Industrial Policy and the Global South: India in a Fragmented World

The world’s major economies are no longer competing on the same terms they were five years ago. Semiconductor access has become a diplomatic instrument. Mineral export controls are now a retaliatory weapon. Carbon policy is reshaping trade flows in ways that trade negotiators have not yet fully absorbed. India’s 2026–27 Budget lands in this environment — and what makes it worth reading carefully is not any single line item, but the aggregate logic: a state making deliberate, if imperfectly coordinated, choices about where it intends to sit when the current structural reordering settles.

Advanced economies have reintroduced industrial strategy through legislation and subsidy regimes. The United States has prioritised semiconductor manufacturing. The European Union has integrated climate policy with trade instruments. China continues state-coordinated technological expansion. The ideological settlement that governed trade policy for three decades — comparative advantage, minimal intervention, market-determined production location — has not been formally abandoned. It has simply ceased to describe what the major economies are actually doing.

India’s approach differs in form. Rather than direct state ownership, it relies on Production Linked Incentive schemes, sector-specific incentives and public capital expenditure to crowd in private investment. Programmes include Semiconductor Mission 2.0, rare earth corridor development, electronics component expansion and biopharma initiatives. These instruments aim to deepen value capture without displacing market mechanisms. The objective, as stated across policy documents, is resilience rather than autarky. The practical difference between those two objectives, under sustained external pressure, may be narrower than the rhetoric suggests.

Semiconductors underpin digital infrastructure, defence systems and advanced manufacturing. India’s semiconductor initiative seeks to develop fabrication capacity, supply chain ecosystems and skilled labour pipelines. The budget’s semiconductor and display ecosystem allocation of ₹8,000 crore, alongside the launch of ISM 2.0 at ₹1,000 crore, extends the policy lens from fabrication attraction to equipment manufacturing, materials, full-stack intellectual property and supply chain resilience. This is a material shift in design logic.

Talent development is central. Expansion of technical training and university-linked manufacturing zones signals recognition that fabrication is as much a human capital challenge as an investment one. The semiconductor laboratory at Mohali, whose capital allocation rises from ₹20 crore to ₹900 crore in this budget, and the Design Linked Incentive scheme — supporting 24 design startups and approximately 67,000 students in chip design tools — represent the early architecture of a domestic capability pipeline. India enters a sector historically concentrated in East Asia and the United States. Success would diversify global production geography. Failure would reinforce existing concentration. Execution will determine outcome.

Rare earth development in states such as Odisha, Kerala, Andhra Pradesh and Tamil Nadu reflects awareness of upstream vulnerabilities in global supply chains. China remains dominant in rare earth processing — not merely extraction, but the refining, separation and alloying that transforms ore into usable industrial inputs. India’s rare earth reserves are among the world’s largest, yet processing capacity remains constrained by technical requirements and regulatory complexity.

The urgency of this agenda has sharpened materially since 2023. China’s Ministry of Commerce imposed export licensing controls on gallium and germanium in August 2023 — both critical inputs for compound semiconductors, LEDs and defence radar systems — followed by graphite export licensing requirements in December 2023, and antimony restrictions in September 2024. In December 2024, China announced an outright ban on gallium, germanium and antimony exports to the United States. In April 2025, controls were extended to seven rare earth elements. This is a sequenced, escalating programme of mineral statecraft, not a series of isolated retaliatory gestures. For India, whose semiconductor and defence electronics ambitions both depend on secure upstream access, reducing exposure to Chinese processing dominance is no longer a medium-term policy preference. It is an immediate operational requirement.

India’s current objective is correctly calibrated as incremental: develop sufficient domestic processing capacity to reduce dependency for strategic applications, rather than attempt to displace incumbents in commercial markets. The challenge lies in processing capacity, environmental compliance and commercial viability. Optionality is the achievable objective — and in the current environment, optionality is worth considerably more than it was three years ago.

Public capital expenditure has increased substantially, supporting freight corridors, logistics integration, ports and urban industrial zones. This investment serves multiple purposes simultaneously: reducing transaction costs, improving export competitiveness and attracting supply chain relocation decisions by manufacturers seeking alternatives to concentrated production geographies.

In a world of selective globalisation — where supply chains are being reorganised around political trust as much as economic efficiency — logistics performance is a strategic variable. A manufacturer evaluating production location is not simply comparing wages. They are comparing end-to-end cycle times, regulatory predictability, power reliability and port connectivity. Whether infrastructure translates into manufacturing scale depends on complementary reforms in land, labour and regulatory consistency. Physical infrastructure without institutional infrastructure produces corridors that underperform their investment.

The European Union’s Carbon Border Adjustment Mechanism enters its definitive phase in 2026. Embedded emissions in steel, aluminium, fertilisers, cement and electricity will carry an explicit carbon cost at point of import into the EU. For Indian exporters in these categories, the mechanism introduces a structural cost that will grow annually as EU carbon prices rise and free allocation to domestic producers phases out by 2034.

