Two typical instruments used by governments in industrial policy.

Two typical instruments used by governments in industrial policy.

• A. Targeted subsidies and tax incentives for firms; creation of SEZ or investment in infrastructure.
• B. Broad tax increases on all sectors.
• C. Free market deregulation only.
• D. Nationalization of all industries.

Answer: (A)

Industrial policy relies on selective tools to steer investment and build competitive industries. Targeted subsidies and tax incentives give firms financial reasons to invest in priority areas, encouraging capital expenditure, productivity gains, and innovation that might not occur in a purely market-driven setting. Creating special economic zones or investing in infrastructure provides the essential environment—reliable power, transportation, and simplified rules—that reduces operating costs and speeds up project timelines, making it easier for firms to scale. Together, these instruments address market failures and signal long-term development priorities. Broader measures like increasing taxes across the board raise costs for all firms and can chill investment; free-market deregulation alone might remove needed safeguards without providing a direct push toward development; and nationalizing entire industries is an overreach that tends to reduce efficiency and deter private investment. The targeted approach strikes a balance: it nudges private activity toward strategic goals while preserving competitive dynamics.

Industrial policy relies on selective tools to steer investment and build competitive industries. Targeted subsidies and tax incentives give firms financial reasons to invest in priority areas, encouraging capital expenditure, productivity gains, and innovation that might not occur in a purely market-driven setting. Creating special economic zones or investing in infrastructure provides the essential environment—reliable power, transportation, and simplified rules—that reduces operating costs and speeds up project timelines, making it easier for firms to scale. Together, these instruments address market failures and signal long-term development priorities. Broader measures like increasing taxes across the board raise costs for all firms and can chill investment; free-market deregulation alone might remove needed safeguards without providing a direct push toward development; and nationalizing entire industries is an overreach that tends to reduce efficiency and deter private investment. The targeted approach strikes a balance: it nudges private activity toward strategic goals while preserving competitive dynamics.