How South Asia Is Shaping Its Next-Generation Industrial Policy

Introduction

South Asia stands at a critical juncture in its economic evolution. As global supply chains reorient and technology reshapes manufacturing, the region’s governments are crafting industrial policies that seek to leapfrog traditional development stages. These strategies—ranging from India’s production-linked incentives (PLI) to Bangladesh’s export diversification—are not just national initiatives; they are collectively shaping a regional industrial landscape with significant implications for global trade and investment.

Main Analysis

The Changing Face of Industrial Policy

The concept of industrial policy has made a strong comeback worldwide, and South Asia is no exception. China’s experience with state-guided industrial transformation—recently dissected by Rhodium Group in its 2026 report, China’s Next-Generation Industrial Policy—demonstrates both the potential and the pitfalls of strategic government intervention. South Asian policymakers are watching closely, adapting lessons to their own fiscal constraints and political realities.

India has emerged as the region’s most active proponent of targeted industrial policy. The Production Linked Incentive scheme, launched in 2020, covers sectors from electronics to pharmaceuticals, aiming to boost domestic manufacturing and reduce import dependence. Early results show measurable gains in electronics exports, though challenges persist in technology acquisition and supply chain depth.

Bangladesh, traditionally reliant on ready-made garments, is pushing into higher-value segments, including electronics and medical devices. Its network of economic zones and special industrial parks is designed to attract foreign direct investment (FDI) and diversify an industrial base that has long been narrowly focused.

Pakistan, despite macroeconomic instability, has identified priority export sectors and is investing in trade-related infrastructure. Sri Lanka’s post-crisis reforms are attempting to rebalance its economy toward tradable goods. Even smaller economies like Nepal and Bhutan are leveraging hydroelectric power as a springboard for energy-intensive manufacturing.

The Regional Imperative

Perhaps the most significant shift is the growing recognition that industrial policy, to be effective in South Asia, must have a regional dimension. Historically, fragmented markets have limited scale and competitiveness. Intra-regional trade accounts for a mere fraction of total trade—far below the levels seen in Southeast Asia. However, initiatives like the BBIN (Bangladesh-Bhutan-India-Nepal) Motor Vehicle Agreement and various Asian Development Bank–supported connectivity projects are beginning to pave the way for integrated production networks.

Cross-border supply chains in automobiles, textiles, and pharmaceuticals are already emerging, albeit slowly. Indian auto components increasingly find their way into assembly plants in Bangladesh and Sri Lanka, while regional value chains in solar energy and active pharmaceutical ingredients are taking shape. This nascent integration could significantly enhance the region’s attractiveness as a location for global manufacturers.

Technology and Digital Leaps

A defining feature of South Asia’s industrial policy is the emphasis on technology and digitalization. India’s digital public infrastructure—Aadhaar, UPI, and GST—has created a model for digital governance that several partners are exploring. The region’s booming fintech sector is transforming financial services and, crucially, enabling industrial growth through better supply chain finance and financial inclusion.

Adoption of artificial intelligence (AI) and Industry 4.0 technologies in manufacturing is still nascent, but early movers are investing in automation, data analytics, and the Internet of Things. The challenge lies in bridging the digital skills gap and ensuring that small and medium-sized enterprises (SMEs)—the backbone of South Asian manufacturing—can participate in this transformation.

Regional Impact

A coherent next-generation industrial policy framework across South Asia could yield substantial benefits. It would:

• Enhance economic diversification, reducing vulnerability to commodity price shocks or overdependence on ready-made garment exports.
• Boost intra-regional trade, which currently represents only about 5% of total South Asian trade, unlocking significant potential.
• Attract global corporations looking for alternatives to China under the "China+1" strategy, given South Asia’s large consumer base, youthful workforce, and improving infrastructure.
• Strengthen supply chain resilience by creating alternative manufacturing and service hubs that complement—rather than compete with—existing East Asian networks.
• Foster innovation ecosystems by connecting universities, startups, and established firms across borders, accelerating technology adoption.

Strategic Insights

For businesses and investors, the evolving policy landscape offers both opportunities and risks.

Opportunities: Companies can tap into incentive-driven growth in targeted sectors, leverage digital infrastructure for operational efficiency, and participate in early-stage regional value chains.

Risks: Policy uncertainty, regulatory bottlenecks, and inadequate logistics in many parts of the region remain significant challenges. Investors must also navigate geopolitical tensions and questions about the fiscal sustainability of incentive programs.

Policymakers should prioritize transparency, predictable rules, and complementary reforms in labor, land, and trade. The most successful industrial policies will be those that enhance—rather than replace—private sector initiative. As the Rhodium Group analysis of China demonstrates, well-executed industrial policy can reshape global competitiveness; but a lack of structural reform can also perpetuate inefficiencies.

Future Outlook

Over the next three to five years, South Asia's industrial trajectory will be shaped by several factors.

First, the acceleration of digital infrastructure and AI adoption will likely redefine competitive advantage. India’s large tech sector could serve as the region’s innovation engine, while smaller economies specialize in niche manufacturing and digitally delivered services.

Second, the energy transition is expected to create new industrial opportunities in solar equipment, hydrogen, and battery manufacturing and storage. Countries with abundant renewable resources—such as Nepal and Bhutan—could become net exporters of clean energy, powering regional industrial clusters.

Third, the state of the global economy and the evolution of China’s industrial policy will influence South Asia’s growth. If Beijing continues its sustained export push while other costs rise, South Asian producers may face both headwinds in third markets and new opportunities for supply chain relocation.

Fourth, the institutionalization of regional cooperation—through BIMSTEC, SAARC reforms, or bilateral agreements—will be critical. Without tangible progress on physical connectivity and trade facilitation, the region risks missing the window to integrate into global supply chains on favorable terms.

Conclusion

South Asia is at a propitious moment. Its demographic dividend, expanding digital footprint, and strategic location offer a solid foundation for next-generation industrial policy. But the path is not automatic. Success will depend on the ability of governments to craft coherent, evidence-based policies, on private sector innovation, and on the political will to deepen regional collaboration. If these elements align, South Asia could transform from a collection of fragmented markets into a dynamic industrial hub, redefining its role in the global economy.

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Key Takeaways

• South Asia’s industrial policies are expanding beyond traditional sectors to include advanced manufacturing, digital services, and green energy.
• Regional integration remains the biggest missing component; deeper connectivity and trade liberalization are essential to unlock economies of scale.
• Investors should focus on countries with clear incentive frameworks, stable policies, and improving infrastructure.
• Technology adoption and digital infrastructure are emerging as the most significant competitive levers for the region.
• The next 3–5 years will be decisive in determining whether South Asia becomes an integral part of global supply chains or remains a collection of fragmented markets.

Sources

• Rhodium Group. China’s Next-Generation Industrial Policy. May 11, 2026. https://rhg.com/research/chinas-next-generation-industrial-policy