opinion | India needs to boost production. Here’s how to do it.

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Dhiraj Nayyar is Director of Economics and Policy at Vedanta Resources.

If the Indian economy has an Achilles heel, it is the country’s manufacturing sector. Despite rapid economic growth since the start of free-market reforms in 1991, the manufacturing industry’s share of India’s gross domestic product has remained stubbornly low at around 15 percent. (In China, it’s been about 30 percent in recent years.) India’s growth has been fueled by services, most prominently in information technology.

The lack of a large, competitive manufacturing sector has consequences. One statistic more than any other captures the impact of an underdeveloped manufacturing sector: just over 40 percent of India’s total workforce is still employed in agriculture and related activities, which account for just 18 percent of GDP. Unlike advanced economies, India does not have an unemployment problem; instead it struggles with underemployment. In the absence of adequate social security, people cannot afford to lose their jobs and are forced to settle for low-productivity and poorly-paid agricultural jobs. Services have not been able to absorb this surplus of low-skilled labour. In fact, they have not done so in any country that has become rich.

After three decades of rapid growth raising public expectations, the call for quality jobs is growing louder. Ironically, China could help. Beijing’s strict “zero Covid” policy is significantly disrupting global supply chains. The recent shortage of iPhone accessories is just the most prominent example. China poses a greater risk to supply chains today than it has at any time during its rise to become the world’s factory over the past three decades. Xi Jinping’s consolidation of unchallenged control at the Chinese Communist Party Congress last month marks a clear break with the moderate era ushered in by Deng Xiaoping. Deepening authoritarianism in Beijing is leading to great unpredictability in the world’s second largest economy. The world watches with growing concern.

The problems don’t end here. For example, many critical supply chains outside of China are located in the neighboring East Asian region, where China has outsized influence. Over 80 percent of high-tech semiconductors are manufactured in just two locations: Taiwan and South Korea, both of which face constant threats from China and North Korea.

The US seems to have recognized the risks. Last month, the Biden administration announced a “technical war” against China by banning the export of semiconductor chips and the technology and equipment used to make them. US allies with access to similar expertise could follow suit. Given that the Trump administration has also cracked down on trade with China, it’s safe to assume that there is now a bipartisan consensus in the United States on the need to contain Beijing and diversify critical supply chains.

India is notorious for missing out on geopolitical opportunities – but this time could be different. Unlike his predecessors, most of whom hail from the agricultural heartland of northern India, Prime Minister Narendra Modi hails from the western coastal state of Gujarat, which has long prioritized industry. In Gujarat, manufacturing contributes 30 percent of the state’s GDP, a level comparable to that of China.

Having served as the state’s chief minister for almost 13 years before becoming prime minister, Modi is acutely aware of what it takes for manufacturing to thrive. Since becoming prime minister in 2014, Modi has sought to make life easier for businesses by cutting regulations and incentivizing bureaucrats to speed up approval processes. Now, in his second term, he is taking industrial policy one step further.

India’s long history of failed government intervention has made politicians suspicious of industrial policy. But in recent years, as production continues to lag behind, Modi has decided to step in. Its manufacturing-related incentive program is designed to reward domestic and foreign companies in 13 selected sectors, from automobiles to pharmaceuticals to advanced batteries. The aim is to ensure global competitiveness through a larger production scale. The program is expected to distribute approximately $25 billion to industry over four years.

The second is its semiconductor and display fab manufacturing program, which offers potential investors up to $10 billion in capital grants. (Disclosure: My company, Vedanta, applied for subsidies from this program as part of its investment in a semiconductor and display manufacturing joint venture with Taiwan’s Foxconn.) Interestingly, the subsidy program was announced before the Biden administration passed its Chips and Science Act earlier this year .

Modi’s takeover of industrial policy is a gamble – but it may be India’s best hope. Subsidies alone will not be enough. Success depends on the Indian manufacturing sector demonstrating its competitiveness in global markets. That will likely require a whole host of other structural reforms – a huge challenge in India’s vocal democracy, where a multitude of interest groups are making it difficult to remove safeguards and unproductive subsidies. This will require all of Modi’s considerable political skills (and possibly a third term from 2024).

But the country’s manufacturers have no time to waste. Currently, companies leaving China are looking for other options. India must do everything it can to ensure it is first choice.

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