Content

1. Trade, supply chains and economic statecraft
2. Productivity, not just growth, for Viksit Bharat

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Trade, supply chains and economic statecraft

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Why in News?

• Intensifying strategic competition between the United States and China, tariff wars, semiconductor export controls and restrictions on rare earth exports have transformed trade and supply chains into core instruments of geopolitical influence and national security.
• India is increasingly seen as a trusted democratic partner capable of hosting diversified manufacturing, digital infrastructure and resilient supply chains as the global economy moves away from concentrated production dependence.

Relevance

• GS Paper II: Strategic autonomy, bilateral and plurilateral diplomacy, changing world order.
• GS Paper III: International trade, industrial policy, critical minerals, semiconductors, logistics.

Practice Question

• “Trade, technology and supply chains have become the principal instruments of power in the 21st century.” Discuss India’s opportunities and challenges in this era of economic statecraft. (250 Words)

Static Background

Supply Chain

• A supply chain is the end-to-end network through which raw materials are extracted, processed, manufactured, assembled and delivered. Control over critical nodes in this chain increasingly determines economic competitiveness and geopolitical leverage.

Weaponisation of Interdependence

• This concept describes how states exploit pre-existing economic dependencies—such as access to semiconductors, energy, shipping routes or financial networks—to exert coercive pressure on strategic rivals.

Rare Earth Elements (REEs)

• Rare Earth Elements are a group of 17 metallic elements, including the 15 lanthanides plus scandium and yttrium, essential for magnets, electric vehicles, wind turbines, semiconductors, smartphones and missile guidance systems.
• Although relatively abundant, REEs are difficult to separate and refine. China dominates global processing and has periodically used export restrictions to exert strategic influence over technology-dependent economies.

Evolution of Geo-Economics

• During the Cold War, military alliances were the primary tools of power. In the 21st century, economic networks, digital infrastructure, semiconductor ecosystems and critical mineral supply chains have become equally important instruments of strategic competition.
• The 2008 financial crisis, COVID-19 disruptions, the Russia-Ukraine war and U.S.-China rivalry accelerated the transition from efficiency-driven globalisation to resilience-driven geo-economic competition.

Why Supply Chains Matter Strategically ?

• Countries controlling key chokepoints in semiconductors, pharmaceuticals, batteries and rare earth processing can shape industrial capabilities and influence the strategic choices of other nations.
• Maritime chokepoints such as the Strait of Hormuz and Taiwan Strait illustrate how logistics and trade routes affect both economic and security outcomes.

Key Instruments of Economic Statecraft

Tariffs and Trade Barriers

• Tariffs protect domestic industries and are often used to pressure trading partners, as seen in successive rounds of U.S.-China tariff escalation.

Export Controls

• Restrictions on advanced chips, AI hardware and strategic materials are designed to limit competitors’ access to cutting-edge technologies.

Sanctions and Financial Restrictions

• Exclusion from payment systems and trade finance can significantly weaken a country’s economic capacity.

Investment Screening

• Governments increasingly scrutinise foreign investments in sectors such as telecom, semiconductors, ports and digital infrastructure.

Regulatory Standards

• Data governance, AI norms and cybersecurity standards shape the architecture of future technological ecosystems.

Contemporary Global Examples

• China’s restrictions on rare earth exports demonstrate its leverage over technologies central to electric mobility, clean energy and defence production.
• U.S. controls on advanced semiconductor exports aim to constrain China’s progress in artificial intelligence and high-performance computing.
• Energy sanctions and shipping disruptions show how economic tools can alter strategic calculations without direct military confrontation.

Decline of Traditional Multilateralism

• The World Trade Organization has weakened as dispute settlement has stalled and major economies increasingly rely on unilateral measures and selective trade arrangements.
• Bilateral and regional agreements now dominate, allowing countries to tailor partnerships to specific strategic and sectoral priorities.

Why India Matters in the New Order ?

• As global firms pursue “China Plus One” strategies, India stands out because of its scale, political stability, reform trajectory and ability to absorb investment across manufacturing and technology sectors.
• The world is no longer merely inviting India to participate; it is actively seeking India’s presence in diversified production and digital ecosystems.

India’s Structural Advantages

Demographic Dividend

• India’s large and youthful workforce offers a long-term labour and consumption base that few countries can match.

Large Domestic Market

• Strong domestic demand enables firms to scale production and reduce dependence on export volatility.

Democratic Credibility

• Transparent institutions and legal predictability enhance India’s attractiveness as a trusted alternative to authoritarian production hubs.

Digital Public Infrastructure

• Platforms such as Unified Payments Interface and Aadhaar reduce transaction costs and improve governance efficiency.

