World Bank wants India to rethink industrial subsidies, fix structural gaps

By Rajiv Shah 

A major new policy research report published by the World Bank Group has raised pointed questions about India's current industrial strategy, warning that the country's flagship Production Linked Incentive (PLI) scheme may be working against its own economic strengths — and that deeper structural reforms are urgently needed.

The report, titled "Industrial Policy for Development: Approaches in the 21st Century"  (2026), authored by Ana Margarida Fernandes and Tristan Reed, covers industrial policy across developing and emerging economies. India features prominently as both a cautionary tale and a case study in what works — and what does not.

The PLI Problem: Betting Against Comparative Advantage

The report's central concern about India is direct. At the national level, the World Bank says, India is making a "high-risk bet on manufacturing" through the PLI scheme — a programme that offers production subsidies of 4 to 6 percent on incremental sales across 14 manufacturing sectors including mobile phones, pharmaceuticals, and medical devices.

The report cites commentary suggesting that "using the PLI to bet against national comparative advantage is a waste of resources." India, the report notes, has historically specialised in services — not manufacturing — and using fiscal resources to artificially pivot this at the national scale carries significant risk.

The PLI is described as a "short-term fix only." The World Bank argues that the money could be better spent addressing what it identifies as India's real long-term industrial bottlenecks: unreliable power supply, weak design capabilities in industry, and inadequate skills among the workforce.

What the World Bank Wants India to Do Instead

The report does not call for scrapping industrial policy. Instead, it recommends that India redirect its efforts toward what it calls "first-choice" policy tools — investments that address genuine market failures rather than subsidise outcomes. For India specifically, the report points to several priority areas:

Invest in quality infrastructure. Unreliable power is explicitly cited as a barrier to manufacturing competitiveness. The report recommends sustained public investment in dependable electricity supply as a precondition for industrial growth.

Build workforce skills. India produces large numbers of engineering graduates, but the report identifies a gap between educational output and actual industrial skill requirements — particularly in design and advanced manufacturing. It endorses targeted skills development programmes as a high-return intervention, noting that India's IT training model for global markets is a genuine success worth expanding to other sectors.

Lower import tariffs on industrial inputs. India's persistently high tariffs on synthetic fibres, for example, are cited as having directly hurt the country's apparel export performance compared to Bangladesh and Vietnam — even after broad trade liberalisation in 1991. The report recommends that India move toward more open trade regimes to improve the competitiveness of export-oriented industries.

Shift from top-down to bottom-up industrial strategy. The report contrasts India's centralised, top-down approach — in which the government picks specific sectors and products for subsidy — with a more responsive, bottom-up model where investment promotion agencies identify investor needs and tailor public support accordingly. The latter, the report argues, is less prone to costly misallocation.

Tamil Nadu as a Model

In a detailed case study on Tamil Nadu's success in attracting Apple's iPhone 16 production, the World Bank draws a sharp contrast between national and state-level industrial policy.

Tamil Nadu succeeded, the report argues, not primarily because of PLI subsidies, but because it invested in comparative advantages: engineering graduates, seaports, highway connectivity, logistics parks with reliable power, and a responsive state government. Crucially, it solved a coordination problem by building worker housing for 18,000 people near the factory site — something no private developer would have done without a guaranteed employer. It also offered gender-targeted training subsidies to address a specific labour supply constraint.

The report describes Tamil Nadu's approach as a "relatively low-risk bet" focused on solving real problems. By contrast, India's national PLI strategy is characterised as higher-risk and less well-targeted.

Despite this progress, the report notes that India currently hosts about 40 percent of iPhone production but remains a minor player in Apple's broader supply chain, with only six Apple supplier assembly plants and one semiconductor plant — compared to China's 34 and 55 respectively.

Historical Warning: Tariffs Have Not Worked for India

The report also revisits India's pre-1991 history of import substitution as a lesson in what to avoid. High import tariffs, despite a massive domestic market, failed to produce internationally competitive industries and were eventually abandoned. The World Bank uses this as a broader argument that tariff-based industrial protection is a "second-choice" tool at best — useful only when countries lack the fiscal space to fund direct subsidies.

While the report acknowledges that India has made progress — tax revenues have risen from 11 percent of GDP in 1980 to 21 percent in 2023, giving the government more fiscal room — the World Bank's core message is clear: India must move beyond subsidy-driven industrial policy and invest in the foundations that make industry globally competitive. These are quality power, skilled workers, open trade, and responsive governance at the state level.