Liberalisation & industrial policy

A decade after Startup India (January 2016), DPIIT had recognised 2,12,283 startups by 31 January 2026, making India one of the world's largest startup ecosystems.

Promoting entrepreneurship, innovation and jobs

• Entrepreneurship: first-generation founders and a spread beyond metros to tier-2 and tier-3 towns; 1,02,054 recognised startups have at least one woman director or partner.
• Innovation: fintech on UPI, edtech, healthtech, agritech, spacetech and deeptech built on India's digital public infrastructure, solving problems for Indian conditions in Indian languages.
• Employment: direct jobs across more than 50 sectors, plus indirect work in logistics, gig platforms and supplier networks; startups also absorb skilled graduates outside the traditional IT-services route.

Challenges

• Global: a funding slowdown under high interest rates, foreign capital that retreats when rates rise, tariff and geopolitical uncertainty, competition from global technology giants, and constrained access to chips and AI compute.
• Domestic: compliance burden and taxation, delayed payments, shallow domestic risk capital concentrated in metros, low R&D spending, regulatory uncertainty in emerging sectors, governance lapses, and layoffs and down-rounds after the funding boom.

Measures

• Finance: expand the Fund of Funds and credit guarantees; dedicated deeptech funding; channel domestic pension and insurance money into venture capital; match the 2024 abolition of the angel tax with stable tax treatment.
• Ecosystem: regulatory sandboxes, public procurement through GeM, patent support and university-industry R&D links.
• Markets and governance: ONDC for open market access; stronger board oversight and disclosure norms; enforcement of timely payments.
• Inclusion: incubators in tier-2 and tier-3 towns and universities, women-founder programmes and mentoring, so that recognition translates into scale.

Patient domestic capital, lighter regulation and a deeptech push can turn India's startup numbers into lasting innovation and quality jobs.

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Launched from 2020 across 14 sectors, the PLI scheme pays incentives on incremental sales of goods made in India for a fixed period — rewarding output rather than inputs.

Rationale

• Scale and cost gaps: Indian manufacturing lacked the scale, logistics and power costs to match East Asian rivals; heavy import dependence in electronics, bulk drugs and solar modules exposed supply chains.
• Timing: the 'China plus one' shift after the pandemic offered a chance to attract global champions and plug into value chains.
• Strategic capacity: batteries, drones, telecom gear and semiconductors matter for security as well as growth.
• Design logic: paying only on realised sales limits the risk of subsidy without output, unlike upfront capital subsidies.

Achievements

• Scale: by 31 December 2025, investment above ₹2.16 lakh crore, production and sales above ₹20.41 lakh crore, 836 approved applications and over 14.39 lakh direct and indirect jobs.
• Mobile phones: India turned from a net importer into a major exporter, with global brands assembling here.
• Pharma and food: bulk-drug and API capacity reduced import dependence; Indian food brands expanded abroad.

Concerns and improvements

• Uneven uptake: slow in textiles, specialty steel and battery cells; assembly-heavy sectors show low domestic value addition; gains concentrated in a few large firms; disbursal delays.
• Link incentives to value addition and local sourcing, extend support to component makers and labour-intensive sectors, and simplify and speed up disbursal.
• Complements: rationalise input tariffs, cut logistics and power costs, implement the labour codes, fund R&D and build skills alongside plants.
• Discipline: independent evaluation, sunset clauses and transparent sector-wise data, so that support stays temporary and performance-based.

PLI has shown that output-linked support can move investment; its next phase must deepen value chains and jobs, not just final assembly.

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Semiconductors are the base layer of the digital economy and of defence; India is a large chip consumer and a global design hub, but it has only begun to build fabrication and packaging capacity at home.

Challenges

• Capital and time: a modern fab costs billions of dollars, takes years to build and faces fast obsolescence and heavy technology-licensing costs.
• Ecosystem gaps: fabs need ultra-pure water, uninterrupted power, specialty gases and chemicals, and a dense web of equipment and component suppliers that India lacks.
• Skills and IP: strong design talent, but few fab-process engineers and little home-grown process IP; talent drains to established hubs.
• Competition and geopolitics: large subsidies in the US, EU, Japan and Taiwan; export controls on advanced tools; a handful of equipment makers control supply.
• Market: assured domestic offtake for chips made in India is still thin, and early value addition will be in packaging rather than wafer fabrication.

