India's Manufacturing Weakness Limits Economic Gains from Bilateral Diplomacy

India's industrial trajectory since independence has been shaped by two distinct phases. The first, from the 1950s through the 1980s, was built on import substitution industrialisation. The state directed investment into heavy industry, shielded domestic producers from foreign competition, and reserved product categories for small-scale firms. This created a broad but low-innovation manufacturing base. Firms had little incentive to invest in research because protected domestic markets rewarded volume, not differentiation.

The 1991 economic reforms opened India to trade and foreign investment. Exports grew and India's share in world trade increased. But liberalisation did not automatically transform the research culture of Indian industry. Most manufacturing sectors continued to compete on cost rather than on product innovation. The habit of low research spending, formed under decades of protection, persisted into the liberalised era. Globalization brought India access to cheaper and more sophisticated imported inputs, particularly from China, but it also deepened structural import dependence rather than forcing domestic industrial upgrading. This is the core tension that shapes India's current bilateral trade relationships with both Russia and China.

India's research effort today is heavily concentrated. Pharmaceuticals and automobiles account for the bulk of private sector R&D. Indian metals firms spend roughly 0.4% of sales on R&D, against a global average of nearly 1.6%. Auto and parts makers spend just over 2%, against a global benchmark of 5%. These gaps reflect a structural choice by Indian industry to compete on price rather than on new products, a choice that now limits India's ability to export competitively to large markets.