From Protected to Promoted, Reimagining India’s Industrial Philosophy in the Shadow of China

From Protected to Promoted, Reimagining India’s Industrial Philosophy in the Shadow of China

The recent recalibration of US tariffs on Indian goods to 18%, while providing welcome relief, has unveiled a more profound and enduring challenge. As economist Dhiraj Nayyar underscores, these tariffs—and indeed the broader global trend of trade barriers—have failed to stem the relentless tide of the Chinese export juggernaut, which posted a record $1.2 trillion surplus last year. For India, the symptom of this reality is a sobering record: a $116 billion trade deficit with China. The newly minted trade deals with the US and EU are doors of opportunity, but they are merely portals. To walk through them successfully and claim a significant share of global manufacturing, India must confront not just external market access, but its own internal economic philosophy. The core argument is compelling: India must undergo a fundamental mindset shift from an economic model centered on protection to one strategically designed for promotion. This requires dissecting China’s winning formula and courageously reforming the pillars of India’s own industrial ecosystem.

Decoding the Dragon: China’s 3S Strategy of Scale, Subsidies, and Skills

Nayyar identifies China’s dominance as resting on a powerful “3S” trinity, a formula that has evolved beyond the simplistic narrative of cheap labour.

1. Scale: China’s ambition has never been insular. It is designed from the ground up to capture global markets. This ambition dictates an industrial architecture of massive scale, which in turn delivers unassailable economies. Factories are built to serve the world, not just the province, allowing for unprecedented cost compression through volume. This scale is “non-negotiable” in China’s playbook and is embedded in everything from supply chain clustering to infrastructure planning.

2. Subsidies (Strategic State Support): Beijing’s industrial policy is a masterclass in targeted promotion. It provides critical inputs like free or subsidised land and power, along with sector-specific R&D funding and financial incentives. This support dramatically lowers the capital and operational cost of manufacturing, allowing Chinese firms to price aggressively in international markets. While many of these measures flout WTO norms, the weakening of the multilateral system post-Trump has allowed this model to thrive with limited challenge.

3. Skills (and Automation): The myth of China relying solely on cheap manual labour is long dead. As Apple CEO Tim Cook noted, Apple is in China for the depth and quality of its skilled workforce—the sheer number of tooling engineers, for instance. This human capital advantage is now being supercharged by a rapid deployment of robotics and automation, cementing a dual advantage of precision and cost that is exceedingly difficult to match.

India’s Crossroads: Protectionist Inheritance vs. Global Ambition

India’s current industrial stance is often a reactive posture of protection, a legacy of its post-independence, import-substitution ethos. This manifests in several key areas that clash directly with the requirements for global competitiveness:

• The Labour Conundrum: India possesses the demographic dividend of a young, abundant workforce. However, as Nayyar argues, the country’s “law and its political economy are geared towards protection of labour; rather than promotion of employment.” Archaic and rigid labour laws, despite recent reforms, continue to discourage formal job creation at scale. They incentivize capital-intensive production (which is less affected by labour regulations) over labour-intensive manufacturing, precisely the sector where India could absorb millions and compete. The mindset prioritizes safeguarding existing formal jobs over creating new ones, stifling the very advantage of a large workforce.

• The Romance of the Small: India has a deep-seated political and policy “romance” with the Micro, Small, and Medium Enterprise (MSME) sector. Historically, incentives were structured to encourage firms to remain small to retain benefits. The result is a sector where the overwhelming majority are micro-enterprises, not even small or medium. While vital for local employment, these entities lack the scale, technology, and financial muscle to compete on global quality, price, or reliability. A fear of large-scale industrial units persists, conflating bigness with monopolistic exploitation, without appreciating that in a globally integrated market, true competition comes from imports, not just domestic rivals.

• Industrial Policy as Tariff Walls: For decades, India’s primary industrial policy tool has been the tariff wall. As Nayyar notes, average weighted tariffs have doubled in the last decade. Yet, the share of manufacturing in GDP has stagnated. This is stark evidence that protection does not automatically foster globally competitive promotion. High tariffs shield inefficient domestic producers from international competition, removing the incentive to innovate, improve quality, or reduce costs. They create a comfortable, captive domestic market but produce industries that wither when exposed to global winds.

The Blueprint for Promotion: Building a 3S Ecosystem in India

Transitioning to a promotion-oriented model requires a pragmatic, multi-pronged strategy that adapts China’s 3S formula to India’s democratic context.

1. Fostering Scale: From MSMEs to MEs and Beyond

   • Policy must actively incentivize growth and consolidation. Tax benefits and access to credit should be tied to graduation thresholds, encouraging micro-enterprises to become small, small to become medium, and medium to become large.

   • Embrace scale as a virtue, ensuring it is coupled with vigorous competition policy and open markets. The fear of monopolies is mitigated when domestic scale is benchmarked against global giants.

   • The Production Linked Incentive (PLI) scheme in electronics, highlighted as an exception, provides a template. It is promotion-focused: it rewards output and scale, not mere existence behind a tariff wall. This model must be expanded and refined for other strategic sectors.

2. Reimagining Subsidies and State Support: Creating Competitive Ecosystems

   • A democratic India cannot, and arguably should not, replicate China’s blank-cheque subsidies. However, it can create ecosystems that drastically reduce the cost of doing business.