India Semiconductor Mission: salient features

• Set up in December 2021 with a ₹76,000 crore incentive framework to build a complete ecosystem, not just one plant.
• Fiscal support of up to 50% across four verticals: silicon fabs, compound-semiconductor and sensor units, assembly-testing units, and chip design through a design-linked incentive.
• Progress: 10 projects worth ₹1.60 lakh crore in 6 States approved by December 2025, including the Tata–PSMC fab at Dholera and Micron's assembly plant at Sanand; ISM 2.0 was announced in 2026.

Way forward

• Talent: fab-process training with universities and industry; R&D in mature and compound-semiconductor nodes where India can compete first.
• Partnerships and stability: supply-chain cooperation with the US, Japan and the Quad; stable, long-term policy so that investors commit through industry cycles.

India should build from its strengths — design, packaging and mature nodes — and climb steadily towards advanced fabrication, treating chips as strategic infrastructure rather than a one-off subsidy.

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Manufacturing has stayed near 15-17% of GDP against the 25% goal of the National Manufacturing Policy, and MSMEs form its widest base of firms and jobs; a faster growth path needs both to expand.

Why manufacturing and MSMEs matter

• Factories absorb workers leaving farms at scale; MSMEs provide most labour-intensive employment and feed larger firms through supply chains.
• Manufacturing exports and productivity gains lift growth faster than services alone can.

Present policies: the push

• Make in India and PLI schemes across 14 sectors reward incremental output; new manufacturing units get a concessional tax rate.
• PM Gati Shakti and the National Logistics Policy attack logistics cost, a long-standing handicap.
• For MSMEs: the 2020 investment-plus-turnover definition, Udyam registration, ECLGS and CGTMSE credit guarantees, a Fund of Funds for equity and TReDS for receivables.
• MSE-CDP cluster development, ZED certification, PMEGP for new units and the World Bank-assisted RAMP programme for competitiveness.

Where they fall short

• PLI benefits flow mainly to large firms, and most MSMEs stay outside global value chains.
• Delayed payments, thin credit, informality, compliance burden and low technology persist.

Way forward

• Tie PLI beneficiaries to MSME sourcing, enforce timely payment, deepen formalisation through Udyam, and fund technology and skill upgrades.

Incentives to large firms alone will not lift manufacturing's share; scale, technology and formalisation of MSMEs will decide whether the sector becomes India's growth engine.

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India exports mostly capital- and skill-intensive goods, while apparel, footwear, leather and toys, which could employ millions, have lost ground to Bangladesh, Vietnam and China.

Why labour-intensive exports failed

• Labour rules: Chapter V-B of the Industrial Disputes Act, 1947 needs government permission for retrenchment and closure in units of 100 or more workers, so firms stay small or mechanise.
• Scale: fragmented, sub-scale units cannot fill large orders, adopt modern technology or absorb compliance costs.
• Logistics: unreliable power, congested ports and high transaction costs make delivery slower and dearer than in competitor countries.
• Skills and credit: low skills and costly finance cap quality and productivity.
• Trade terms: fewer trade agreements than rivals, inverted duties and a strong rupee erode price competitiveness; Bangladesh, a least developed country, enjoys duty-free access to the EU.

Measures for labour-intensive exports

• Labour flexibility: the June 2016 apparel package brought fixed-term employment, higher overtime caps and government payment of the employer's EPF share for new low-wage workers; extend it to leather, footwear and toys.
• Scale: plug-and-play parks and common facilities for apparel and leather clusters, plus cheaper credit for small units.
• Trade: FTAs with major markets, timely refund of state levies, corrected inverted duties and faster customs.
• Skills and women: sector training, plus hostels and transport for women, who form the bulk of garment workers.

Labour-intensive exports need flexible labour rules, world-class logistics and a skilled workforce, so that jobs and exports grow together.

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After 1991 services became the engine of India's growth, while industry, and manufacturing in particular, kept roughly the same share of GDP, unlike the manufacturing-led take-off of East Asia.

Why industry lagged

• Infrastructure deficit: unreliable power, congested ports and costly logistics raised costs and delayed projects, a burden that software and finance could sidestep.
• Factor markets: rigid labour laws pushed firms to stay small or capital-intensive; land acquisition was slow and contested; multiple clearances stretched gestation periods.
• Competition and finance: tariff cuts exposed firms to imports before they reached scale; weak R&D kept technology borrowed; high real interest rates and, after 2011, stressed bank and corporate balance sheets choked credit.
• Structure: a fragmented, informal small-scale sector could not scale up, while services grew on skilled labour and needed far less physical capital.
• Demand shocks: the global slowdown after 2008 hit exports, and private investment stayed weak thereafter.

