From Resilience to Indispensability, Why India’s Industrial Policy Must Become a Springboard

From Resilience to Indispensability, Why India’s Industrial Policy Must Become a Springboard

Industrial policy is no longer just about growth; it is now inseparable from national security. From the COVID-19 pandemic to the Russia-Ukraine war, rising trade protectionism, and the US-Iran conflict, each has underscored how deeply geopolitics shapes economic outcomes. For India, the vulnerability is stark. Nearly half of its LPG imports pass through the Strait of Hormuz, a chokepoint exposed to escalating tensions. Brent crude has surged from around $70abarrelbeforetheconflicttowellover$100. Every $10increaseinoilpricesaddsanestimated$12-15 billion to India’s import bill, widening the current account deficit (CAD), weakening the rupee, and stoking inflation. India’s growth forecasts for 2026 have already been revised downward. The instinct such shocks trigger in governments is understandable: produce more at home and depend less on the world. In the short run, there are sectors like energy, fertilisers, and critical minerals where meeting demand through domestic production, particularly in renewable energy, is sensible and urgent. The Economic Survey’s idea of “strategic resilience”, which emphasises producing what a country cannot afford to be without, is a sound starting point. But if strategic resilience is the beginning of India’s industrial response, it cannot be the end.

The Deeper Lesson: India Doesn’t Export Enough

The deeper lesson of the Hormuz crisis is not merely that imports create dependencies, but also that India does not yet earn enough foreign exchange through exports to comfortably absorb external shocks. The real vulnerability is not that India imports too much; it is that it does not export enough to pay for those imports when crises hit.

Countries with strong export capabilities are better insulated from such volatility. South Korea, for instance, is as dependent on imported energy as India, yet its external position is structurally more resilient. Decades of export-oriented industrial policy have built manufacturing ecosystems that generate foreign exchange even as energy prices spike. India, by contrast, still has relatively modest manufacturing exports for an economy of its size and workforce needs. Its services exports, particularly in white-collar sectors like IT and business process outsourcing, also face rising uncertainty from technological disruptions such as artificial intelligence. AI is already displacing routine coding, customer support, and back-office work—the very segments where India has dominated global services trade.

In the long run, the answer to import dependence is not simply to import less, but to export more, especially goods. India’s share of global goods exports is around 1.8 per cent, far below China’s 14 per cent and even below Vietnam’s 1.5 per cent (Vietnam’s economy is one-tenth the size of India’s). This is not a marginal inadequacy; it is a structural failure.

From Strategic Resilience to Strategic Indispensability

This is where the Economic Survey’s ambition of “strategic indispensability” becomes a security imperative. The aim is not merely to substitute imports but to insert India into critical nodes of supply chains, making it an economy the world cannot easily bypass. An India that is indispensable to global electronics, green energy components, or advanced manufacturing will have a more resilient balance of payments and greater geopolitical leverage. It would also generate employment at scale and support more inclusive growth.

Being indispensable means that when a global shock occurs—whether a pandemic, a war, or a trade disruption—the world cannot simply route around India. It means that India is not just a market but a manufacturing hub, not just a consumer but a producer, not just a taker of global prices but a setter of them. This is a very different ambition from import substitution, which aims to reduce dependence on the world. Strategic indispensability aims to make the world dependent on India.

Structural Weaknesses: Inward-Looking, Protected, and Uncompetitive

The challenge, however, lies in confronting a long-standing structural weakness. India’s manufacturing sector has historically been inward-looking, protected, and insufficiently competitive. Firms have often found it easier to serve a captive domestic market than to meet the exacting standards of global buyers. R&D spending remains below 1 per cent of GDP. Participation in global value chains (GVCs) is shallow. Backward linkages—where firms import intermediate inputs to produce globally competitive exports—are far weaker than in East and Southeast Asian economies. As a result, export earnings have not kept pace with import dependence, and India has yet to build firms capable of competing at the technological frontier.

The political temptation, particularly in times of crisis, is to double down on protection and insulation from global competition. This path is seductive but ultimately defeating. It risks recreating the inefficiencies of the Licence Raj—a business environment in which entry, competition, and exit are constrained, and firms are shielded rather than strengthened. Industrial policy cannot succeed if it protects firms from competition instead of preparing them for it. Without competitive discipline, it risks becoming industrial patronage.

India’s experience with the production-linked incentive (PLI) schemes illustrates both the promise and the peril. In sectors like mobile phones, electronics, and pharmaceuticals, PLI has attracted investment and boosted production. But many PLI schemes have also been criticised for favouring large incumbents, lacking transparency in performance measurement, and failing to create backward linkages. Some have simply subsidised what firms would have done anyway.

