Industrial Policy Agenda for the New Government

With the new government sworn in, the focus should be on adopting a new industrial policy (NIP). The policy’s current focus is on manufacturing, given the need to create decent jobs. It is also driven by the realization that a high degree of import dependence could undermine the country’s strategic autonomy. While the external economic environment is less benign than before in supporting manufacturing—flat growth in global trade, rising protectionism, and a sluggish world economy as globalization morphs into “slowballing”—global supply chain restructuring offers India an opportunity.

To facilitate localization of manufacturing, the government has recently taken a series of steps, including raising tariffs and providing incentives for increased production in 14 specified sectors under the Production Linked Incentive (PLI) scheme. India’s industrial policy revival after the primacy of market forces since the 1991 reforms is part of a global trend. The United States (US) has led the industrial policy revival most aggressively, committing hundreds of billions of dollars in subsidies, tax breaks, and other protectionist measures to boost its manufacturing industry through the CHIPS and Science Act, the Inflation Reduction Act, and the Infrastructure Act. The European Union has followed the US example, apart from introducing its own protectionist measures, such as the carbon border adjustment mechanism. Such steps by leading industrialized countries could drag India into a war of incentives to attract investment. But they also lend legitimacy to industrial policies. Apart from PLI, India’s industrial policy has included measures to improve industrial and logistics infrastructure, reduce compliance burdens to facilitate ease of doing business, lower corporate tax rates, focus on skill development and sectoral missions. India’s recent emergence as a net exporter of mobile phones and toys has instilled confidence in its industrial policy. A framework is needed to put these interventions in perspective to steer industrialisation.

The Industrial Policy Resolution of 1956 established a framework for a licensing system and import-substitution industrialization, with the public sector established as the “highest peak” of the economy. The Industrial Policy Resolution of 1991 initiated reforms through liberalization. Along with commitments in the post-Uruguay Round of the multilateral trading system, trade liberalization, while strengthening the competitiveness of some sectors, also led to some deindustrialization—to illustrate, the decline of the electronics industry.

But today’s context is different. India is the fastest growing economy and the fifth largest in the world. The external context of industrialization has changed dramatically. Industry 4.0 and the digital revolution are shaping the new world of work, offering many opportunities and challenges. Net zero emissions goals require more sustainable industrialization. India’s demographic and geopolitical hotspots can help it integrate into supply chain friend-shoring.

The NIP should therefore provide a framework to accelerate industrialisation and help India become a developed country by generating employment in an inclusive and sustainable manner. It should set guiding goals such as doubling India’s share of global manufacturing (value added and exports of finished goods) by, say, 2030. It should articulate broad principles such as the primacy of localisation of jobs and value added, entrepreneurship and locally anchored technological capabilities in a language consistent with the World Trade Organisation (WTO). It could also encourage pioneering industries, as many late industrialisers do, and support SMEs. The NIP should identify sectors where leadership should be built, depending on our endowments such as abundant labour, skills and natural resources. It could do this in dynamic sectors with high added value (consumer durables, electronics), strategic areas (capital goods, semiconductors) and sustainable development (electric vehicles, photovoltaics or green hydrogen).

The NIP should leverage FDI and MNC presence. It should provide a framework to foster innovation-based competition among firms. Similarly, it should support green industrialisation opportunities, including through sustainable corporate practices and modernisation. More importantly, it should provide a framework to support manufacturing through multilateral, regional and bilateral trade negotiations focused on gaining market access for Indian products and leveraging some strategic interventions – for example, efficiency requirements to integrate SMEs into global value chains and government procurement. Exchange rate management has been another critical factor in building a competitive manufacturing sector and should not be overlooked. Given the constraints of commercial banks in term loans due to asset-liability mismatches, it can provide a new national industrial development bank in addition to developing a corporate bond market.

Finally, the NIP should provide an efficient architecture to enable coordinated implementation through a whole-of-government approach.

Nagesh Kumar is the Director and CEO of the Institute for Studies in Industrial Development. The views expressed are personal