Capital Goods Sector and India's Industrial Policy

Capital goods are the machines that a country uses to make other things. A tractor factory needs machine tools to cut metal. A metro project needs tunnel boring machines and cranes. A power plant needs turbines and boilers. These "machines that make things" are called capital goods, and the industry that produces them is called the capital goods sector. It is often described as the "mother of all industries", because every other factory, road, railway and power plant depends on it.

What exactly counts as a capital good?

A capital good is any plant, machinery, equipment or accessory needed to produce other goods or services, directly or indirectly. It also includes machines bought to replace old ones, to modernise a factory or to expand it. The key test is use, not shape. A truck bought by a family for a holiday trip is not a capital good, but the same kind of truck bought by a transport company to carry goods for money is used as a capital good.

Capital goods are not used up in one go. They are used again and again over many years, and they slowly lose value. This loss of value is called depreciation.

Why does the sector matter so much?

Think of capital goods as the tools in a carpenter's workshop. If the carpenter must borrow or import every tool, he depends on the tool-seller's price, mood and delivery time. A country is the same.

• Growth: When the government and companies build roads, railways, ports and factories, they must buy capital goods. If these machines are made in India, the money stays in India and creates jobs here.
• Jobs and skills: Making machines needs engineers, designers and skilled workers. It builds high-level skills.
• Trade balance: Importing machines costs foreign exchange (dollars). Making them at home saves foreign exchange.
• Security: A country that cannot make its own machines can be stopped by a supplier. A ban on one machine can delay a whole national project.

The main sub-sectors

India's Ministry of Heavy Industries looks after most of the capital goods sector. Its main parts include:

• Machine tools (machines that cut, shape and drill metal)
• Earthmoving, construction and mining machinery (excavators, backhoe loaders, cranes, dump trucks, tunnel boring machines)
• Heavy electrical equipment (turbines, generators, transformers)
• Textile machinery
• Process plant equipment (large tanks, boilers and reactors used in chemical, oil and fertiliser plants)
• Others such as printing machinery, plastic machinery, food processing machinery, and dies, moulds and press tools

Where did India's policy come from?

After Independence, India followed a planned path of industrial growth. The Second Five Year Plan (1956-61), shaped by the Mahalanobis model, gave top priority to heavy industry and capital goods. The idea was that if India made its own machines, every other industry could grow from them. Public sector companies such as Bharat Heavy Electricals Limited (BHEL), Heavy Engineering Corporation and HMT (machine tools) were set up in the 1950s and 1960s.

After the 1991 reforms, imports became easier and cheaper. Many Indian machine makers faced tough competition, and imports of high-end machines rose. Since 2014, policy has turned again towards building domestic capacity, under Make in India and, later, Atmanirbhar Bharat (self-reliant India).

The National Capital Goods Policy, 2016

This was India's first dedicated policy for the sector, released by the Ministry of Heavy Industries in 2016. Its targets for 2025 were:

• Raise capital goods production from ₹2.3 lakh crore (2014-15) to ₹7.5 lakh crore
• Raise exports from about 27% to 40% of production
• Raise the share of Indian-made machines in India's own demand from 60% to 80%, so that India becomes a net exporter of capital goods
• Raise the sector's share in total manufacturing from about 12% to 20%
• Raise direct and indirect jobs from 8.4 million to 30 million

The Capital Goods Competitiveness Scheme

The government also runs the Scheme for Enhancement of Competitiveness in the Indian Capital Goods Sector. It does not pay companies for each machine sold. Instead, it builds shared facilities that single companies cannot afford alone.

• Phase I was notified on November 5, 2014. Its outlay was about ₹930.96 crore (₹581.22 crore from the government and ₹349.74 crore from industry). A later ministry figure gives about ₹995.96 crore.
• Phase II was notified on January 25, 2022, with an outlay of ₹1,207 crore (₹975 crore from the government and ₹232 crore from industry).
• Phase II has six parts: technology innovation portals to find needed technologies; advanced Centres of Excellence for research; skilling for higher-level jobs; Common Engineering Facility Centres (shared workshops for small firms); better testing and certification centres; and industry accelerators for technology development.

