Piercing the Veil of Protectionism: Evaluating the Compatibility of the Indian Domestic Industrial Base and Foreign Trade Commitments

India is pursuing two policy objectives that are at odds with each other. The first is the construction of deep, subsidised, protected domestic manufacturing capacity. This has been extensively expressed through the PLI (Productivity-linked scheme) across 14 sectors and quality control orders on steel, aluminium, chemicals, and electronics. Along with this, high tariffs to protect sectors till they are competitive, in addition to the strong push for self-reliance demonstrated by the government’s push for an “Atmanirbhar Bharat”, show the Indian argument: India needs to build its productive capacity before it opens up its markets. 

Illustration by The Geostrata

However, contrary to this is an aggressive focus on FTAs. Since 2022, India has signed agreements with the UAE, Australia, EFTA, the UK, Oman, and is in the concluding stages with the EU and the US. Each deal brings market access to the Indian economy. However, it requires serious goods-to-market access concessions in exchange for the services and pharmaceutical gains that India seeks. 

These objectives are at odds with each other.

South Korea and Japan combined state-directed industrial policy with deep trade integration. However, they did this sequentially, achieving manufacturing capability before opening up their markets.

THE PLI RECORD: WHERE DOES THE INDIA MODEL ACTUALLY WORK? 

The PLI scheme, launched in 2020 with an outlay of 1.97 lakh crore rupees, was designed to raise the share of manufacturing in the GDP from 15% to 25% by 2025. That target has not been fulfilled due to disbursement issues and the overall structure of the PLI itself.

Disbursement data exposes structural problems more precisely. As of early 2024, only 4415 crore rupees, which stands for roughly 2.25% of the outlay, have been released. Firms had achieved 37% of the cumulative production targets by October 2024. The gap reflects a flaw in the scheme itself. 

The PLI’s threshold-linked disbursement model rewards throughput (units produced above a base year) rather than capability accumulation. This works well in sectors of short gestation periods and already existing industrial infrastructure. Pharmaceuticals and electronics have indeed benefited from the scheme in this manner. India moved to a 2285 crore API trade surplus by FY25. Smartphone exports have surpassed $23 billion in 2025. 

In capital-intensive sectors that need multi-year investment cycles before the production thresholds are actually reachable, the model fails.

The advanced chemistry cell battery PLI, laying out 18,100 crore, targeting 50 GWh of domestic capacity, had commissioned merely 2.8% of the target by October 2025 with zero disbursements.

Battery manufacturing, the backbone of India’s EV push and energy storage targets, remains almost fully import-dependent.

It is unfair to blame only the PLI for this, given the failures in Indian deep-sea mining targets. However, the scheme’s design itself is incompatible with the architecture required by the sector to actually result in the benefits received by sectors like electronics and pharmaceuticals. 

THE MIRAGE OF MANUFACTURING 

India assembles roughly 25% of the global iPhone production. This number roughly translates to an annual 55 million units. The export numbers seem striking after seeing these developments. $23 billion in electronic exports in 2025, up 85% year-on-year, is a genuine achievement. 

However, the domestic value added reframes the actual importance of this achievement significantly. India’s contract manufacturers, including TATA Electronics, Foxconn, and Wistron, crossed the 20% DVA threshold in FY25, up from 5-8% at the inception of the PLI. 

This means that 80% of the value of the iPhone India assembles still comes from outside the country. This is overwhelmingly dominated by foreign component suppliers. The fundamental picture as a result of this shows us that while the Indian trajectory is encouraging, it is currently playing the role of a mere assembler. 

The definitional problem continues to compound this. The DPIIT’s Public Procurement Order permits companies to classify assembly and testing of imported battery packs, chargers and adapters as domestic value addition for PLI purposes due to the local content definition in practice. While this flexibility of accounting metrics continues to serve numbers, it obscures whether India is producing goods or merely finishing them. 

THE MSME FAULT LINE 

MSMEs generate approximately 45.79% (As of May 2024) of India’s total exports, contributing 30.1% of gross value added. Export volumes have grown from 3.95 lakh crore rupees in FY21 to 12.39 lakh crore rupees in FY25. In the same period of time, the number of exporting MSME firms more than tripled. However, volume growth is not the same as an addition to the net value chain. NITI Aayog’s own diagnostics acknowledge that MSMEs face structural barriers in technology adoption, capital access, skilled labour and compliance capacity. This is a fundamental handicap that no FTA in itself can address, regardless of the incoming market access. 

