The goal of India's industrial policy should be profits, not votes

By Mihir Sharma

Between April and October, Apple Inc. exported about $7 billion worth of iPhones from India, most of them to the US. Prime Minister Narendra Modi can claim that as a victory for his government’s manufacturing subsidies, the closest the country has come to industrial policy in decades. In 2019, before Modi’s push, phone exports to the US barely crossed $5 million.

The government has handled Apple the right way, giving the company a great deal of freedom in choosing where to locate its factories and making sure that India’s often fractious labour relations haven’t disrupted its operations. The temptation, though, is to seek not just economic but political dividends from state largesse. Modi should look to the recent experience of the US to understand how unwise that is.

Industrial policy is a partnership between private and public sectors. While the former may be given a free hand in how a subsidized factory is run, the government often has a decisive say in where it is located and the constraints under which it must operate. From the politician’s point of view, the choice of subsidy recipient should balance political and commercial factors.

The politician is, of course, wrong. The ideal industrial policy is one that is completely unbalanced, considering only the economic rationale for a chosen set of incentives and ignoring any political harms or benefits.

Unfortunately, the average leader is incapable of designing a strategy of that sort. A policy that doesn’t win votes is generally dead on arrival.

When left to themselves, for example, foreign investors usually drift toward India’s developed southern states. Yet newer investments in the semiconductor sector — made possible by billions of dollars that the government has set aside — seem to be going to regions more closely associated with Modi’s Bharatiya Janata Party.

His home state of Gujarat has done particularly well in spite of lingering concerns about the reliability of its industrial water supply, a necessity for fabrication plants. Southern leaders have complained that they are losing out because Modi has given up on winning votes in their bailiwicks. Such politicized decisions help explain why industrial policy has a long history of failing economically.

As President Joe Biden’s Democratic Party just discovered, there’s no guarantee it won’t fail politically, too. The billions of dollars doled out by the administration to revive manufacturing in blue-collar towns appear — in electoral terms — to have been a colossal waste. Thousands of jobs have been created by Biden in areas that gratefully voted for Donald Trump.

Biden officials compounded their mistake by insisting that taxpayer dollars only go to unionized workplaces, raising costs without apparently buying many union votes. (Not to mention that the restrictions seem to have been one of the factors driving Elon Musk to spend tens of millions of dollars to help elect Trump.)

Bidenomics’ theory of politics was designed around a vision that is outdated at best. Electoral geography matters more than usual when so much is being doled out to create so few jobs. By contrast, the administration seemed to think that any money spent on the working class, anywhere in a former industrial area, would eventually help to win 100,000 extra votes in the so-called Blue Wall states of Pennsylvania, Michigan, and Wisconsin. That hope has now exploded spectacularly.

Indian politicians would argue they are more strategic than the Democrats by properly targeting the areas they want to defend or flip. But, in the process, they risk overspending on projects that are riskier and less productive than Apple’s successful factories. And in India, as in any other democracy, voters can quickly sour on big, expensive subsidy schemes that don’t address their cost of living or visibly create jobs.

For politicians, playing games with cash is the most obvious of temptations. But it can easily backfire. The smartest strategy is to avoid it altogether.