India's Economic Survey 2025-26 Advocates Swadeshi Strategy for Strategic Resilience

INDIA’S ECONOMIC performance in recent years is the stuff of envy. High economic growth coupled with macroeconom­ic stability is a combination that all countries strive for but few are able to secure on a long-term basis. In a world beset with strategic rivalries, mercantilist tendencies and outright hostility, India remains open to trade and investment. What could pos­sibly go wrong?

In one word: much. The Economic Survey 2025-26 released on January 29 cautioned against strategic vulnerabilities in key sectors necessary for India’s contin­ued economic performance and advocated a swadeshi eco­nomic strategy that stops just short of Import Substitution Industrialisation (ISI). ISI was a strategy that was in vogue for much of independent India’s history until economic liber­alisation in the early 1990s.

The Survey offers a three-tiered gradation list for govern­ment intervention. In Tier 1 are industries where “denial of access would impose immedi­ate and asymmetric national costs, and where global supply is highly concentrated.” These include defence critical systems, core infrastructure inputs, sectors dealing with energy and public health and foundational industrial technologies. Here, deeper involvement of the govern­ment is essential and support going all the way to “demand assurance” and procurement alignment. Tier 2 includes “goods where domestic production is economically feasible at reasonable cost, but imports persist due to coor­dination failures, historical path dependence, early scale disadvantages, or entrenched procurement and contracting practices rather than genuine comparative disadvantage.” Tier 3 sectors are those where “dependence does not create systemic vulnerability, where global supply is diversified, or where domestic substitution would impose high economy-wide costs relative to the strategic benefits.”

This is a good classification that can serve as a rough guide for where government should intervene and where it should not. But there are plenty of questions before the govern­ment intervenes. Some of these are answered in the Survey. For starters, what is the difference between the 21st-century variant of Swadeshi advo­cated in the Survey and the ISI strategy that was in vogue in the 1970s? The latter did not help industrialise India and led to a particularly vicious form of rent-seeking that ultimately killed economic growth. Then, there is the issue of the actual strategy, the nuts and bolts of intervention. Finally, the most important question, does India have the political wherewithal to maintain discipline that such intervention requires if it is to be successful?

The Survey answers the first question emphatically: it makes a distinction between ISI and “strategic resilience”. The latter is systemic while ISI is mostly sectoral. The ultimate aim of strategic resil­ience is to lead India to a state of strategic indispensability, a situation where it has leverage in international relations. When it comes to the actual strategy of implementation, the Survey is cautious. It advocates minimising costs of inputs across multiple sectors instead of simply handing over the “commanding heights” of the economy to sectors, industries and firms involved in production as was done the last time in India’s history.

These are laudable and even necessary imperatives in this age. But some questions and nagging doubts refuse to go away. The first problem is that India is starting its jour­ney of strategic indispensabil­ity late in the day. Now most countries with some capabili­ties—be they technological, of a modicum of state capability and wherewithal in terms of scientific manpower—are try­ing that route. If all countries were to become self-reliant, or at least a critical minimum number of them would, trade would cease to have mean­ing. Such a quest runs against the grain of comparative advantage, a long-understood principle behind free trade. This has never fully obtained in the world: all countries are lacking in one way or another, a condition that makes trade an attractive proposition.

Even if one were to keep aside this issue for the mo­ment, there is a bigger problem at hand. The last time India tried self-reliance by the ISI route, it could not discipline the public sector at the “com­manding heights” of the economy. The government could not ‘exit’ strategic sectors, which by the 1948 and 1956 Industrial Policy Resolutions, encompassed almost the entire industrial sector. It would not let the private sector, which was more disciplined, ‘enter’ most areas of the industrial sector. Has this changed?

This is a complicated matter. At one level, the issue is purely ideological: govern­ments that are clear about national interest may possess the necessary will to follow through an interventionist economic strategy. This is the unspoken part of industrial strategies in South Korea, Tai­wan, Japan and China. This is a necessary condition. India also has much better state-capacity to enforce discipline now as compared to say, 1960s and 1970s. This is a sufficient condi­tion. In the current political conditions, India has the right mix on this score.

But what if the political complexion of the govern­ment changes, say 10, 15 or 20 years down the line? In that case, the risk of this strategy degenerating into a 1970s kind of situation is very real. That would be the worst of all worlds: the state would have the capacity to impart discipline but would lack the political inclination to do so. Corruption and cronyism are likely, if not certain, under those conditions.

The world of benign glo­balisation is over as the Survey correctly notes. Under these circumstances, the ability to manufacture a wide variety of goods is essential for preserv­ing independence. The present global conjuncture requires that India build these capabili­ties assiduously. But the costs and risks associated with such a strategy need to be under­stood thoroughly.

Sixty years ago, Harry Johnson, one of the great trade economists of the 20th century, set out to analyse the conditions under which newly indepen­dent nations sought to build domestic industries such as steel, automobiles and even atomic energy. For Johnson and economists of his time, this was a puzzle: these countries lacked the capital and the necessary managerial talent to successfully undertake industrialisation. A much quicker way to prosperity in these countries lay through the export of primary com­modities. For these ‘nascent nations’, the problem was seen differently: primary commodi­ties were subject to adverse terms of trade. This was based on the then famous Prebisch-Singer hypothesis that prices of primary commodities decline relative to manufactured goods over time, leading to deteriorat­ing terms of trade for develop­ing countries reliant on these exports. Johnson’s assessment proved to be correct and was the basis for these countries to switch their economic strategies under the aegis of the Washington Consensus by 1990.No one thought that the tables would be turned 35 years later and the US itself would aggressively champion dirigiste ideas.

India is much wiser now. It is unlikely to make a return to the era of “commanding heights”. What it is looking for is something much more pragmatic. If only the world was a more benign place for trade, India would be a very happy participant in that system. But now it is ranged against protectionist and mercantilist great powers. Its path to security and prosperity lies through economic prag­matism. That is the message of the Economic Survey.