The deeper problem is also the structure of the PLI itself. It was designed for firms with a balance sheet depth sufficient to absorb disbursement delays. MSMEs, ironically, by definition, usually cannot sustain operations with these delays. The result of this translates to a situation where PLI-supported large firms are assembling for global firms at the top, and the more than 6 crore MSMEs below are unable to ascend into Tier 2 and Tier 3 component supply positions that would actually enable value chain integration for the Indian economy.

COLLISION OF DOMESTIC POLICY WITH TRADE COMMITMENTS

Indian FTA push is ambitious and strategically positive for the Indian economy. High-income bilateral partners offer genuine market access that India needs for services, textiles and pharmaceuticals. However, the other side reveals the negatives due to the reciprocity of access that these commitments demand. 

The India-EU FTA requires India to eliminate tariffs on 86% of tariff lines, with overall coverage reaching 96.6%. The sectors expected to gain market access into India include pharmaceuticals, chemicals, machinery and automotive components. These are all sectors where the PLI is trying to build domestic players.

The India-UK FTA introduces phased tariff reductions on medical equipment and automobiles. The India-EFTA TEPA delivers near-comprehensive goods access. 

These concessions expect Indian domestic players to compete with competitively produced foreign goods precisely at the time when India’s domestic manufacturing capacity, as PLI data confirms, remains incomplete. This is effectively eroding the entire protective tariff structure that the PLI’s entire incentive structure depended on to begin with.

THE CPTPP: A CASE IN POINT

India was well justified in its exit from the RCEP in 2019 on the terms offered. The framework opened up a pathway for Chinese goods reclassified as ASEAN goods to flood the Indian market and increase the trade deficit. India’s deficit with RCEP members has significantly widened since then, and this is clear evidence of why the exit was not classic New Delhi protectionism. However, an exit does not mean the end of multilateral ambition; the CPTPP provides a case that is more compatible with the Indian economy.  

However, it is not true that the RCEP is the only multilateral option. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) presents a different proposed framework. 

Where the RCEP reduces tariffs on roughly 65% of tariff lines, the CPTPP eliminates them on 99%. However, the catch is that the membership does not include China. Its current 12 members in Japan, Mexico, Australia, Vietnam, Canada and others, cover roughly 13% of global GDP. In addition to this, accession processes are opening for Uruguay, Indonesia, the Philippines and the UAE.

The most lucrative distinction outside of China's absence is the architecture of the CPTPP framework. Its chapters on IP, digital trade, e-commerce, labour mobility, environment and state-owned enterprise disciplines are enforceable to levels the RCEP cannot match. For India, this enforcement is both an obstacle and an opportunity.

Accession would require domestic reforms in the aforementioned areas. However, these are reforms the Indian economy already needs on its own merits. Any accession India pursues carries opportunity with equal risk because if such an accession is pursued as a signal to the West, the reputational damage caused to India would not be repaired by an FTA, especially with the existing precedent of the RCEP exit.  

SEQUENCING REMAINS THE CORE REQUIREMENT 

Within the current trade commitments India has, many of them have phased tariff removals. To address the stated contradiction, the rough time period for India would amount to 5-10 years. This is the period before the tariff elimination schedules of the current FTAs reach their steepest phase, and before underperforming PLI sectors start to deliver or have to be, unfortunately, written off. 

Fundamentally, the Indian economy would need 3 changes to make sure FTA utilisation is optimal, and the aforementioned priority contradiction is addressed.

The first is a redesign of the PLI to cater to capital-intensive sectors and introduce performance-based disbursements through reforms akin to the National Manufacturing Mission’s enhanced MSME credit facilities, which are required to make sure targets are fulfilled.

Secondly, MSME integration into Tier 2 and Tier 3 component supply chains must become a priority, even in aggregate numbers akin to the reforms deployed by Vietnam across two decades. Finally, should India choose to apply for accession to the CPTPP, it should be treated as an industrial policy tool in itself and a catalyst for domestic reforms instead of a diplomatic signal in the current global order to the West.

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BY KRISH TEAM GEOSTRATA

info@thegeostrata.com