demonstrating sustained growth momentum and improving business sentiment across multiple industries. The latest Quarterly Survey on Manufacturing by the Federation of Indian Chambers of Commerce and Industry (FICCI) reveals significant improvements in production levels, demand patterns, and overall manufacturing activity during the October-December 2025-26 period.

Production Performance Shows Strong Growth

The manufacturing sector's performance reached unprecedented levels during Q3 FY26, with substantial improvements across key metrics:

The 68th edition of FICCI's comprehensive survey assessed manufacturing performance across eight major sectors, including auto components, capital goods, chemicals, pharmaceuticals, electronics, machine tools, metals, and textiles. The survey captured responses from both large companies and small and medium enterprises, representing a combined annual turnover exceeding ₹3 lakh crore.

Export Performance and Trade Dynamics

Export activity demonstrated resilience during the survey period, with manufacturers reporting stable to positive trends. Approximately 69% of respondents indicated higher or stable export levels in Q2 FY26. Looking ahead, over 70% of manufacturers expressed optimism about Q3 FY26 export performance, expecting levels to be higher or unchanged compared to the corresponding period in the previous year.

The positive export sentiment reflects the sector's ability to maintain competitiveness in global markets despite various operational challenges.

Employment and Financial Conditions

The manufacturing sector showed improved employment prospects and maintained adequate access to funding:

The increase in hiring intent from 35% to 38% compared to the same quarter last year indicates growing confidence among manufacturers about business prospects and operational expansion.

Cost Pressures and Operational Challenges

Despite the positive growth trajectory, manufacturers continue to face significant cost pressures. Nearly 57% of respondents reported increases in production costs as a percentage of sales. The primary drivers of elevated costs include:

• Higher raw material prices
• Currency depreciation impacts
• Increased logistics expenses
• Rising power and utility costs

Manufacturers also identified global and geopolitical factors, operational challenges, and regulatory issues as key constraints to expansion plans over the next six months.

Sectoral Outlook and Workforce Dynamics

The survey revealed varying growth expectations across different manufacturing segments. Electronics and electricals emerged as strong growth sectors, while capital goods, chemicals, pharmaceuticals, metals, machine tools, textiles, and auto components were expected to register moderate growth.

Regarding workforce availability, approximately 80% of respondents indicated they were not experiencing labour shortages. However, the remaining firms highlighted the persistent challenge of skilled labour availability, emphasising the need for enhanced efforts from both industry and government stakeholders to address skill development requirements.

The record-high manufacturing performance in Q3 FY26, supported by improved demand sentiment aided by recent GST rate cuts, positions India's manufacturing sector for continued growth despite ongoing cost and operational challenges.

India's manufacturing sector is experiencing a multi-speed growth trajectory, with distinct winners and laggards emerging across different segments. This divergence reflects structural shifts in global supply chains, varying domestic demand patterns, and the varying preparedness of Indian companies to capitalize on new opportunities, according to Manoj Bahety, fund manager at Carnelian Asset Management & Advisors.

Leading Manufacturing Segments

Contract Development and Manufacturing Organizations

CDMOs represent one of the strongest growth stories in Indian manufacturing. The sector is benefiting from a meaningful reallocation of global orders as multinational companies implement China-plus-one strategies to diversify their supply chains. India's combination of engineering talent, cost efficiency, and improving regulatory credibility positions it as a natural alternative to China-dominated manufacturing.

Bahety emphasizes that this trend has structural underpinnings rather than being cyclical. The ongoing diversification provides Indian CDMOs with multi-year visibility for capacity expansion, creating sustainable growth opportunities.

Capital Goods Sector

Companies with strong execution capabilities and established market positions are experiencing favorable conditions from both domestic and international markets. The alignment of these factors is creating robust opportunities:

Auto Ancillaries Performance

The auto components sector is benefiting from a healthy domestic automotive cycle combined with steady export growth. Several Indian component manufacturers are scaling operations faster than in previous cycles by aligning with evolving technologies and global original equipment manufacturer platforms. This strategic positioning has enabled companies to move up the value chain and strengthen their competitive positioning.

Underperforming Segments

Chemicals Sector Challenges

The chemicals sector faces headwinds primarily due to weak global end-consumer demand rather than structural weaknesses within India. As a heavily export-oriented sector, global softness has negatively impacted both volumes and pricing. However, Bahety views this slowdown as cyclical, noting that India's leadership in complex chemistry remains intact and should recover as global demand normalizes.

Key Growth Drivers and Investment Framework

The manufacturing divergence stems from three critical factors: global supply chain reallocation patterns, domestic demand strength in specific segments, and companies' effectiveness in capturing both trends. While policy support through initiatives like the Production-Linked Incentive scheme has provided assistance, the most significant gains are occurring in sectors where India already possesses scale and proven ecosystems.

Looking ahead, the primary beneficiaries of supply-chain realignment are likely to be manufacturers in areas where India already maintains relevance and competitiveness. These represent expansion opportunities within established markets rather than entirely new ventures.

Investment Approach and Valuation Considerations

Carnelian Asset Management employs a disciplined investment framework to navigate this multi-speed environment:

Valuations have already experienced sharp rerating in parts of manufacturing. While some premium is justified where growth visibility and competitive advantages are clear, Bahety cautions that markets can move ahead of fundamentals, requiring balanced optimism with clear growth-valuation analysis.

Future Opportunities and Risk Factors

Within manufacturing, capital goods and specialty engineering continue to present attractive opportunities, particularly in precision engineering and industrial equipment where entry barriers remain high. Electronics manufacturing services and select import-substitution themes are gaining traction as domestic capabilities reach global standards.

Despite near-term weakness, the chemicals sector still offers compelling opportunities in specific niches for companies with differentiated products and strong client relationships. Bahety identifies niche manufacturers supplying mission-critical components to global OEMs as the most underappreciated opportunity, combining durability with scalability potential.

However, risks persist including global demand volatility, margin pressures, and aggressive capital expenditure decisions that could strain balance sheets. The investment approach emphasizes focusing on quality, capital discipline, and operational flexibility in India's evolving manufacturing landscape.