From the Opinions Editor: The visible hand of the state

In the US, the traditional Left vs Right divide in matters of economic policy seems to be narrowing in some aspects. The economic ideology of the Republican Party, which used to revolve around free markets and minimal government intervention, has shifted considerably under Donald Trump. By taking a stake in Intel, the US government has, in a manner of speaking, taken over the means of production, as economist Tyler Cowen has pointed out. While this is not the first time in recent memory that the US government has done so – during the financial crisis of 2008, it had taken stakes in companies like Citigroup, AIG and General Motors – the circumstances then were different.

Joe Biden’s presidency saw a wholehearted embrace of industrial policy. The CHIPS Act provided support to the tune of $53 billion for semiconductor manufacturing and research and development. Similarly, the Inflation Reduction Act channelled funding into clean energy. Trump, however, has gone way beyond. His interventions are not just limited to promoting national champions or building manufacturing capacity in critical sectors. He has, for instance, asked Apple to manufacture in the US, not India; has sought a share in the revenue from Nvidia’s chip sales to China; and is even said to have brokered a deal for the US operations of social-media platform TikTok. From socialising losses and privatising profits to perhaps socialising profits, the party of Reagan has travelled a long distance.

With US policy expanding from providing direct subsidies to intervening in the market, directing operations of companies and raising tariff barriers, troubling questions arise: What will guide firms’ decision making? Can US exports to countries be curtailed like China’s exports of rare earth minerals? While some restrictions are imposed on sectors such as defence hardware and nuclear reactors, will decisions of companies, like setting up factories and R&D centres, now be shaped by priorities of the White House or value-maximising shareholders?

The correlation between industrial policy and stock market returns, at least in China, isn’t tight. Between 1992 and 2025, while its economy grew from $428 billion to $18.7 trillion, the MSCI China index gave returns of just about 2 per cent (CAGR in US dollars).

But, unlike Trump’s industrial policy, which economist Stephen Roach has characterised as transactional in nature, industrial policy in China operates through a well-oiled machinery across various levels of government. The central government creates the overarching framework in line with the party’s priorities, while the local governments drive most policies. Policies are tailor-made, with the support extended via various channels such as direct subsidies and regulation policies changing as industries evolve. Economists at the IMF have pegged the extent of support provided by China at 4.4 per cent of GDP. And this has remained relatively stable over the years. Of the total support, 2 per cent is in the form of cash subsidies, 1.5 per cent is tax benefits, 0.5 per cent is land subsidies, and 0.4 per cent is subsidised credit.

But, even as its policies are only deepening the structural imbalances in the economy, government intervention is expanding, and is now not just limited to promoting sectors and companies, but to even regulating competition. With the Chinese market facing “Neijuan” or “involution”, which reflects price cuts to grab market share, its top economic policy body has said that “enterprises engaging in disorderly low-price competition must be regulated”.

In India, industrial policy tends to operate through a combination of tariff barriers, non-tariff barriers like quality-control orders, and direct subsidies such as the production-linked incentives scheme. And, like in China, subnational governments also offer their own set of incentives to persuade industries to locate in their regions. For instance, under the Gujarat Semiconductor Policy, projects that are being set up in the Dholera Special Investment Region are provided a land subsidy and a power tariff subsidy. Despite this, direct support extended by the state is considerably smaller compared to China.

The Indian variant of industrial policy also straddles two different approaches. In some sectors, it tends to shield domestic companies from foreign competition, and even “selects” firms that receive support, while in others, it provides support to help firms, domestic and foreign-owned, to compete in the global market. The former is more along the lines of import substitution, while the latter mimics the East Asian model. But, the success of either approach is conditional on outside support. From capital to rare earths, from tech to technicians — becoming atmanirbhar requires help. It is perhaps this realisation that has prompted the government to recently change tack.

Modi’s statement reflects this growing realisation: “My definition of swadeshi is very simple. I am not concerned about whose money is being invested. I am not worried whether it is dollars or pounds or whether the currency is black or white. However, in the production, the sweat must be of my countrymen”. Decades ago, Deng Xiaoping articulated the same pragmatic approach: “It doesn’t matter whether a cat is black or white, as long as it catches mice.” But, unlike in India, a strategic vision underpins industrial policy in China.

While the Indian government may well have decided that the visible hand of the state, and not the market, will have a greater say in the allocation of resources in the economy, a more prudent approach would be to focus on increasing efficiency and competitiveness, rather than prioritising self-sufficiency and resilience.

Till next week,
Ishan