India’s industrial strategy must therefore integrate energy transition and carbon management. Carbon pricing frameworks and green industrial standards are becoming competitive requirements rather than environmental add-ons. Industrial policy now intersects with regulatory compliance in ways the current budget does not yet fully address. Firms that decarbonise will access EU markets on competitive terms. Those that do not will face incremental cost disadvantage that compounds annually. This is a market access condition, not a voluntary commitment.

India positions itself as a leading voice among developing economies — and the claim is not without substance. Its G20 presidency in 2023 placed Global South debt, climate finance and technology access on the agenda of an institution historically shaped by OECD priorities. Its BRICS membership and non-alignment tradition give it diplomatic room to manoeuvre between competing bloc alignments that few countries at its scale can exercise. This is genuine strategic optionality, and it is being actively deployed.

But optionality is only as valuable as what it enables. The industrial trajectory India is now pursuing is being watched closely by economies that face structurally similar questions with far less fiscal space to answer them. In Sri Lanka, the post-2022 debt restructuring has compressed public investment to the point where any industrial policy requires external partnership rather than domestic capital — and India is the nearest large economy with a functioning PLI model to examine. In Mauritius, an economy whose services-led growth model is under structural pressure from digital competition and OECD tax transparency requirements, the question of how to deepen manufacturing without fiscal destabilisation is not abstract. In East African economies including Kenya and Tanzania, the relationship between infrastructure investment and manufacturing attraction — the precise linkage India’s GatiShakti programme is attempting to establish — is being watched as a potential template. None of these economies can replicate India’s scale. All of them are asking variants of the same policy question: how much can the state intervene, on what instruments, for how long, without triggering fiscal instability or market distortion?

India’s credibility as a reference point depends entirely on demonstrable outcomes, not diplomatic positioning. Employment generation at scale, export diversification beyond assembly, technological depth, and institutional durability through electoral cycles — these are the metrics by which the model will be evaluated by the audience that actually matters here: finance ministries and development planners in economies where the policy choices of the next decade will determine whether manufacturing becomes a genuine engine of structural transformation or another decade of deferred industrialisation.

China remains the principal structural competitor in manufacturing scale and mineral processing. Competitive pressures may include price adjustment, trade alignment and export controls on critical minerals. Industrial competition is therefore embedded within broader geopolitical dynamics that extend beyond commercial market logic.

India’s comparative advantages include demographic scale, services integration and strategic partnerships that give it room to manoeuvre between competing bloc alignments. Its constraints include infrastructure execution pace, the cost and timeline of energy transition, and uneven social protection coverage across the formal and informal workforce. Industrial expansion must operate within these limits. Advantages not converted into productive capacity within the next decade may not be available on the same terms thereafter.

Industrial strategy interacts with labour markets, education quality and health systems. Manufacturing depth requires skilled labour. Supply chain reliability requires institutional predictability. Export credibility requires regulatory stability across electoral cycles. These are not soft complements to industrial policy. They are prerequisites for sustained competitiveness.

Industrial ambition that outpaces institutional capacity creates fragility. Sustained positioning requires alignment between capital allocation, social policy and execution capability. The budget cycle signals intent. Institutional alignment determines whether intent converts into durable industrial capacity or into a series of well-designed programmes that run below their potential.

India’s industrial strategy reflects a serious and largely coherent reading of the structural conditions of the current global economy. Infrastructure expansion, technological ambition and fiscal discipline form its core. The approach aligns incentive design with the principal structural pressures of supply chain reorganisation, technology securitisation and carbon-linked trade access. The direction is correct. The calibration questions — semiconductor depth versus assembly scale, energy transition pace versus manufacturing cost, social investment timing versus fiscal consolidation — are genuinely difficult and will not be resolved in a single budget cycle.

Whether this approach reshapes global production geography will depend less on policy announcement and more on administrative throughput, capital absorption and sustained competitiveness over time. By 2030, the observable tests will be clear enough to assess. Is India’s first domestically fabricated semiconductor chip commercially produced, or has the programme produced another generation of assembly-adjacent activity with imported materials? Has the electronics trade deficit narrowed in ratio terms, or has assembly growth simply pulled more component imports in its wake? Have PLI schemes generated formal employment at the absorption rate the demographic window requires, or have capital-intensive incentives produced output growth without proportionate job creation? Has CBAM exposure prompted systematic industrial decarbonisation, or has it been treated as a European compliance problem rather than a structural market condition?

These are not hostile questions. They are the questions any honest assessment of a serious industrial strategy must pose before it can be declared durable. Industrial policy in this era is not an ideological statement. It is a structural response to uncertainty. The budget is the statement of intent. The decade ahead is the examination.