Industrial policy is no longer just about growth; it is now inseparable from national security. From the Covid-19 pandemic to the Russia-Ukraine war, rising trade protectionism, and now the US-Israel-Iran conflict, each has underscored how deeply geopolitics shapes economic outcomes. For India, the vulnerability is stark. Nearly half of its LPG imports pass through the Strait of Hormuz, a chokepoint exposed to escalating tensions. Brent crude has surged from around $70 a barrel before the conflict to well over $100. Every $10 increase in oil prices adds an estimated $12-15 billion to India’s import bill, widens the current account deficit (CAD), weakens the rupee, and stokes inflation. India’s growth forecasts for 2026 have already been revised downward.
The instinct such shocks trigger in governments is understandable: produce more at home and depend less on the world. In the short run, there are sectors like energy, fertilisers, and critical minerals where meeting demand through domestic production, particularly in renewable energy, is sensible and urgent. The Economic Survey’s idea of “strategic resilience”, which emphasises producing what a country cannot afford to be without, is a sound starting point.
But if strategic resilience is the beginning of India’s industrial response, it cannot be the end. The deeper lesson of the Hormuz crisis is not merely that imports create dependencies, but also that India does not yet earn enough foreign exchange through exports to comfortably absorb external shocks. The real vulnerability is not that India imports too much; it is that it does not export enough to pay for those imports when crises hit.
Hormuz Wake-up Call
Countries with strong export capabilities are better insulated from such volatility. South Korea, for instance, is as dependent on imported energy as India, yet its external position is structurally more resilient. Decades of export-oriented industrial policy have built manufacturing ecosystems that generate foreign exchange even as energy prices spike. India, by contrast, still has relatively modest manufacturing exports for an economy of its size and workforce needs. Its services exports, particularly in white-collar sectors, also face rising uncertainty from technological disruptions such as artificial intelligence. In the long run, the answer to import dependence is not simply to import less, but to export more, especially goods.
This is where the Economic Survey’s ambition of “strategic indispensability” becomes a security imperative. The aim is not merely to substitute imports but to insert India into critical nodes of supply chains, making it an economy the world can’t easily bypass. An India that is indispensable to global electronics, green energy components, or advanced manufacturing will have a more resilient balance of payments and greater geopolitical leverage. It would also generate employment at scale and support more inclusive growth.
The challenge, however, lies in confronting a long-standing structural weakness. India’s manufacturing sector has historically been inward-looking, protected, and insufficiently competitive. Firms have often found it easier to serve a captive domestic market than to meet the exacting standards of global buyers. R&D spending remains below 1% of GDP. Participation in global value chains is shallow. Backward linkages, where firms import intermediate inputs to produce globally competitive exports, are far weaker than in East and Southeast Asian economies. As a result, export earnings have not kept pace with import dependence, and India has yet to build firms capable of competing at the technological frontier.
The political temptation, particularly in times of crisis, is to double down on protection and insulation from global competition. This path is seductive but ultimately self-defeating. It risks recreating the inefficiencies of the Licence Raj—a business environment in which entry, competition, and exit are constrained, and firms are shielded rather than strengthened. Industrial policy cannot succeed if it protects firms from competition instead of preparing them for it. Without competitive discipline, it risks becoming industrial patronage.
Escaping the “Protection Trap”
There is an additional constraint. Energy shocks are not just trade shocks; they are fiscal ones. A widening CAD, a weaker rupee, and rising inflation, combined with the need to cushion households and industry, limit the government’s fiscal space. In such conditions, industrial subsidies must deliver more value. The opportunity cost of poorly allocated public support is too high to ignore.
This is fundamentally a design problem. India’s industrial policy must combine incentives with accountability and performance. China’s “Little Giants” programme offers one useful template. Launched in 2018, it provides tiered support to small and medium enterprises based on measurable improvements in productivity and innovation. Firms are evaluated periodically and rewarded or penalised accordingly. The result is a dynamic pool of enterprises that are both competitive and capable of moving up the value chain.
India need not replicate this model wholesale. There are valid questions about when to support domestic firms and when to anchor global players, as seen in the role of companies like Apple in driving India’s smartphone exports. But the broader principle is clear: public support must be linked to performance, and industrial policy must create incentives for firms to compete, innovate, and scale.
The Strait of Hormuz crisis will eventually pass. The structural challenge it has exposed will not. India’s journey from strategic resilience to strategic indispensability will depend on the quality of its industrial policy. In a world of recurring geopolitical shocks, resilience is not enough. Industrial policy cannot remain a shield; it must become a springboard.
Mayank Jain & Sabyasachi Kar are respectively Senior Research Analyst and Director, Institute of Economic Growth
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.