Industrial Policy Redux, Can India Break Free from China’s Chokehold?

Industrial Policy Redux, Can India Break Free from China’s Chokehold?

Introduction

In an era of global supply chain vulnerabilities, industrial policy has made a dramatic comeback. Once dismissed as a relic of inefficient state planning, governments worldwide—from the U.S. to Indonesia—are now aggressively subsidizing domestic manufacturing, raising trade barriers, and reshoring critical industries. For India, this shift is existential. With 80% of pharmaceutical ingredients, 70% of electronics, and 90% of solar modules imported from China, recent disruptions—like China’s export curbs on rare earths and fertilizers—have exposed India’s dangerous dependence.

This article examines India’s halting journey toward self-reliance, the lessons from China’s industrial playbook, and why slogans like “Make in India” must translate into systemic reforms to avoid becoming another missed opportunity.

1. The Global Return of Industrial Policy

From Free Markets to Fortress Economies

• 1980s–2000s: The Washington Consensus preached deregulation, free trade, and minimal state intervention.

• 2020s: The pendulum has swung back. Examples:

  • U.S.: CHIPS Act ($52B for semiconductors) and Inflation Reduction Act ($370B for green tech).

  • EU: €43B subsidy for clean tech to counter China.

  • Indonesia: Nickel export bans to force EV battery investments.

Why the Reversal?

1. Geopolitics: COVID-19 and Ukraine war exposed supply chain risks.

2. China’s Dominance: Controls 32% of global manufacturing, weaponizing trade (e.g., rare earth embargoes).

3. Job Creation: Manufacturing employs 100M+ in China vs. 30M in India.

2. India’s Industrial Policy: Hits and Misses

Phase 1: License Raj (1950s–1990s)

• Model: State-led planning, import substitution.

• Result: Stifled innovation; GDP growth stuck at 3.5% (“Hindu rate of growth”).

Phase 2: Liberalization (1991–2014)

• Reforms: Reduced tariffs, opened FDI.

• Outcome: Services boomed (IT, finance), but manufacturing stagnated at 15% of GDP.

Phase 3: Make in India (2014–Present)

Production-Linked Incentive (PLI) Scheme

• Goal: Boost 14 sectors (e.g., semiconductors, EVs) with $26B in subsidies.

• Progress:

  • Mobile Assembly: Foxconn, Pegatron set up plants; exports hit $11B (2023).

  • Pharma: Reduced API imports from 90% to 70%.

• Shortfalls:

  • Low Value Addition: iPhone components still 70% imported.

  • Fund Disbursement: Only 8% of PLI funds released (Reuters, 2024).

  • Jobs: 68,000 created vs. 10M annual labor market entrants.

Gati Shakti (2021)

• Aim: Cut logistics costs from 14% to 8% of GDP.

• Reality: Port delays and rail bottlenecks persist.

3. Why India Struggles Where China Succeeded

China’s Blueprint

1. Decades of Planning: Focused on textiles (1980s), electronics (1990s), EVs (2020s).

2. State Capitalism: SOEs like Sinopharm dominated strategic sectors.

3. Forced Tech Transfer: Joint ventures extracted IP from foreign firms.

India’s Bottlenecks

Case Study: Semiconductors

• China: Spent $150B since 2014; now produces 15% of global chips.

• India: Approved $10B scheme in 2021; yet to break ground on first fab.

4. The Road Ahead: Fixing India’s Industrial Ecosystem

Immediate Steps

1. PLI 2.0:

   • Link subsidies to value addition, not just assembly.

   • Penalize firms failing to meet targets (e.g., Vedanta’s semiconductor delays).

2. Land & Labor Reforms:

   • Simplify land acquisition (model: Gujarat’s plug-and-play industrial parks).

   • Merge 44 labor laws into 4 codes (pending since 2020).

Long-Term Foundations

1. Education-Industry Tie-Ups:

   • Scale Germany-style vocational training (only 5% of Indian workers are formally skilled).

2. R&D Push:

   • Raise R&D spending to 2% of GDP; incentivize patents (India files 1/10th of China’s patents).

3. Local Supply Chains:

   • Mandate mineral processing (e.g., lithium in Jammu) to avoid raw material exports.

Political Will vs. Populism

• Problem: $130B/year spent on welfare (e.g., free rations) vs. $26B for PLI.

• Solution: Redirect subsidies to job-linked manufacturing (e.g., solar panel factories in Bihar).

5. Global Lessons: What India Can Learn

Success Stories

• Vietnam: Attracted $36B in FDI (2023) by streamlining permits and tariffs.

• Taiwan: TSMC became chip leader via state-funded R&D (ITRI model).

Cautionary Tales

• Brazil: “Local content” rules in oil backfired, sinking Petrobras.

• South Africa: SEZs collapsed due to corruption (sound familiar?).

Conclusion: Industrial Policy or Industrial Mirage?

India stands at a crossroads. The PLI scheme and Gati Shakti are steps in the right direction, but without addressing land, labor, logistics, and innovation, “Make in India” risks becoming another slogan without substance. China’s rise proves industrial policy works—but only with long-term vision, ruthless execution, and systemic reforms.

For Modi’s government, the choice is clear: double down on hard reforms or watch India remain a “China+1” also-ran in the global supply chain race.

Key Questions & Answers

1. Why is industrial policy back in vogue globally?
   Geopolitical tensions and supply chain shocks revealed the risks of over-reliance on rivals like China.

2. How successful is India’s PLI scheme?
   Mixed: boosted mobile exports but failed in semiconductors; only 8% of funds utilized.

3. What’s the biggest hurdle to India’s manufacturing growth?
   Logistics costs (14% of GDP) and skilled labor shortages.

4. Can India replicate China’s manufacturing model?
   Not without decades of focused R&D, labor reforms, and state-backed scaling.

5. What’s the alternative to industrial policy?
   Continued dependence on China, risking economic and national security.