Challenges in the Return of Industrial Policy

Discussions on the return of industrial policy, with suitable adaptations to the changing global econo­mic scenario, have surfaced recently. This is fuelled primarily by the disruptions in economic activity due to the COVID-19 pandemic and the exogenous shocks driven by uncertainties and disruptions in supply chains. The push by the United States (US) administration to support the manufacturing sector through a new industrial policy and the implementation of the performance-linked incentive scheme (PLIS) by the Indian government in specific sectors, are both clear signals of the return of industrial policy aimed to design contemporary strategies to support the firms to enhance economic performance. This resurgence of industrial policy as a tool to arrest the effects of exogenous shocks has two objectives: enhance the pace of economic activity at the national level and implant mechanisms to impart resilience to the industrial sector. The latter is to make sure that economies can shield themselves from exogenous shocks which have persisting and debilitating effects on economic growth.

The re-emergence of industrial policy as a vehicle to drive economic performance raises important issues on its essential elements, which are required to endow it with the necessary credibility to address the problems of economic growth. Further, the emphasis on imparting resilience to supply chains runs the risk of “turning inwards” and increas­ed protectionism leading to decoupling from production networks. Given this setting, we trace the trajectory of some important discussions around industrial policy to locate its relevance for the present as well as future. In our view, this return of industrial policy is also the return of classical approaches to understanding the role of institutions in facilitating economic growth and the importance of state discipline in the arena of economic activity.