Recasting India’s Industrial Policy: A Call for Structural Reform

India’s economic dependence on China is evident in its annual import of goods worth $115 billion, while China remains largely self-sufficient and does not rely on any critical imports from India. This imbalance underscores the urgent need for India to strengthen its local manufacturing base, especially for critical items. A robust industrial policy is crucial to achieving this goal.

Lessons from History

The term industrial policy in India has historically evoked memories of inefficiency and corruption. Between the 1950s and 1970s, India’s approach was dominated by price controls, licensing regimes, heavy import restrictions, and public sector monopolies. While intended to drive self-reliance, this model stifled entrepreneurship, created inefficiencies, and drained state resources through unproductive enterprises.

However, well-crafted industrial policies have transformed nations like Japan (before World War I), Taiwan, and South Korea. China, too, is a prime example. Its focused, long-term industrial strategy has made it the world’s manufacturing hub, commanding 32% of global production and wielding significant economic power.

India’s Recent Steps: PLI and Gati Shakti

India took a notable step in March 2020 with the launch of the Production Linked Incentive (PLI) scheme, initially covering three sectors and later expanding to 17. The scheme aims to boost domestic production, reduce import dependency, and generate employment. While it has had some success in mobile phone assembly and pharmaceuticals, domestic value addition remains low, with key components still imported. Worse, the overall share of manufacturing in India’s GDP has further declined.

In October 2021, the Gati Shakti scheme was introduced to cut logistics costs and enhance connectivity to economic zones. This is vital, as high logistics costs have long been a barrier to India’s manufacturing competitiveness.

The Core Challenges     

To truly transform manufacturing, India must address fundamental issues:

• Education and Research: A skilled workforce and strong R&D are crucial for innovation-driven growth.
• Ease of Doing Business: High costs due to logistics, energy, taxes, and regulatory hurdles continue to deter manufacturing investments.
• Labour-Intensive Sectors: Labour-intensive industries have failed to scale up due to rigid laws, inefficiencies, and lack of supportive ecosystems.
• Employment Gaps: Despite high unemployment, manufacturing companies report worker shortages, partly due to over-reliance on welfare schemes that dampen motivation to work.

The Way Forward

A strong industrial base cannot be built overnight. It requires decades of consistent reform, infrastructure development, and policy stability. India’s focus should shift from welfare-based cash transfers to fostering industries that can create millions of jobs for unskilled and semi-skilled workers. Manufacturing, unlike services, has the potential to provide large-scale employment while reducing poverty.

For industrial policy to succeed, it must be implemented effectively and backed by complementary reforms—a principle as true today as it was 40 years ago. If India aspires to reduce its economic dependence on China and secure its place in global manufacturing, it must recast its industrial strategy with a long-term vision.

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