Air Pollution As A Blind Spot Of Indian Industrial Policy

Bérenger SANON

In 2011, manufacturing still accounted for just over 16% of India’s GDP (Government of India, 2011). To reverse this trend, the government launched the National Manufacturing Policy (NMP), with two numerical targets for 2022, raising this share to 25% of GDP and creating 100 million jobs (Government of India, 2011). In 2014, the government launched Make in India, a broader initiative aimed at promoting manufacturing and investment, which carries forward these same targets.

The policy is built on a principle of neutrality. No sector, region, or technology was meant to be
favored over another, the idea being to let the market itself direct resources toward their most efficient use. Yet the NMP itself acknowledges, in the section on special focus sectors, that sectors like textiles, leather, or agro-food need specific interventions, given their competitiveness and job potential (Government of India, 2011). This raises the question of whether this framework truly accounts for the different constraints these sectors face, particularly exposure to pollution and its effects on productivity.

Ten years after the policy was launched, neither the 25% of GDP nor the 100 million jobs target was reached. One cause often cited is that the government focused on improving its ranking in the World Bank’s Ease of Doing Business index rather than pursuing a genuinely targeted industrial policy, without this translating into more investment (Nagaraj, 2019).

Industrial development also comes with an environmental cost that can weigh on productivity,
especially air pollution. Research shows that exposure to PM2.5 has a negative effect on
manufacturing productivity (Majumder, Chaudhary, & Dey, 2024). Measured as an average across all sectors, this effect may look small. But does it hide very different realities depending on the sector? Hansen-Lewis (2018) finds that the effect is far stronger in labor-intensive industries, while capital- intensive industries show no significant effect. Maiti and Chakraborty (2023) similarly find that air pollution reduces labor productivity in Indian manufacturing, notably for workers in physically demanding occupations.

If these environmental effects of the policy are not taken into account differently across sectors, the most labor-intensive ones, the very sectors the job creation target relied on, risk seeing their productivity held back more than others, pulling the manufacturing policy further away from its own goals. Yet these are the same sectors that, following the logic developed by Krugman (1987), would benefit most from targeted support, since a smaller productivity gap with leading producers lets learning by doing close that gap faster.

South Korea shows what targeted industrial policy can achieve. Between 1973 and 1979, the country concentrated directed credit and public procurement on its heavy and chemical industries. This targeting produced output and productivity gains that lasted well after the program ended (Lane, 2025). The NMP also announced interventions for sectors like textiles, but it remains unclear whether they had the same scale, and above all whether they accounted for constraints such as air pollution.

The main question is therefore to understand to what extent this pollution, both already present in India and fueled by industrial development, has weighed unevenly on manufacturing sectors, and to what extent this uneven burden has shaped the outcomes of the policy.

The analysis unfolds in three steps, drawing on state-level data that combine manufacturing indicators from the Annual Survey of Industries with PM2.5 concentrations from satellite estimates produced by the Atmospheric Composition Analysis Group (van Donkelaar et al., 2021). The first step is to assess the average effect of PM2.5 on total factor productivity across the entire Indian manufacturing sector between 2011 and 2020, without distinguishing between sectors. This first estimate helps determine whether, on average, air pollution holds back manufacturing productivity over the period studied.

The second step goes beyond this average effect to look for possible heterogeneity. It checks whether the effect of PM2.5 varies with the labor intensity of manufacturing sectors, using differences in sectoral specialization across states.

Finally, the third step relies on a counterfactual simulation. The goal is not to assume that pollution did not exist before the manufacturing policy, but to estimate what the path of manufacturing productivity could have looked like if pollution had been kept at a lower level. This also makes it
possible to quantify what a stronger effort to reduce pollution, carried out alongside industrial
development, could have added in terms of productivity.

This study also connects two strands of literature that have rarely been brought together. The first asks why Indian manufacturing policy has not reached its targets, while giving limited attention to the potential role of air pollution in these outcomes (Nagaraj, 2019). The second measures the effect of PM2.5 on manufacturing productivity, but without linking its findings to the evaluation of a specific industrial policy (Majumder, Chaudhary, & Dey, 2024, Hansen-Lewis, 2018, Maiti & Chakraborty, 2023). By connecting these two approaches, this work seeks to examine whether air pollution has affected the very goals of Indian manufacturing policy, particularly in the labor-intensive sectors it aimed to develop.

The counterfactual also provides a policy implication, if pollution does hold back productivity and if this effect is stronger in certain sectors, manufacturing development policies could better integrate pollution reduction measures alongside their production and employment objectives.

References

Government of India. (2011). National Manufacturing Policy. Ministry of Commerce and Industry, Department of Industrial Policy and Promotion.
https://iauonline.in/pdf/National_Manufacturing_Policy_25October2011.pdf and
https://www.pib.gov.in/newsite/PrintRelease.aspx?relid=76843&reg=48&lang=2

Hansen-Lewis, J. (2018). Does air pollution lower productivity? Evidence from manufacturing in India [Working paper]. Northeast Universities Development Consortium Conference (NEUDC).
https://barrett.dyson.cornell.edu/NEUDC/paper_324.pdf

Krugman, P. (1987). The narrow moving band, the Dutch disease, and the competitive consequences of Mrs. Thatcher: Notes on trade in the presence of dynamic scale economies. Journal of Development Economics, 27(1-2), 41–55. https://doi.org/10.1016/0304-3878(87)90005-8

Lane, N. (2025). Manufacturing revolutions: Industrial policy and industrialization in South Korea. The Quarterly Journal of Economics, 140(3), 1683–1741. https://doi.org/10.1093/qje/qjaf025

Maiti, S., & Chakraborty, C. (2023). Does air pollution affect labour productivity in Indian
manufacturing? Evidence from state-level data. In The impact of environmental emissions and
aggregate economic activity on industry: Theoretical and empirical perspectives (pp. 183–194).
Emerald Publishing. https://doi.org/10.1108/978-1-80382-577-920231014

Majumder, P., Chaudhary, E., & Dey, S. (2024). Exposure to ambient PM2.5 and its association with the loss of labor productivity of manufacturing plants in India. Environmental Research Letters, 19(10), 104010. https://doi.org/10.1088/1748-9326/ad6ea4

Nagaraj, R. (2019, April 8). Make in India: Why didn’t the lion roar? The India Forum.
https://www.theindiaforum.in/article/make-india-why-didnt-lion-roar

van Donkelaar, A., Martin, R. V., Brauer, M., Hsu, N. C., Kahn, R. A., Levy, R. C., Lyapustin, A.,
Sayer, A. M., & Winker, D. M. (2021). Monthly global estimates of fine particulate matter and their uncertainty. Environmental Science & Technology, 55(22), 15287–15300.
https://doi.org/10.1021/acs.est.1c05309

About the Contributor

Bérenger SANON is currently a second-year Magistère student in Development Economics and a first-year Master’s student in the Economic Analysis and Project Analysis track.

Disclaimer: All views expressed in the article belong solely to the author and not necessarily to the organisation.