The Fiscal Constraint: Industrial Subsidies Must Deliver Value

There is an additional constraint. Energy shocks are not just trade shocks; they are fiscal ones. A widening CAD, a weaker rupee, and rising inflation, combined with the need to cushion households and industry, limit the government’s fiscal space. In such conditions, industrial subsidies must deliver more value. The opportunity cost of poorly allocated public support is too high to ignore.

India’s fiscal deficit is already under pressure. The government has cut excise duties on petrol and diesel to shield consumers, but this has reduced revenue. It has hiked export duties on diesel and ATF to ensure domestic supply, but this has reduced export earnings. It has provided subsidies for fertilisers, food, and electricity. Every rupee spent on an inefficient industrial subsidy is a rupee not spent on health, education, or infrastructure.

This is fundamentally a design problem. India’s industrial policy must combine incentives with accountability and performance.

Learning from China: The “Little Giants” Programme

China’s “Little Giants” programme offers one useful template. Launched in 2018, it provides tiered support to small and medium enterprises (SMEs) based on measurable improvements in productivity and innovation. Firms are evaluated periodically and rewarded or penalised accordingly. The result is a dynamic pool of enterprises that are both competitive and capable of moving up the value chain.

The programme is not a handout; it is a performance-based contract. A firm that meets its targets receives continued support, market access, and technical assistance. A firm that fails is dropped. This creates a powerful incentive for firms to invest in R&D, upgrade technology, and expand exports. China has over 10,000 “Little Giants” in sectors ranging from robotics to renewable energy to advanced materials. Many are now global leaders in their niches.

India need not replicate this model wholesale. There are valid questions about when to support domestic firms and when to anchor global players, as seen in the role of companies like Apple in driving India’s smartphone exports. Apple’s contract manufacturers (Foxconn, Wistron, Pegatron) have created hundreds of thousands of jobs in India and boosted electronics exports from nearly zero to over $20 billion in a decade. But Apple’s presence is not a substitute for building indigenous capability. The iPhones assembled in India are largely assembled, not designed or manufactured indigenously.

Design Principles for India’s Industrial Policy

The broader principle is clear: public support must be linked to performance, and industrial policy must create incentives for firms to compete, innovate, and scale. India should adopt the following design principles:

1. Performance-based support: Subsidies, tax breaks, and other incentives should be conditional on measurable outcomes: export growth, R&D spending, patent filings, employment generation, and quality improvements. Firms that meet targets receive continued support; firms that fail are cut off.

2. Sunset clauses: No subsidy should be permanent. Incentives should be time-bound, with automatic expiration unless renewed based on performance. This prevents the creation of perpetual rent-seeking.

3. Transparency and accountability: All industrial policy interventions should be publicly disclosed, with clear criteria, application processes, and evaluation results. An independent body should audit the schemes.

4. Focus on backward linkages: Incentives should be structured to encourage domestic value addition. A firm that imports components and assembles them for export should receive less support than a firm that manufactures components domestically.

5. Competition, not protection: Industrial policy should prepare firms for global competition, not shield them from it. This means supporting R&D, quality upgrading, and market access, not imposing tariffs or non-tariff barriers to keep out imports.

6. Leverage global anchors strategically: Use the presence of global firms like Apple, Samsung, and Tesla to build domestic supply chains. Mandate local sourcing requirements, but with realistic timelines and quality standards. Use technology transfer agreements.

Conclusion: A Springboard, Not a Shield

The Strait of Hormuz crisis will eventually pass. The structural challenge it has exposed will not. India’s journey from strategic resilience to strategic indispensability will depend on the quality of its industrial policy. In a world of recurring geopolitical shocks, resilience is not enough. Industrial policy cannot remain a shield; it must become a springboard.

A shielding industrial policy says: “Protect domestic firms from imports.” A springboard industrial policy says: “Prepare domestic firms to export.” A shielding policy looks inward; a springboard policy looks outward. A shielding policy fears globalisation; a springboard policy leverages it. India has tried shielding for most of its post-independence history—the Licence Raj, import substitution, high tariffs. It did not work. The country grew slowly, exports stagnated, and poverty persisted.

India has experimented with springboarding for the past three decades—liberalisation, integration with global supply chains, the IT services boom. It has worked. Growth has accelerated, exports have diversified, and poverty has declined. But the job is not done. India’s manufacturing exports are still too low. Its participation in global value chains is still too shallow. Its technological capabilities are still too limited.