Recent policy changes

• Make in India (2014): FDI opened in defence, railways and insurance; ease-of-doing-business reforms, online clearances and self-certification; Start-up India and Skill India.
• National Manufacturing Policy (2011): a target of a 25 per cent manufacturing share of GDP by 2022 through National Investment and Manufacturing Zones and corridors such as Delhi-Mumbai.
• GST (July 2017) created one national market and removed cascading taxes; the Insolvency and Bankruptcy Code (2016) allows quick exit and resolution of stressed assets; Sagarmala targets logistics costs.

How far they can help

• Strengths: lower transaction costs, better allocation of capital, foreign technology, scale economies from a common market and formalisation of supply chains.
• Limits: land, labour and power reforms lie largely with the States; bank credit to industry stayed sluggish; skill gaps persist; exports need trade access and a competitive exchange rate; the GST transition and demonetisation disrupted output in the short run.
• Verdict: the changes remove real constraints but are necessary rather than sufficient, and their effect will show only over several years.

Industrial policy now points the right way; a stable tax and regulatory regime, factor-market reform and a credit revival must follow if industry is to lead growth rather than trail it.

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Since the 1991 reforms output has grown far faster than secure, contract-based jobs. The National Commission for Enterprises in the Unorganised Sector (2007) found that informal workers made up 92 per cent of India's workforce, and a growing number of them work inside organised firms.

How globalisation cut formal jobs

• Capital-intensive growth: import competition and easy access to imported machinery let organised firms raise output with fewer workers, so growth outran formal job creation.
• Contractualisation: to match global prices while avoiding the retrenchment rules of the Industrial Disputes Act, 1947, firms hire casual and contract labour through contractors; informal workers now sit inside organised units.
• Restructuring: weaker units closed or shrank under import competition, public sector employment was pruned, and services growth favoured skilled work in IT and finance rather than mass employment.
• Global value chains: production is pushed down to small units, home-based and piece-rate workers, with lower wages and little protection.

Is informalisation detrimental?

Largely, yes.

• Low productivity and wages, no social security, little bargaining power and heavy exposure to shocks keep workers poor even when the economy grows.
• A narrow tax base, weak skill formation and thin domestic demand slow the shift to higher-value activity.
• Counterview: informal work absorbs surplus labour and sustains livelihoods; the real problem is low productivity and lack of protection, not informality as such.

Way forward

• Labour-intensive manufacturing and exports, formalising MSMEs, skilling, portable social security for all workers, and labour law reform with safeguards.

Globalisation can raise incomes only if its gains reach workers: more formal jobs, and decent, protected work for those who remain informal, must go together.

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FDI brings long-term capital along with technology, management and market access. India received its highest-ever inflow of US$ 55.46 billion in 2015-16, yet the commitments announced at investor summits remain far larger than what reaches the ground.

Why India needs FDI

• It bridges the gap between domestic savings and investment needs and finances the current account deficit without adding to external debt; it is steadier than portfolio flows.
• It brings technology, management practice, exports and jobs, deepens competition and helps India join global value chains, especially in manufacturing (Make in India) and infrastructure.

Why MoUs do not become FDI

• MoUs are statements of intent, not binding contracts; many are announced for publicity or as broad, non-committal figures at State investor summits.
• Land acquisition, environmental and other clearances, power and logistics delays, tax uncertainty and slow contract enforcement make investors hold back or scale down.
• Centre-State differences, sectoral caps and approval routes, and changes in global conditions and financing costs postpone projects after signing.

Remedial steps

• Single-window, time-bound clearances and ready land banks with clear titles.
• Stable, predictable tax rules with no retrospective taxation, and faster commercial dispute resolution and contract enforcement.
• Keep liberalising: the June 2016 reforms opened defence, civil aviation, pharmaceuticals and food retail further and put most sectors on the automatic route.
• Build infrastructure, involve States through ease-of-doing-business rankings, and track every MoU through a facilitation cell from signing to commissioning.

Credible policy, speedy clearances and reliable contract enforcement will convert MoUs into investments faster than any number of summits.

Written by Minimalist IAS from facts checked at source (how we verify) — a little fuller than exam length, so every part of the question is covered; in the hall, keep the structure and trim the detail. UPSC publishes no model answers: compare your structure and coverage with this, then write your own.