End of easy globalisation: India must rethink its manufacturing playbook

Policy must now assume depoliticised global trade is over, with US-led politicisation meaning no country treats globalisation as an end

Over the past few weeks, policymakers in India have had to cope with the economic impact of the West Asia war, particularly on oil and gas availability and prices. The ceasefire softened this impact, but the failure of dialogue between the United States (US) and Iran has revived these adverse effects.

 

The US’ withdrawal from cooperation with allies and from the standards set out in the United Nations (UN) Charter signals that inter-state relations are entering a new phase — one based more on power than cooperation. This adverse transformation of the global trade, finance, and economic system runs much deeper than the immediate challenges posed by the West Asian war.

 

We have experienced this in the behaviour of the Trump administration in global economic relations. At risk is the free and depoliticised flow of trade and finance that has benefitted emerging economies over the past four decades. This pattern was threatened by the global financial crisis in 2008, the growing concern in the developed world about the rising strength of emerging developing countries, particularly China, and its impact on employment in the developed countries.

 

The big change has been the explicit politicisation of trade policy by the US. Its impact on global supply chain investments will weaken corporate linkages across countries, as pressure from the federal government to reshore production increases and constraints are imposed on which countries firms can trade with and invest in.

 

As the influential American writer Francis Fukuyama said recently: “There has never been a time when the United States was more distrusted, by both traditional friends and by rivals, as at the present.”  In fact, in a variety of ways, the US has become the Unreliable State of America.

 

There is another dimension of emerging constraint that needs to be understood and considered in development policy in India. China is best seen not just as an emerging economy but as a manufacturing powerhouse that accounts for 27-29 per cent of global manufacturing production and around 20 per cent of global manufacturing trade. It has also demonstrated a willingness to use its domination of production and trade in certain areas, such as rare earths, as a tool in its political relationships with major states.

 

Our policy must now assume that the de facto depoliticisation of inter-country trade and finance relations has ended, and that with the heavy politicisation of trade by the US, no country is pursuing globalisation as an end. All are focusing on prioritising their people and enterprises. Going forward, countries are likely to emphasise bilateral and regional trade agreements, as well as government policies aimed at protecting key industries. This is already a part of India’s policy framework.

 

When it comes to finance, the imposition of direct controls has not occurred, and the precautions that we experience are more because of concerns about the views of national governments, particularly in the US. However, there is a body of argument in the US and in some countries in Europe that the free movement of capital has contributed to the hollowing out of industry. Hence, foreign direct investment (FDI) and foreign institutional investor (FII) flows will become more constrained.

 

All these developments require substantial policy changes.  This has been elaborated very well in Chapter 16 of the Economic Survey 2025-26 (ES 25-26). It says: “In a world marked by geopolitical fragmentation, contested trade, volatile capital flows, and rapid technological shifts, growth by itself is no longer the binding constraint. What increasingly differentiates countries that merely absorb shocks from those that shape outcomes is the depth and quality of their state capacity.”

 

Let me focus on the industrial policy changes that we require to cope with the threats to global trade from the possible continuation of the West Asian war and the rise of mercantilism in the US and some other states. But this policy change is also required to correct the inadequate growth in manufacturing production, whose share in national gross value added at current prices has declined from 17.4 per cent in 2011-12 to 14.1 per cent in 2025-26.

 

The most important requirement is a more strategic orientation of manufacturing policy. The global politicisation of trade requires us to focus our import substitution policies sharply on products that are critical and whose imported inputs are liable to political controls by supplying countries.  This may also be worth doing for industries that have the potential to become dominant in global markets.

 

In fact, strategic import substitution does not necessarily work against export promotion.  For instance, if a policy assessment leads to incentives for greater domestic production of Active Pharmaceutical Ingredients (API), whose imports at present are about ₹39,000 crore, mostly from China, this domestication of API availability may actually boost pharmaceutical exports, which are a major component of our manufacturing exports.

 

In fact, an important objective of our industrial policy has to be to enable manufacturing to rise to a globally competitive level and for its exports to increase from about 2 per cent of global manufacturing exports to something closer to China’s share of 20 per cent. This will reduce the current account deficit and make us less dependent on inflows of foreign finance.

 

Raising tariffs to promote domestic production of critical input requirements is not sufficient.  We need to move our private and public corporations more firmly into becoming enterprises that place a higher priority on being more focussed on being technology innovators and global competitors.  The key requirement here is for policy to emphasise substantially higher spending on research & development (R&D) by larger manufacturing establishments. 

 

At present, India’s R&D spending as a percentage of gross domestic product is about one-fourth of China’s. Since China’s GDP is four times higher than India’s, this implies that in absolute terms, India’s

 

R&D spending is one-sixteenth of that of China. But the most critical difference is that In India only about 35 per cent of the national R& D is done by the commercial non-government sector, while in China this sector accounts for about 75 per cent .  This is one important reason for the sharp difference in the size, evolution, and global role of the manufacturing sector between India and China. Hence, a policy that pushes the private sector, mainly in manufacturing, towards much more committed R&D is an essential part of the change that we need.

 

The most important policy change we require is to shift the policy priority of corporations away from focusing on relations with politicians and the administration towards standing in global competitiveness. If we do this, manufacturing production will move closer to the long-standing target of 25 per cent of GDP, become more dynamic in a global context, and more technologically independent.

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desaind@icloud.com