Economic Survey Warns Against Import Protection for Indian Industry

In a message likely to unsettle protectionist voices, the Economic Survey 2025-26 has delivered a pointed critique of import substitution strategies, arguing that attempts to shield domestic manufacturing through higher tariffs effectively "function as a tax on downstream manufacturing and export competitiveness."

The Survey, tabled in Parliament on January 28, makes a forceful case that protecting domestic production is "a less efficient way" to support manufacturing than investing in innovation, infrastructure, logistics, and MSME scaling. The assessment comes at a time when parts of the automotive industry have been seeking higher import duties to counter competition, particularly in electric vehicle components and advanced technology products.

No National Tariff Wall Can Override

The Survey pulls no punches in its analysis of protectionism's limits. It argues that international cost and technology frontiers "effectively determine" competitiveness, and that "no national tariff wall can override" these fundamentals.

"Indian businesses grapple with inverted input costs, whether in freight or electricity tariffs," the Survey notes. "Policies that insulate domestic production instead function as a tax on downstream manufacturing and export competitiveness."

This framing directly challenges the logic behind calls for higher import barriers, suggesting that such measures ultimately hurt rather than help manufacturing competitiveness by raising input costs for downstream producers and exporters.

The Case for "Intelligent Indigenization"

Rather than blanket protection, the Survey advocates what it calls "intelligent indigenisation"—building domestic capability through genuine competitiveness rather than artificial barriers.

"Intelligent indigenisation requires discipline, outward orientation, and credible exit," the Survey states. It argues that manufacturing must be "embedded as a high-productivity manufacturing hub" through investments in "innovation, skilling, infrastructure/logistics and MSME scaling."

This represents a significant shift in emphasis from traditional import substitution thinking. The Survey suggests that even domestic-focused industries need the discipline of export markets to remain competitive.

The Survey makes a strategic argument for why exposure to global competition matters. "Manufacturing, exports, and participation in global value chains act as institutional stress tests, exposing weaknesses that sheltered activities can conceal," it argues.

This logic suggests that protecting industries from competition can allow inefficiencies and institutional weaknesses to persist—ultimately harming long-term competitiveness. "Success in these domains depends as much on the quality of institutions as on capital, incentives, or intent," the Survey notes.

For the automotive sector, this implies that competing in export markets and global supply chains forces improvements in quality, efficiency, and institutional capability that purely domestic focus would not.

Infrastructure Over Import Barriers

The Survey makes a clear case that supporting manufacturing through better infrastructure and logistics is more effective than raising tariff walls. It highlights how "the expansion of infrastructure—illustrated by the doubling of the airport network over the past decade and the rapid growth of freight movement through inland waterways—is easing logistics constraints and raising economy-wide efficiency."

This infrastructure dividend, combined with "sustained state-level deregulation efforts," is credited with helping raise India's potential growth rate to 7.0%—higher than previous estimates. The implication is clear: fix the underlying cost structure and efficiency constraints rather than trying to compensate for them through import protection.

The Survey specifically flags the "inverted duty structure" as a problem that protectionist measures can exacerbate. It notes that trying to protect finished goods while their inputs remain expensive creates distortions that hurt competitiveness.

This is particularly relevant for the automotive sector, where components and materials often come from diverse sources. Protecting the final assembly while input costs remain high—whether due to tariffs on inputs or inefficient domestic supply—creates a competitiveness trap.

The Survey argues that the 'Net Zero' transition has "the potential to exacerbate this inversion" if not managed carefully, as green technology inputs may face higher costs in protected markets.

PLI as Alternative Model

The Survey's analysis of Production-Linked Incentive (PLI) schemes suggests a different approach to building manufacturing capability. Rather than protecting markets through tariffs, PLI schemes incentivize production and exports, with support tied to performance.

The automotive sector's PLI performance is cited positively—the automobile PLI shows "positive export growth with negative import growth," indicating genuine manufacturing capability building rather than simply substituting imports behind a tariff wall.

This model links government support to demonstrated competitiveness rather than providing open-ended protection.

Perhaps most significantly, the Survey argues that India's move "from Swadeshi to strategic resilience, and from resilience to strategic indispensability, cannot be achieved through insulation alone."

Instead, it emphasizes building "state capacity"—the ability of government institutions to deliver on policy objectives efficiently. "Countries that can act before certainty emerges, correct course without paralysis, and align incentives across the State, firms, and citizens are better placed to convert growth into influence," the Survey notes.

This framing suggests that demanding tariff protection may be easier than fixing underlying institutional and infrastructure constraints, but it's ultimately less effective for building genuine competitiveness.

Deregulation as State Strengthening

The Survey makes a counterintuitive argument that deregulation actually strengthens state capacity. It describes the Compliance Reduction and Deregulation Initiative as evidence that "deregulation, when pursued as a continuous and coordinated governance process, is not a retreat of the State but a strengthening of it."

"By simplifying rules, clarifying responsibilities, and making processes predictable and time-bound, administrative effort is shifted away from low-value policing toward problem-solving, monitoring, and execution," it explains.

While opposing tariff protection, the Survey supports the recently announced GST 2.0 reforms that reduce taxes on automotive products. The GST reductions on "small cars, two-wheelers, and auto parts" are framed as measures to "boost demand and strengthen India's automotive manufacturing base."

The Survey emphasizes that export performance is crucial for building genuine capability. "Manufacturing exports carry international leverage for India," it notes. "Policies, therefore, must be aligned with this imperative."

For automotive companies, this means that success is measured not by capturing a protected domestic market, but by being able to compete globally. India's automotive exports of 5.3 million vehicles in FY25, with double-digit growth continuing in H1 FY26—are held up as evidence that the sector can compete without excessive protection.

The Tariff Reality Check

The Survey's timing is significant given current tariff uncertainties. It notes that India is "currently subject to an effective export tariff rate of 50% on goods exports to the United States" due to reciprocal and penal tariffs, though some moderation has been achieved through negotiations.

Rather than seeking reciprocal protection in the Indian market, the Survey's logic suggests the response should be diversifying export markets and improving competitiveness to overcome tariff disadvantages.

The Survey does acknowledge the need for "strategic autonomy" in certain areas, particularly given its 40% probability assessment of supply chain disruption risks. However, it argues this should be achieved through building genuine capability rather than simply raising barriers.

"In a more uncertain world, risk is unavoidable. The advantage lies in managing it better," the Survey states, suggesting that resilience comes from competitiveness, not insulation.

A Tougher Message

The Economic Survey's message to the automotive sector is essentially: compete or be left behind. The government appears willing to support manufacturing through infrastructure, innovation, and institutional improvements, but not through tariff walls that insulate inefficiency.

For an industry accustomed to periodic protection, this represents a more demanding standard. The good news is that India's automotive sector has already demonstrated it can compete globally, with exports growing strongly. The Survey's message is that this export-oriented competitiveness, not domestic market protection—is the path forward.