The Hormuz crisis is a reminder that the world is dangerous and unpredictable. But the answer is not to retreat from the world; it is to compete more effectively within it. India must build the capacity to export its way out of crises, not just to import its way into them. That requires an industrial policy that is strategic, performance-driven, and globally oriented. It requires a shift from resilience to indispensability. The time to start is now.

Q&A: India’s Industrial Policy and Strategic Indispensability

Q1: The article argues that India’s real vulnerability is not that it imports too much, but that it does not export enough. Explain this argument.

A1: Countries with strong export capabilities are better insulated from external shocks because they earn foreign exchange to pay for essential imports. South Korea is as dependent on imported energy as India, yet its external position is structurally more resilient due to decades of export-oriented industrial policy. India’s manufacturing exports are modest for an economy of its size: its share of global goods exports is about 1.8 per cent, far below China’s 14 per cent and even below Vietnam’s 1.5 per cent (Vietnam’s economy is one-tenth the size of India’s). India’s services exports face rising uncertainty from AI displacing routine coding, customer support, and back-office work. The article states: “The real vulnerability is not that India imports too much; it is that it does not export enough to pay for those imports when crises hit.” Every $10increaseinoilpricesadds$12-15 billion to India’s import bill.

Q2: What is “strategic indispensability,” and how does it differ from “strategic resilience”?

A2: “Strategic resilience” (from the Economic Survey) emphasises producing what a country cannot afford to be without—import substitution for critical goods like energy, fertilisers, and minerals. “Strategic indispensability” goes further: it aims to insert India into critical nodes of global supply chains, making it an economy the world cannot easily bypass. An indispensable India would be a manufacturing hub for global electronics, green energy components, and advanced manufacturing, giving it greater geopolitical leverage and a more resilient balance of payments. The article states: “Being indispensable means that when a global shock occurs, the world cannot simply route around India.” While resilience aims to reduce dependence on the world, indispensability aims to make the world dependent on India.

Q3: What are India’s long-standing structural weaknesses in manufacturing, as identified in the article?

A3: India’s manufacturing sector has historically been:

• Inward-looking, protected, and insufficiently competitive: Firms have found it easier to serve a captive domestic market than to meet global standards.

• Low R&D spending: Below 1 per cent of GDP, far behind China (2.4 per cent) and South Korea (4.8 per cent).

• Shallow participation in global value chains (GVCs): Backward linkages (importing intermediates to produce competitive exports) are far weaker than in East and Southeast Asian economies.

• Lack of firms at the technological frontier: India has not built firms capable of competing in advanced manufacturing, semiconductors, AI hardware, or biotech.
  The article warns that the political temptation is to double down on protection, risking a return to the inefficiencies of the Licence Raj, where firms are “shielded rather than strengthened.”

Q4: What is China’s “Little Giants” programme, and what lessons can India learn from it?

A4: China’s “Little Giants” programme (launched in 2018) provides tiered support to SMEs based on measurable improvements in productivity and innovation. Firms are evaluated periodically and rewarded or penalised accordingly. The result is a dynamic pool of enterprises that are competitive and capable of moving up the value chain. China has over 10,000 “Little Giants” in robotics, renewable energy, and advanced materials. The lesson for India is that public support must be linked to performance. India need not replicate the model wholesale, but the principle is clear: industrial policy must create incentives for firms to “compete, innovate, and scale.” The article notes that India’s PLI schemes have had mixed results—attracting investment but often lacking transparency and failing to create backward linkages.

Q5: What design principles for India’s industrial policy does the article recommend?

A5: The article recommends six design principles:

1. Performance-based support: Subsidies conditional on measurable outcomes (export growth, R&D spending, patent filings, employment).

2. Sunset clauses: No permanent subsidies; incentives should be time-bound with automatic expiration unless renewed based on performance.

3. Transparency and accountability: Public disclosure of criteria, applications, and evaluations; independent auditing.

4. Focus on backward linkages: Incentives structured to encourage domestic value addition, not just assembly.

5. Competition, not protection: Prepare firms for global competition through R&D, quality upgrading, and market access, not tariffs or import barriers.

6. Leverage global anchors strategically: Use presence of firms like Apple, Samsung, and Tesla to build domestic supply chains with local sourcing mandates and technology transfer agreements.
   The article concludes that industrial policy must transition from a “shield” (protecting domestic firms) to a “springboard” (preparing them to export). “India’s journey from strategic resilience to strategic indispensability will depend on the quality of its industrial policy. In a world of recurring geopolitical shocks, resilience is not enough. Industrial policy cannot remain a shield; it must become a springboard.” The Hormuz crisis will pass, but the structural challenge it exposed will not. The time to start is now.