Indian industry must wake up to new order

The shift from a rules-based world order to an increasingly transactional paradigm means there are major threats for business-as-usual

After the new US Administration took office in 2025, the policies announced signalled that the old global economic order had ruptured. The post-World War II system — built broadly around comparative advantage, multilateral trade rules and institutions such as the WTO — gave way to a more transactional world of beggar thy neighbour and might is right.

Indian industry must shed its complacence and spend more in research and development. (Getty Images)

Within months, several assumptions underpinning the global order were broken. Tariffs were weaponised. Industrial installed capacity was weaponised. Access to critical minerals, large language models, and semiconductors was curtailed. Wars disrupted energy supplies, shipping routes, and supply chains. Economic security and national security became inseparable. Sanctions could be imposed or withdrawn as part of transactional deal-making. The distinction between allies and adversaries blurred. The new sources of power were increasingly clear: economic and military might, nuclear capability, control over critical raw materials and technologies, and influence over dollar-based payment systems.

Indian industry better wake up — there is a major threat for “business as usual” and an extraordinary opportunity for those that can pivot.

First, a short historical tour. India’s economic policy adopted at Independence created a fair degree of path dependency. India’s growth model was highly impacted by the fact, that it along with just another 20 countries, offered its citizens universal adult franchise in 1947. As with all democracies, its polity had to be very responsive to the electorate. So, the voter demanded and obtained subsidies, support prices, and welfare payments. These were provided by the government. Not only that, in return for offering egregious amounts of protection (over 130%) industry was forced to cross subsidise the voter, subsidising rail travel, power, and capital costs. High tariff walls led to poor quality, little need for research and development investments as the Indian consumer was captive and created export pessimism.

Jawaharlal Nehru’s policy to see the State occupy the “commanding heights” in the economy devolved by 1970 into a full-fledged Licence Raj, where government approvals were required for production levels, product lines, and capacity expansion. The State also entered most sectors — banking, insurance, oil and gas, steel, coal, telecommunications, power generation and distribution. So much so that public sector companies ran hotels and made bread. This led to all the expected inefficiencies, low growth rates, fiscal profligacy, leading ultimately to the balance of payments crisis in 1990.

The economic reforms that were necessitated in 1991 removed many of the worst distortions, devalued the rupee, lowered tariffs and freed prices, and removed some arcane regulations. But the economy remained protected, heavily regulated with a high degree of State control. Infrastructure with increased growth became a big constraint. Post 2000, what did grow were services exports and non-resident Indian remittances. This allowed us to run a modest (1.5% of GDP) current account deficit on account of oil, gas, and gold with which the policy establishment got comfortable. These reforms changed the growth trajectory of the economy to an impressive 6.5% per annum but not the essential model.

Government actions post 2014 recognised that the massive gaps in infrastructure were strangulating the economy and boosted infrastructure spending. The decade 2014-24 saw the creation of 60 000 km of roads, 100 airports, 210 GW of additional power generation, increases in rail and port capacity, 35 million low-cost homes, and a palpably stronger domestic business environment. The passage of the Goods and Service Tax and Insolvency and Bankruptcy Act further boosted the underlying momentum of the economy. Also noteworthy was the wide deployment of Aadhaar, growth in mobile penetration, and the development of a world beating digital technology stack. Together they transformed communications, payments and financial inclusion.

Despite all of this, the basic economic model has not changed. Tariff protection for industry remains high, the establishment is comfortable with a modest current account deficit, domestic goods continue to lack global quality, R&D spending is abysmal, and Indian business has grown by serving the domestic consumer. Unsurprisingly, no global brands developed, and manufacturing share of GDP further declined. Yet, even with this model, India was the world’s third best performing economy over three decades.

Some months after the US announced liberation day tariffs, the Prime Minister in his Independence Day address last year alerted India on the needs of this new era. We needed to be atmanirbhar (especially on our current account), and he sought a mission mode thrust to deregulate the economy. There was a push towards advanced manufacturing, supporting it with production-linked incentives, a 22-year tax holiday provided for data centres, in addition oil exploration in the sea was permitted, and the need for R&D was signalled by creating an R&D fund. India worked hard to not get shut out of global markets by signing nine bilateral free trade agreements covering 38 countries. While some important areas of reform remain — contract enforcement, subsidy regime rationalisation, financial sector reforms among others — the overall message is clear.

FTAs mean we will need to defend our domestic business as much as we try and take advantage of the markets opening to us. In the new era winners will compete on global quality, best service or lowest cost. Indian industry must study every FTA market for opportunity; it needs to shed its complacence and up R&D spend. Industry must develop innovative models to attract talent back, build centres of excellence in critical technologies in their own global capability centres in India. They must stop lobbying for tariffs on raw materials and intermediate goods for India to take advantage of the signed FTAs. We have about three years to get ready before the FTAs become fully operational. Our economy is robust, corporate and bank balance sheets are strong, and our entrepreneurial class is the best in the world. But the old order is dead: Time to wake up. The world awaits!

Janmejaya Sinha is chairman, BCG India. The views expressed are personal