Industrial Policy – Not the What, But the How

 

Summary: Industrial Policy – Not the What, But the How

1. The Debate in India

• For decades, Indian commentary has been split:

  • Dirigistes: argue reforms went too far, want state-led industrial policy back.

  • Liberalisers: warn that state direction revives licence-raj inefficiencies.

• Chief Economic Advisor Dr. V. Anantha Nageswaran reframes the debate: India never stopped industrial policy; the issue is not what policy, but how it is implemented.

2. The “Missing Middle” Problem

• India has millions of micro firms and a few large ones, but very few mid-sized enterprises.

• Decades of SME-friendly policies (reservations, subsidies, carve-outs) created survival, not competitiveness.

• Nageswaran: “It is not for want of the what. It is a want of the how.”

3. Lessons from East Asia

• Northeast Asia (Japan, Korea, Taiwan, Singapore): aggressive industrial policy succeeded due to discipline — time-bound protections, export-performance requirements, simulated competition.

• Southeast Asia (Philippines, Indonesia, Malaysia, Thailand): similar tools but failed due to permanent protection and lack of discipline.

• India’s record resembles Southeast Asia: protection without discipline.

4. Discipline Framework

Nageswaran outlines three principles:

1. Simulate competition where none exists (R&D quotas, benchmarks).

2. Benchmark globally — firms must compete internationally.

3. Time-bound protections — tariffs, subsidies, duties must be reviewed and withdrawn when ineffective.

5. India’s Second Chance

• The window for industrial policy reopened due to deglobalisation trends (Brexit, COVID, Ukraine war, US-China trade conflict).

• Every major economy is now pursuing industrial policy (US CHIPS Act, EU Critical Raw Materials Act, China’s ongoing state-led model).

• India has demographic strength, macro stability, and geopolitical opportunity.

• Current instruments: PLI scheme, cluster revival, deregulation, IndiaAI Mission, Gift City sandbox.

6. Early Grades

• PLI Scheme: well-designed (time-bound, performance-linked). Some sectors (mobiles, semiconductors) show progress; others lag. The test is whether failures are shut down or politically entrenched.

• Tariff Protection: danger zone — politically permanent, risks becoming “Indonesian-style” entrenchment.

• Cluster Manufacturing: promising (e.g., Tirupur apparel cluster), but still smaller than global competitors (Dhaka). Needs export discipline to scale.

7. The Test Ahead

• India must embed discipline into industrial policy:

  • Sunset clauses that actually expire.

  • Independent cost-benefit reviews.

  • Willingness to let firms fail if they don’t deliver.

  • Accountability for clusters to scale globally.

• The next 20 years will decide whether India resembles Korea (success) or Indonesia (failure).

• Nehru wanted growth too — but chose the wrong instruments. India must now choose better ones and have the courage to withdraw them when necessary.