A background note can be accessed here: IMF: Asia’s Industrial Policy Push Shows Limited Lasting Productivity Gains
India’s industrial-policy push has often sought to strengthen manufacturing competitiveness through cost advantages, while sustained productivity gains require firms to compete on product quality, technology and reliability. What policy conditions would enable Indian firms to move from competing primarily on cost towards competing on quality and technological performance?
Cost competitiveness remains important, particularly for labour-intensive manufacturing. However, sustained gains must increasingly rest on quality, reliability and technological capability. The World Bank’s 2022 Enterprise Survey for India highlights significant capability gaps, finding that only 7.7 percent of surveyed firms offered formal training, compared with 31 percent in lower-middle-income countries, while just 4.3 percent invested in research and development (R&D) and 5.8 percent introduced new products. These figures underscore the need to strengthen workforce skills and firms’ capacity for innovation.
Exposure to domestic and international competition, alongside predictable standards and targeted innovation support, is essential to ensure that Indian firms compete on quality and reliability rather than price alone. The ₹1 lakh crore Research, Development and Innovation scheme and the Anusandhan National Research Foundation are welcome, and their impact will depend on a supportive tax framework for R&D investment and stronger links between industry and research institutions. Credible quality standards, certification aligned with international standards and stronger quality-control systems are equally important, particularly in sectors such as pharmaceuticals and food products, where quality failures can undermine export markets and international confidence.
The government has taken important steps to strengthen infrastructure, logistics, and workforce capabilities. Initiatives such as Pradhan Mantri Gati Shakti and the National Logistics Policy, alongside investments in transport corridors, industrial infrastructure, and energy systems, can reduce input costs and improve delivery reliability. Skill India, apprenticeship programmes, and digital skilling platforms provide a foundation for workforce development. The next priority is to align these initiatives more closely with firms' technological and skill needs. Performance-linked incentives should reward measurable improvements in productivity, quality, export performance, and technological capability, rather than production volumes alone.
India seeks to move firms towards more sophisticated products and production processes, but also needs industrialisation to absorb a large and growing workforce. How should industrial policy balance the pursuit of productivity-enhancing, sophisticated production with the need to generate sufficient employment for workers moving out of low-productivity activities?
Productivity gains can lower unit costs, raise wages, expand output and generate new demand. The employment effects, however, depend partly on the balance between capital-intensive production and activities capable of absorbing large numbers of workers. Industrial policy should pursue technological upgrading alongside broad-based employment generation, assessing its success in terms of both productivity growth and employment outcomes. Fostering entrepreneurship is central to this process, as the expansion of productive enterprises can generate employment and accelerate structural transformation.
A balanced strategy should promote advanced manufacturing in areas where India can build technological strengths, while also supporting labour-intensive sectors such as textiles, garments, food processing, and beverages. Workforce skill development is essential to improve employability and support sector growth.
Skilling initiatives must move beyond conventional classroom-based programmes. Industry-linked apprenticeships, short modular courses, and local-language digital content can help workers acquire practical skills in machinery operation, maintenance, quality control, and production management. Accessible platforms such as YouTube can complement certified government training programmes. Training should also target entrepreneurs and supervisors to strengthen managerial capabilities and help small firms translate skills and capital investments into productivity gains. Practical guidance should enable workers moving out of agriculture and informal activities to identify manufacturing opportunities, operate equipment and establish enterprises.
The effectiveness of these efforts will also depend on whether firms can expand and create productive employment. The World Bank’s Enterprise Survey identifies access to finance, regulatory hurdles, infrastructure bottlenecks, informal-sector competition, and corruption as firms’ leading concerns. Improving credit availability, land access, electricity reliability, logistics infrastructure, and regulatory transparency through digitisation is essential for enabling firms to expand.
The IMF finds that an increasing share of targeted products face several policy interventions simultaneously, with the possibility that measures reinforce each other, duplicate support or impose costs on downstream producers. How should India assess the combined effect of multiple industrial-policy instruments directed at the same product or sector rather than evaluating each intervention in isolation?
When a product or sector is subject to tariffs, subsidies, quality control orders, export incentives, and credit support simultaneously, these measures can reinforce one another, duplicate support, or increase costs for downstream producers. Policymakers should therefore evaluate industrial policy as a comprehensive package at the product, sector, and value chain levels, rather than reviewing each intervention separately.
To do this, it is important to map out all central and state interventions, study how they interact, and, where possible, estimate their overall impact. Reviews should examine the combined effects of these measures on investment, employment and productivity, including whether their benefits outweigh their fiscal and economic costs. They should also assess whether policy support raises input costs, creates conflicting incentives or weakens the competitiveness of downstream industries.
Strengthening the government's institutional capacity for monitoring and evaluation is essential to this process. Better coordination among ministries and departments can help identify overlapping schemes, conflicting incentives, and implementation gaps. PM Gati Shakti offers a relevant example of integrated planning across ministries and states to improve infrastructure connectivity and reduce fragmented implementation. Similar coordination mechanisms could support the evaluation of industrial policies. Collaboration with academia and the consulting industry would further strengthen assessments through independent analysis, sectoral expertise and firm-level evidence. The objective should be to ensure that industrial policy delivers additional investment and productivity gains while minimising fiscal waste, policy duplication and adverse effects on economy-wide competitiveness.