Industrial policy is back in policy debates. After decades of faith in liberalisation and market-led growth, governments are intervening again. Geopolitics, supply-chain shocks, and technology transitions have forced the shift. The World Bank’s recent report, Industrial Policy for Development: Approaches in the 21st Century, captures this turn.
The report is direct. Industrial policy is universal. Advanced and developing economies use it. Outcomes depend on state capacity, fiscal space, and governance. Where these are weak, policy relies on tariffs and subsidies. Implementation quality remains the constraint.
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What industrial policy now means
Industrial policy today is not confined to manufacturing. It spans agriculture, services, and new sectors such as green technologies. The rationale is standard: market failure. Private investment does not always deliver optimal outcomes, especially where coordination, information, or infrastructure is missing.
In developing economies, firms hold back. Infrastructure gaps, credit constraints, and policy uncertainty raise risks. Information failures and weak coordination compound the problem. Governments respond with policy interventions. The question is not whether to intervene, but how.
India’s policy record: From control to reform
India’s post-independence industrial policy relied on state control. Licensing, protection, and public sector dominance aimed to build capacity. The outcome was predictable: inefficiency and limited competition.
The 1991 reforms dismantled this framework. Liberalisation, privatisation, and global integration followed. Sectors such as IT and pharmaceuticals expanded rapidly. Indian firms proved competitive.
Manufacturing did not. Its share in output and employment lagged expectations. Informality persisted. Employment generation remained weak. The structural shift seen in East Asia did not occur at scale.
The shift to targeted intervention
Recent policy reflects a change in approach. Initiatives such as Make in India aim to build capabilities rather than shield firms. The emphasis has moved from protection to enabling conditions: infrastructure, logistics, investment facilitation, and innovation.
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The World Bank report reinforces this shift. Public inputs—skills, industrial corridors, institutional support—deliver more durable gains. Tariffs and subsidies distort incentives and reduce efficiency. The policy mix matters.
India’s current industrial policy rests on the Production Linked Incentive scheme. It marks a shift from input subsidies to output-linked support tied to incremental production and exports. The design seeks scale in sectors such as electronics, pharmaceuticals, and solar modules. Early outcomes are uneven. Mobile phone assembly has expanded rapidly, with exports rising, but deeper value addition remains limited and results in other sectors are slower.
The scheme’s logic is clear: reward performance, not protection. Its constraint is also clear: without reliable infrastructure, logistics, and supplier ecosystems, incentives alone cannot sustain competitiveness.
Implementation is the constraint
Design is not the main problem. Execution is. Effective industrial policy requires coordination, discipline, and credible monitoring. Examples from East Asia underline this: performance-based support, institutional coherence, and clear targets.
Without governance discipline, policy fails. Weak accountability and fragmented implementation dilute outcomes. State capacity—administrative, fiscal, and regulatory—determines results.
Targeting and trade-offs
The report advises focus. Labour-intensive sectors offer immediate gains in employment and exports. The logic is straightforward: absorb surplus labour, raise productivity, and build scale.
Trade-offs are unavoidable. Labour-intensive growth may limit productivity gains. Rapid industrialisation can strain environmental systems. Policy cannot optimise all objectives simultaneously.
Diversification helps. A portfolio approach reduces risk when sectors underperform. It also allows policy correction without systemic disruption.
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Industrial policy is not a substitute
Industrial policy cannot compensate for weak fundamentals. Education, infrastructure, and macroeconomic stability remain non-negotiable. Without these, interventions yield little.
The current global context raises the stakes. Geopolitical tensions and technological shifts are reshaping production systems. For India, the response requires discipline, not expansion of instruments.
The revival of industrial policy is also shaped by external policy competition. Measures such as the Inflation Reduction Act and the CHIPS and Science Act have normalised large-scale subsidies in advanced economies. This changes the baseline for countries like India. Competing for investment now involves fiscal trade-offs and risks of subsidy escalation. At the same time, multilateral trade rules remain unsettled, creating ambiguity over permissible support.
Industrial policy is therefore no longer a purely domestic design problem. It operates within a contested global regime where policy space is uneven and shifting.
The revival of industrial policy offers opportunity. It can improve competitiveness, generate employment, and support structural change. But outcomes hinge on execution.
India’s past record is clear. Policy intent is not enough. Institutions, monitoring, and coordination determine success. That constraint remains.
Dr Rajeev Verma is Assistant Professor (Economics), Department of Economics, University of Delhi.