   • Land & Power: The state can act as an aggregator and facilitator, creating land banks with clear titles and providing it at reasonable, long-lease rates. For power, it can enable access to affordable, high-quality electricity through dedicated industrial corridors with green energy options, rather than direct subsidies.

   • Regulatory Friction as a Cost: One of the most significant hidden subsidies a state can provide is speed and predictability. Implementing “deemed approval” clauses, robust single-window systems with accountability, and self-certification regimes can cut the massive cost of delays and bureaucratic entanglement, a form of indirect promotion more valuable than many financial incentives.

3. Cultivating Skills and Societal Shift:

   • India’s education system and societal preferences are skewed heavily towards white-collar degrees. To build a manufacturing powerhouse, this must change.

   • Dignifying Skills: A national campaign to elevate the status of skilled technicians, engineers, and operators is needed. As Nayyar suggests, formal skills qualifications should be made equivalent to university degrees for public employment and societal recognition.

   • Industry-Linked Training: Scaling up apprenticeships and vocational training directly tied to the needs of the promoted sectors (like the proposed rare earth corridors or electronics clusters) is essential. The goal is to create India’s own army of “tooling engineers” and high-skilled operators.

Conclusion: The Choice of a Generation

The record trade deficit with China is not just a number; it is a report card on economic strategy. The new trade deals with the US and EU offer a historic window, but windows close. To walk through them, India must shed the defensive crouch of protectionism.

The path forward is clear: embrace promotion-driven industrial policy that champions scale, systematically lowers the cost of competitive manufacturing through smart state support, and cultivates a skilled workforce with societal pride. This means making tough political choices—liberalizing labour markets not to exploit workers, but to create millions of new formal jobs; encouraging firms to grow large enough to compete globally; and replacing tariff walls with quality and efficiency benchmarks.

India aspires to be a leading player on the world stage. That status cannot be claimed by protecting a domestic market; it must be earned by promoting globally competitive industries that export to the world. The choice is between protecting the past and promoting the future. For India’s economic sovereignty and the employment destiny of its youth, the promotion of a vibrant, global manufacturing sector is no longer just an option—it is an imperative.

Q&A: Shifting India’s Industrial Model from Protection to Promotion

Q1: According to the analysis, why have global tariffs (like Trump’s) failed to curb China’s export dominance?
A1: Tariffs have failed because China’s dominance is built on a deeply entrenched “3S” ecosystem—Scale, Subsidies, and Skills—that allows it to absorb or bypass tariff pressures. China has found alternate markets (e.g., in Europe) and alternate routes to tariff-imposing markets like the US. Its massive scale provides cost advantages, state subsidies lower production costs, and a highly skilled workforce (now augmented by robotics) ensures quality and efficiency, making its exports resilient to mere price-based trade barriers.

Q2: What is the fundamental philosophical shift India needs to make in its economic approach?
A2: India needs to shift from an economic philosophy centered on protection to one strategically designed for promotion. This means moving away from:

• Protecting existing, often inefficient, industries via high tariffs.

• Protecting a small base of formal labour through rigid laws that discourage new hiring.

• Romantically protecting micro-enterprises in their smallness.
  Instead, the focus must be on promoting global competitiveness by encouraging scale, providing smart state support to reduce business costs, and actively promoting skill development and job creation for a global market.

Q3: How does India’s approach to labour and MSMEs currently hinder its manufacturing competitiveness?
A3:

• Labour: Laws are designed for protection of existing labour rights, making formal hiring rigid and risky for employers. This discourages job creation, pushes industries towards capital-intensive (rather than job-intensive) models, and nullifies India’s advantage of abundant cheap labour.

• MSMEs: Policy has historically incentivized firms to remain small to retain benefits. This results in a sector dominated by micro-enterprises that lack the scale, technology, and financial strength to be globally competitive. A fear of large-scale industrial units persists, preventing the emergence of national champions capable of exporting at scale.

Q4: What lessons can India learn from China’s “3S” strategy, adapted to its democratic context?
A4: India can adapt the 3S strategy as follows:

• Scale: Actively promote the growth and consolidation of MSMEs into larger, more competitive units through growth-linked incentives, and embrace scale as necessary for global competition.

• Subsidies (Reimagined): Instead of direct, WTO-problematic subsidies, focus on creating competitive ecosystems—facilitating affordable land banks, ensuring reliable and reasonably priced power, and most crucially, reducing the “subsidy of speed” by implementing deemed approvals and cutting bureaucratic delays.

• Skills: Launch a national mission to dignify skilled trades, making vocational qualifications equivalent to academic degrees for recognition and employment. Foster industry-linked apprenticeship models to build a deep pool of tooling engineers and high-skilled technicians.

Q5: What is the one existing Indian policy cited as a positive example of the “promotion” model, and why?
A5: The Production Linked Incentive (PLI) scheme for electronics is cited as a positive exception. Unlike protectionist tariffs, the PLI is a promotion-focused policy. It does not simply shield domestic producers from imports. Instead, it provides financial incentives linked to achieving scale and incremental production (output). This rewards competitive performance and growth, encouraging firms to build capacity aimed at serving global markets, which aligns with the goal of creating globally competitive manufacturing.