First, it was shadow banning of exports of rare earths which panicked Indian electric vehicle (EV) manufacturers. Now comes a Chinese halt on specialised fertilisers. A German tunnel-boring machine bound for India is reportedly stuck in China, awaiting export clearance. What next? India, the drug manufacturing giant, imports 80% of key starter materials from China. What if that is choked? China needs nothing critical from India; India needs US$115bn (billion) worth of goods every year from China to keep various parts of its economy going.
All those who were advocating that manufacturing is less relevant to nation-building in a globalised economy, need to offer an answer to the chokehold China has come to acquire. The answer, of course, is more local manufacturing, especially of critical items which should not come as a surprise.
Forty years ago, the dominant economic prescription was a heady cocktail of free-market principles: open competition, minimal government interference, low tariff barriers and financial liberalisation. This marked a decisive triumph of free-market ideology over State-led planning. Well, the economic thinking appears to have come full circle. Tariff barriers are up and government intervention is strongly shaping up economic forces.
US president Donald Trump wants to reshore steelmaking from electronics to drug production. Earlier, Joe Biden doubled down with vast subsidies for semiconductors and green technologies. Britain is discussing subsidising the energy bills of manufacturers while India has been offering incentives to boost local manufacturing in 17 sectors. Indonesia is mandating ‘local content’ in foreign investments in manufacturing. With vast reserves of nickel, it aspires to be an electrical vehicle powerhouse.
First, it was shadow banning of exports of rare earths which panicked Indian electric vehicle (EV) manufacturers. Now comes a Chinese halt on specialized fertilizers. A German tunnel-boring machine bound for India is reportedly stuck in China, awaiting export clearance. What next? India, the drug manufacturing giant, imports 80% of key starter materials from China. What if that is choked? China needs nothing critical from India; India needs US$115bn (billion) worth of goods every year from China to keep various parts of its economy going.
All those who were advocating that manufacturing is less relevant to nation-building in a globalised economy, need to offer an answer to the chokehold China has come to acquire. The answer, of course, is more local manufacturing, especially of critical items which should not come as a surprise.
Forty years ago, the dominant economic prescription was a heady cocktail of free-market principles: open competition, minimal government interference, low tariff barriers and financial liberalisation. This marked a decisive triumph of free-market ideology over State-led planning. Well, the economic thinking appears to have come full circle. Tariff barriers are up and government intervention is strongly shaping up economic forces.
US president Donald Trump wants to reshore steelmaking from electronics to drug production. Earlier, Joe Biden doubled down with vast subsidies for semiconductors and green technologies. Britain is discussing subsidising the energy bills of manufacturers while India has been offering incentives to boost local manufacturing in 17 sectors. Indonesia is mandating ‘local content’ in foreign investments in manufacturing. With vast reserves of nickel, it aspires to be an electrical vehicle powerhouse.
The idea of ‘industrial policy’ once evoked memories of state inefficiency and rent-seeking. Between the 1950s and 1970s, India’s industrial policy was a mix of price controls, licensing, import restrictions, and public sector dominance — a model that stifled entrepreneurship, fostered inefficiencies and propped up inefficient and corrupt state enterprises, draining public exchequer.
So how is it that industrial policy, and its core component, manufacturing, are back as preferred growth hormones? The answer is China. Missed the lessons of how sensible industrial policies can transform a nation—Japan, before the World Wars and Taiwan and South Korea later?
China has provided a dazzling masterclass on how to formulate and implement long-term industrial policy under which the country has come to control 32% of global manufacturing, making even the mightiest of nations vulnerable to its manufacturing prowess.
Where does India fit into these trends? Prime minister (PM) Narendra Modi’s ‘Make in India’ campaign promised to raise the share of manufacturing in gross domestic product (GDP) from 15% in 2014 to 25% by 2025, with an eye on job creation and export growth. But apart from promotional slogans and roadshows, little of substance followed.
A more structured attempt came six years later, in March 2020, when India launched the production-linked-incentive (PLI) scheme for three sectors which was later expanded to 17. The idea was to scale up domestic manufacturing capability to up to Rs30 lakh crore, substitute imports, while also creating 6mn (million) new jobs.
The PLI scheme has spurred some success in mobile phone assembly and pharma ingredients. Yet domestic value addition remains low — key components are still imported. In January 2024, a government release claimed 678,000 new jobs had been created under the scheme — a drop in a country where over 10mn youth enter the labour market annually. The manufacturing share of GDP has, in fact, slipped further, from 15.4% to 14.3% in 2025.
A Reuters investigation, citing internal government documents, noted that, by October 2024, less than 8% of the allocated funds for PLI had been disbursed. Two-thirds of the scheme's targets had been missed.
What happened?
PLI puts the cart before the horse. The horse in this case is the quality of education and research and the enormous frictional cost of doing business comprising logistics, energy, taxes and cess, bribes, state and Central laws and red tape. This is why even labour-intensive sectors like leather, garments, handicrafts and jewellery have failed to scale.
PLI is a useful reminder that shortcuts won’t build industrial capability. A genuine manufacturing ecosystem takes years of foundational reform.
India’s efforts to build this foundation have been sporadic, at best. In the mid-2000s, the Congress-led government had tried to emulate the export-led success of countries like Thailand and Malaysia by promoting special economic zones (SEZs). But the initiative devolved into corruption, controversy, scandal and, ultimately, fizzled out. It had included gems such as a 1,000-acre land allotment near Nagpur to fugitive businessman Mehul Choksi!
India has never tried to reduce logistics costs systematically until October 2021 when Gati Shakti was launched. It aims to reduce logistics costs (currently 13%–14% of GDP compared to 8%–10% in China) and enhance connectivity to economic zones.
Had manufacturing taken off, it could have addressed India’s twin challenges of joblessness and poverty. Unlike services, manufacturing can absorb large pools of unskilled and semi-skilled labour. But instead of building that base, the government has focused on numerous cash transfers and welfare schemes.
While these schemes may prevent unrest and yield political dividends, they also dull the incentive to work, especially in rural India. Employers in the manufacturing sector routinely report a shortage of willing labour, despite high unemployment.
India's demographic dividend is fast turning into a demographic liability. The small-scale sector which employs the overwhelming majority of workers is struggling in a stifling and creaking ecosystem.
Any industrial policy is as good as how it is applied and the other reforms that support it. This was as true 40 years ago, as it is now.
by Debashis Basu