Domestic Reforms Strengthening India

• Production-Linked Incentive schemes encourage manufacturing in electronics, pharmaceuticals, solar modules and semiconductors, linking industrial policy with strategic resilience.
• Infrastructure initiatives such as Gati Shakti, Dedicated Freight Corridors and port modernisation lower logistics costs and improve competitiveness.
• GST and digital compliance systems integrate the national market and improve business predictability.

Strategic Sectors for India

Semiconductors

• Trusted partnerships with the U.S., Japan and Taiwan support the creation of indigenous chip design and fabrication capabilities.

Critical Minerals

• Overseas resource partnerships and domestic exploration seek to reduce dependence on concentrated mineral suppliers.

Defence Manufacturing

• Co-development and indigenisation strengthen national security and export potential.

Digital Infrastructure

• India Stack and AI initiatives enhance both domestic capacity and international influence.

Economic Security as Foreign Policy

• Trade agreements, technology partnerships, supply-chain coalitions and standards-setting are now central pillars of India’s diplomacy, not peripheral economic engagements.
• Economic resilience increasingly determines a nation’s strategic autonomy and bargaining power.

Challenges for India

• Logistics costs remain above those of many East Asian competitors, reducing export competitiveness.
• Limited R&D expenditure and skill shortages constrain technological sophistication.
• Dependence on imported energy and critical minerals creates strategic vulnerabilities.
• Regulatory uncertainty and contract enforcement delays can weaken investor confidence.

Risks in the Geo-Economic Era

• Overdependence on any single partner for technology, minerals or markets can expose India to coercive pressure.
• Excessive protectionism may isolate domestic firms from global innovation and efficiency gains.
• Geopolitical fragmentation could reduce demand and disrupt export-oriented growth.

Overview

• The fusion of economics and geopolitics offers India a historic opportunity to become a central node in global production networks. However, this opportunity will be realised only if domestic competitiveness and institutional credibility advance alongside diplomatic ambition.
• Strategic autonomy today is best preserved through diversified integration rather than economic isolation, allowing India to engage widely while retaining sovereign policy space.

Way Forward

• Reduce logistics and compliance costs through continued infrastructure and governance reforms.
• Increase public and private investment in research, design and advanced manufacturing.
• Expand critical mineral agreements and strategic reserves.
• Deepen trade partnerships while protecting legitimate national security interests.
• Strengthen skilling, innovation and institutional capacity to convert geopolitical demand into lasting economic capability.

Data and Facts

• Rare Earth Elements comprise 17 elements crucial for EVs, semiconductors, wind turbines and defence systems.
• China dominates the global processing of rare earths, giving it significant geo-economic leverage.
• India is a leading beneficiary of “China Plus One” diversification strategies.

Prelims Pointers

• Rare Earth Elements include the 15 lanthanides along with scandium and yttrium.
• Economic statecraft uses economic instruments to achieve strategic objectives.
• Strategic autonomy involves independent foreign policy decision-making.
• The WTO governs multilateral trade rules, though its influence has weakened.

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Productivity, not just growth, for Viksit Bharat

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Why in News?

• India recorded 6.5% real GDP growth in FY 2024-25, making it one of the world’s fastest-growing major economies. However, achieving Viksit Bharat by 2047 will require sustained gains in productivity, not merely high aggregate growth.
• The Economic Survey of India emphasises that manufacturing-led structural transformation, stronger business dynamism and efficient resource allocation are essential to raise incomes and create large-scale employment.

Relevance

• GS Paper III: Inclusive growth, manufacturing, industrial policy, productivity, labour and capital.
• GS Paper II: Governance and regulatory reforms.

Practice Question

• “High GDP growth alone is insufficient to achieve Viksit Bharat. Discuss the role of productivity, manufacturing and business dynamism in sustaining India’s long-term development trajectory.”(250 Words)

Static Background

Economic Growth

• Economic growth refers to an increase in the total value of goods and services produced in an economy, measured by real GDP. Growth can occur through higher labour participation, greater capital formation or improvements in productivity.

Productivity

• Productivity measures the efficiency with which inputs such as labour and capital are converted into output. Higher productivity enables faster income growth without proportionate increases in resources or inflationary pressures.

Total Factor Productivity (TFP)

• TFP captures gains arising from innovation, technology, managerial efficiency and better allocation of resources, rather than simply increasing labour or capital inputs.

Structural Transformation

• Structural transformation is the movement of workers and capital from low-productivity sectors like agriculture to higher-productivity sectors such as manufacturing and modern services.

Creative Destruction

• Coined by Joseph Schumpeter, it refers to the process whereby efficient firms expand while unproductive firms exit, driving innovation and aggregate productivity growth.

Zombie Firms

• Zombie firms are economically unviable businesses that survive through repeated refinancing despite weak profitability. They lock capital and labour in low-productivity uses and crowd out more dynamic enterprises.

