Key Points
- High tariffs and non-tariff barriers continue to shield domestic markets
- Foreign investment remains constrained by sector caps and approval rules
- Technology and digital regulations tighten state oversight
- Labour and land bottlenecks limit manufacturing expansion
ISLAMABAD: India’s economy remains heavily shaped by state controls, regulatory barriers, and protectionist policies across trade, investment, technology, and manufacturing.
Despite government claims of reform, broad sections of the economy continue to operate under high tariffs, restrictive licensing regimes, and sector-specific investment limits, according to trade data, regulatory filings, and policy analysts.
Multiple international observers, including a recent Wall Street Journal opinion and analysts from the Delhi-based think tank Prosperiti, have highlighted that India’s reform measures are largely incremental. They note that amendments to insolvency rules, tax simplification, labour law consolidation, and selective liberalisation of foreign investment address existing distortions but stop short of dismantling entrenched state control.
Persistent controls and external pressure
The persistence of these controls has drawn renewed scrutiny. India faces external pressure from key trading partners.
US policies under President Donald Trump explicitly reacted to Indian protectionism, including punitive tariffs on selected exports. These measures have intensified the urgency for reform. According to The Wall Street Journal, the US pressure might have led to these eyewash reforms.
Economists and investors say the gap between reform announcements and on-ground liberalisation remains wide. This limits India’s ability to translate demographic and market size advantages into sustained productivity gains.
Marginal reform measures
Observers argue that India’s recent steps amount to marginal adjustments rather than systemic reform. External pressure has prompted some policy changes. Critics say they are reactive, addressing only the most visible distortions rather than implementing a coherent, market-driven agenda.
Tariffs and non-tariff barriers
Trade policy remains a clear example. India still maintains amongst the highest average tariff levels of any major economy.
Duties are particularly steep on agricultural goods, automobiles, electronics, and consumer products. Some import tariffs exceed even 100 per cent. This effectively insulates domestic producers from foreign competition.
It also complicates trade negotiations with partners such as the United States and the European Union.
Non-tariff barriers further reinforce protection. Licensing requirements, quality control orders, and port-specific import restrictions apply across chemicals, textiles, electronics, and processed foods.
Trade specialists note that these measures are often introduced with limited consultation and short compliance windows. This raises costs for importers and domestic manufacturers reliant on global supply chains.
Recent curbs affecting imports from neighbouring countries underscore concerns that regulatory tools are used to manage trade flows rather than promote competition.
Foreign direct investment controls
Foreign direct investment remains governed by a tightly controlled, sector-by-sector regime.
Notwithstanding India has eased caps in areas such as insurance, foreign ownership continues to face limits or approval requirements in defence manufacturing, media, banking, multi-brand retail, and parts of the digital economy.
Entire sectors, including atomic energy, tobacco manufacturing, and gambling, remain closed to foreign capital.
All investments linked to entities from countries sharing land borders with India are as yet subject to prior government approval.
Introduced in 2020 as a security measure, the rule slows down deal execution and adds uncertainty for foreign investors. Government data show that foreign manufacturing investment remains modest relative to services, despite repeated policy incentives aimed at building domestic production capacity.
Technology and digital regulation
Regulatory tightening has become increasingly explicit in the technology and digital services. Proposed security rules would require smartphone manufacturers to share source code and comply with expanded government oversight.
Global firms have raised concerns about intellectual property protection and regulatory reach. Industry executives warn that such requirements risk deterring investment and slowing technology transfer.
Satellite communications and cloud-based services face similar constraints. New licensing and security norms mandate domestic gateways, local data storage, and extensive compliance obligations tied to national security considerations.
Companies say these conditions raise costs and complicate the deployment of next-generation digital infrastructure.
India’s data protection framework has also expanded state oversight of digital activity. Firms handling personal data must fulfil the new obligations, including restrictions on cross-border transfers.
At the same time, proposed digital competition rules seek to impose upfront behavioural restrictions on major online platforms. These measures broaden the government’s regulatory role in pricing, data use, and market conduct.
Labour and land bottlenecks
Labour and land are there as the longstanding structural bottlenecks. Although India consolidated dozens of labour laws into four codes, economists note that core rigidities persist.
Companies employing more than 300 workers still face limits on layoffs. Compliance requirements are also complex, particularly for small and medium-sized firms.
Land acquisition continues to slow industrial expansion. Businesses require multiple clearances, covering environmental impact, water use, zoning, and safety in routine operations. These requirements often lead to lengthy delays and cost overruns. Industry groups believe the licensing burden undermines India’s competitiveness as a manufacturing destination.
Selective liberalisation
External pressures have highlighted these vulnerabilities. US tariffs imposed on Indian exports exposed how India’s own protectionist framework can weaken export competitiveness, particularly in labour-intensive sectors.
Although New Delhi has pursued selective trade agreements to counter such pressures, politically sensitive areas such as agriculture, dairy, and fuel subsidies continue to stay largely shielded from liberalisation.
Bottom line
Taken together, the evidence supports the observations that India’s recent reforms represent incremental course correction rather than systemic change. Critics argue that instead of dismantling entrenched controls, policymakers continue to fine-tune an overregulated framework.
Economists say meaningful reform would require sustained reductions in tariffs. Deregulation of land and labour markets, privatisation of loss-making state enterprises, and a consistent commitment to market-driven growth are also needed.
Without such changes, India risks remaining caught between reform rhetoric and regulatory reality.