Other tools that support the sector

• Production Linked Incentive (PLI) schemes: The government pays companies a reward linked to extra sales of goods made in India. Some PLIs cover machines or parts, such as advanced chemistry cell batteries.
• Public procurement rules: Under the Public Procurement (Preference to Make in India) Order, 2017 (revised in June 2020), a "Class-I local supplier" has 50% or more local content and a "Class-II local supplier" has more than 20% but less than 50%. Government buyers must give preference to these suppliers. In simple words, government projects are asked to buy Indian where possible.
• Rules on bidders from neighbouring countries: In July 2020, the Ministry of Finance added Rule 144(xi) to the General Financial Rules, 2017. A bidder from a country that shares a land border with India can bid for government contracts only after registering with a competent authority.
• Budget 2026-27: The Union Budget announced the Scheme for Enhancement of Construction and Infrastructure Equipment (CIE) to boost domestic production of items such as tunnel boring machines. It also announced a ₹10,000 crore Container Manufacturing Scheme and CPSE-led high-tech tool rooms (central public sector companies setting up workshops to make high-precision parts).

How is the sector measured?

The Index of Industrial Production (IIP) tracks factory output every month. In its "use-based" classification (base year 2011-12), goods are grouped by how they are used: primary goods, capital goods, intermediate goods, infrastructure/construction goods, consumer durables and consumer non-durables. Capital goods have a weight of 8.22 in this series. Economists watch capital goods output closely. When it rises, companies are investing in new capacity, which usually signals future growth.

Localisation: assembly is not the same as making

A machine "made in India" may still be built mostly from imported parts. The share of a machine's value that is actually produced in India is called localisation or domestic value addition. In construction equipment, simpler machines like backhoe loaders reach about 85-90% localisation, but excavators are only about 55-60%. The hard parts are high-precision components: hydraulic pumps and valves, electronic control units, engines and transmissions. If these stay imported, a supplier country can still choke production by stopping the parts.

Commonly confused concepts

• Capital goods vs consumer goods: Capital goods are used to make other goods or services (a lathe machine). Consumer goods are used directly by people (a refrigerator at home). Consumer durables last long (a TV); consumer non-durables are used up quickly (soap, food).
• Capital goods vs intermediate goods: Intermediate goods are used up inside the final product (steel sheets that become a car body). Capital goods are not used up; they keep working for years (the press that shapes those sheets).
• Capital goods vs capital expenditure: Capital goods are physical machines. Capital expenditure (capex) is money spent on creating long-lasting assets, such as roads, buildings or machines. Higher government capex usually raises demand for capital goods.
• PLI vs the Capital Goods Competitiveness Scheme: PLI pays individual companies a reward linked to extra sales. The Capital Goods scheme mainly funds shared facilities such as testing centres, research centres and common workshops.

Issues, criticism and the way forward

• Dependence on imports for high-tech parts: India makes many simple machines but still imports high-end machine tools, precision parts and control electronics. Much of this comes from China, Germany, Japan and other advanced economies.
• Small scale and low research spending: Many Indian machine makers are small firms. They cannot afford long research projects or costly testing labs.
• Long payback: Machines are expensive and are bought only when investment is rising. Demand goes up and down with the economy, so firms hesitate to invest in new factories.
• Targets not fully met: Goals such as the 2016 policy's 2025 targets were ambitious, and India remains dependent on imports in many segments. Critics say policy has often focused on final assembly rather than deep component capability.
• Way forward: Experts suggest clear local-value-addition milestones, steady government buying from public projects (metros, railways, highways), more shared testing and research centres, skilling for advanced manufacturing, and export support. Building strength in components, not only final machines, is seen as the key to real self-reliance.

Concepts to Know

• Localisation / domestic value addition: The share of a product's value that is created inside India. If a machine is worth ₹100 and ₹60 of its parts and work come from India, its localisation is 60%.
• Depreciation: The slow fall in a machine's value as it wears out and becomes older.
• Mahalanobis model: The planning approach behind India's Second Five Year Plan. It said India should first build heavy industries and machine-making capacity, so that other industries could grow later.
• Hydraulics: A system that uses liquid under pressure to move heavy parts, such as the arm of an excavator.
• Net exporter: A country that sells more of a product to the world than it buys from the world.
• Atmanirbhar Bharat: The government's self-reliant India campaign, launched in 2020, which aims to cut import dependence in key sectors.