India’s Recent Economic Performance

• India has combined strong growth with macroeconomic stability, supported by robust domestic demand, moderating inflation, fiscal consolidation and a relatively stable banking system.
• Real GDP growth remained at 6.5% in FY 2024-25, positioning India among the fastest-growing major economies and reinforcing confidence in its medium-term growth prospects.

Why Growth Alone Is Insufficient ?

• High growth can coexist with inefficient resource use if labour and capital remain trapped in low-productivity activities. Without productivity gains, income convergence with advanced economies will be slower and less sustainable.
• Viksit Bharat requires not just larger output, but better-quality growth that raises wages, competitiveness and technological capability across sectors.

Manufacturing as the Missing Link

• Manufacturing historically serves as the bridge between low-productivity agriculture and high-productivity modern sectors, absorbing labour and generating broad-based productivity gains.
• India’s development has been service-led, but manufacturing has not expanded sufficiently to create mass employment or deliver the structural transformation seen in East Asian economies.

Structural Weaknesses in Manufacturing

Dominance of Small Firms

• India’s manufacturing landscape is characterised by numerous small, low-productivity firms and too few medium-sized firms capable of scaling, innovating and exporting competitively.

Missing Middle

• Regulatory burdens, financing constraints and labour rigidities prevent small enterprises from evolving into larger and more productive firms.

Limited Global Value Chain Integration

• Many firms remain weakly integrated into international production networks, restricting access to advanced technologies and export markets.

Productivity and Resource Misallocation

• A significant share of India’s labour remains in agriculture, where productivity is substantially lower than in manufacturing and modern services.
• Capital is often allocated inefficiently, reducing the economy’s ability to maximise returns on infrastructure investment and human resources.

The Problem of Zombie Firms

• According to the 2025 study Zombie Firms in Emerging Markets, zombie firms form a small share of enterprises but account for a disproportionately large share of debt and assets.
• These firms consume scarce credit, suppress competition and prevent labour and capital from shifting toward more productive sectors.

Why Zombie Firms Persist ?

Weak Exit Mechanisms

• Delays in insolvency resolution and legal processes allow non-viable firms to continue operating long after their economic usefulness has ended.

Distorted Credit Allocation

• Banks may repeatedly refinance distressed borrowers to avoid recognising losses, perpetuating inefficiency.

Limited Equity Financing

• Firms dependent on debt are more vulnerable to prolonged distress, while equity-backed firms generally recover more sustainably.

Role of Manufacturing in Viksit Bharat

• Manufacturing can generate large-scale employment, boost exports, deepen technological capabilities and strengthen India’s participation in global supply chains.
• It also produces stronger productivity spillovers than many service sectors by fostering innovation, supplier networks and industrial clustering.

Importance of Research and Development

• Sustained productivity growth depends on higher investments in innovation, intellectual property and advanced technologies, enabling Indian firms to move up the value chain.
• Stronger university-industry linkages are critical for technological self-reliance.

Financial Sector Reforms Needed

• Credit should flow toward efficient firms rather than being trapped in low-return enterprises.
• Development of venture capital, private equity and corporate bond markets can diversify financing beyond traditional bank lending.

Governance and Regulatory Reforms

• Simplified regulations, faster approvals and predictable policy frameworks reduce compliance costs and encourage firms to scale.
• Efficient contract enforcement and stronger insolvency processes improve investor confidence and business dynamism.

Labour and Skill Reforms

• Flexible labour markets, coupled with social security and skilling, can facilitate movement of workers into productive manufacturing jobs.
• Programmes such as Skill India and apprenticeship expansion are vital for industrial competitiveness.

Data and Evidence

• 6.5% real GDP growth in FY 2024-25.
• Manufacturing remains below its potential as an employment engine despite substantial infrastructure investment.
• Zombie firms account for a disproportionate share of debt and assets, indicating severe capital misallocation.

Overview

• India has successfully established macroeconomic stability and high growth, but without stronger productivity gains, it risks a “middle-income plateau” where growth persists without corresponding improvements in living standards.
• The central challenge is institutional: enabling efficient firms to grow while ensuring unproductive firms exit swiftly.

Way Forward

• Accelerate manufacturing integration into global value chains.
• Strengthen insolvency and bankruptcy mechanisms.
• Improve credit allocation and deepen equity financing.
• Expand R&D expenditure and industrial innovation.
• Simplify regulations and enhance labour market flexibility.
• Continue infrastructure and logistics improvements.

Prelims Pointers

• Productivity = Output per unit of input.
• TFP measures gains from innovation and efficiency.
• Zombie firms survive despite weak profitability due to repeated refinancing.
• Creative destruction is associated with Joseph Schumpeter.