Budget FY27: A trillion-dollar dream needs a smarter industrial policy

It is no longer a question of whether we need a proactive industrial policy; the question is how to design and implement it. Across the developed world, governments have decisively abandoned the passive, market-first orthodoxy that dominated economic thinking for decades and have returned—unapologetically—to the business of picking, nurturing, and protecting strategic industries.

The United States, through its landmark Chips and Science Act of 2022, is injecting $39 billion in direct subsidies to rebuild domestic semiconductor manufacturing on American soil. The European Union spent €67 billion between 2014 and 2020 on "Smart Specialisation" programmes specifically designed to accelerate innovation and firm development across its member states.

Germany, France, Japan, and the United Kingdom have all rolled out aggressive state-backed industrial strategies targeting electric vehicles, renewable energy, and advanced manufacturing. As Project Syndicate wrote in 2023, "Industrial policy is back." For a country like Bangladesh—still in the early stages of industrial deepening—the lesson is not merely academic; it is urgent.

Bangladesh's industrialisation story, while genuinely impressive, has been built on a surprisingly weak industrial policy foundation. The country's manufacturing success rests on two pillars that, on closer inspection, owe as much to circumstance as to deliberate state action.

The first is the readymade garment (RMG) sector, which grew largely on the back of preferential quota access to Western markets under the Multi-Fibre Arrangement—an external opportunity rather than an internally designed strategy. That said, domestic policies played a critical role in enabling the country to seize this opportunity.

The second is a domestic market story, best illustrated by the rise of conglomerates such as RFL and Walton, which succeeded through entrepreneurial dynamism and a large captive consumer market rather than through a state-directed industrial plan. Bangladesh is "not only an RMG story; it is also an RFL-Walton story." Crucially, however, neither story was scripted by a coherent industrial policy.

What Bangladesh currently maintains is not a strategic industrial vision; it is, by most honest assessments, a long shopping list of scattered incentives spread thinly across too many sectors to generate transformative outcomes in any of them.

The country has yet to do what South Korea did during its formative decades: make hard choices, identify a handful of sectors in which it intends to compete globally, and then marshal every instrument of the state—fiscal, monetary, regulatory, and institutional—in support of that strategy.

The National Budget for FY2026–27, framed around the government's "3R Strategy" of Recovery, Restoration, and Reconstruction and its ambition to build a one-trillion-dollar economy by 2034, takes meaningful steps towards incentivising local production. The budget proposes a broad array of fiscal measures: a 10-year tiered tax holiday for edible oil producers using domestically grown oilseeds; a zero-percent tax rate for the solar power sector until 2035; full duty and tax exemptions for local electric vehicle manufacturing and assembly until 2030; duty exemptions on raw materials used in semiconductor chip design and pharmaceutical production; and a Tk60,000 crore stimulus package offering a 6% interest subsidy to entrepreneurs.

These are, without question, welcome and well-intentioned provisions. But they share a common limitation: they are entirely supply-side in nature. They reduce the cost of production but do nothing to guarantee a market. They lower barriers to entry but do not ensure that there is a buyer waiting on the other side, especially for industries with high fixed costs. It is precisely here that the budget reveals a missed opportunity of historic proportions.

The single most powerful lever in any industrial policymaker's toolkit is not a tax exemption. It is the ability of the state, as the largest buyer in the economy, to use its purchasing power to create and sustain demand for domestically produced goods. When a government declares that it will purchase only buses, computers, medical equipment, or solar panels that meet a minimum local-content threshold, it does not merely reward domestic producers—it creates the market itself. The FY2026–27 budget, for all its fiscal generosity, does not deploy this lever at all.

The importance of a guaranteed market for the emergence of a new industry cannot be overstated. Bangladesh's RMG sector offers the clearest illustration. The Multi-Fibre Arrangement's export quotas to Western markets provided the demand certainty needed for investors to build factories, import machinery, and train workers. The risk was borne not by the market but by a policy framework that guaranteed buyers.

The same logic is visible in the rise of BYD, now the world's largest electric vehicle manufacturer. Shenzhen used public procurement and purchase subsidies to create demand for electric buses and taxis, while China's "Ten Cities, Thousand Vehicles" programme directed cities to purchase new-energy vehicles for public fleets. Manufacturers were effectively handed a government-guaranteed market while they climbed the learning curve.

South Korea's industrialisation followed a similar path. Korean steel, shipbuilding, and electronics firms did not become globally competitive from day one. They benefited from guaranteed access to the US market, which absorbed exports at scale and enabled the production volumes and technological upgrading needed to compete internationally. In each case—Bangladesh's garments, China's EVs, and Korea's heavy industries—the state, either as a direct buyer or guarantor of market access, provided the demand certainty that unlocked private investment, enabled scale, and accelerated learning.

India offers Bangladesh the most contemporary and replicable model of procurement-led industrial policy. Through the Public Procurement (Preference to Make in India) Order, 2017, suppliers are classified according to local content. Class-I suppliers with 50% or more local content receive absolute preference in government tenders, while suppliers with less than 20% local content are effectively excluded from many procurement categories. The requirements are sector-specific: government-procured vehicles must contain 65% local content, automotive components 60%, desktops 45%, laptops 40%, and some smart cards up to 70%. In medical devices, dozens of products may be procured only from Class-I suppliers.

The single most powerful lever in any industrial policymaker's toolkit is not a tax exemption. It is the ability of the state, as the largest buyer in the economy, to use its purchasing power to create and sustain demand for domestically produced goods. When a government declares that it will purchase only buses, computers, medical equipment, or solar panels that meet a minimum local-content threshold, it does not merely reward domestic producers—it creates the market itself. The FY2026–27 budget, for all its fiscal generosity, does not deploy this lever at all.

The system is backed by strict enforcement. Suppliers must certify local content, large contracts require independent verification, and false declarations can result in debarment. The policy is further reinforced by Production Linked Incentive (PLI) schemes that reward firms for meeting domestic value-addition thresholds. Together, procurement preferences and production incentives function as the stick and the carrot of India's industrial strategy.

Together, the procurement mandate acts as the "stick" and the PLI as the "carrot", compelling global firms to relocate manufacturing to Indian soil rather than simply importing finished goods under a local label. The results are imperfect, and implementation has faced legitimate criticism, but the direction is unambiguous: India has decided that government spending will serve industrial development, and it has built the policy architecture to deliver on that decision.

For Bangladesh, the path forward requires more than fiscal generosity—it requires a fundamental reimagining of the relationship between public spending and industrial strategy. Several concrete steps are essential.

The first and most foundational is strategic prioritisation. A high-powered committee, backed by genuine political commitment at the highest level of government, must be convened to identify three to five sectors in which Bangladesh has a realistic pathway to competitiveness over the next decade. Candidates include light engineering; bus, truck, van, and agricultural machinery manufacturing; solar panels; IT hardware; man-made fibres; and active pharmaceutical ingredients. The selection must be made with discipline: not a shopping list, but a short, defensible, and fully resourced commitment.

For each selected sector, the government must then design a comprehensive industrial development package—not merely a tax holiday, but a coordinated combination of fiscal incentives, access to affordable credit, dedicated infrastructure, skills and training programmes, and, critically, a procurement guarantee that creates domestic demand. The bus and minibus manufacturing sector presents a compelling and immediately actionable pilot case. Bangladesh imports large numbers of buses annually for the Bangladesh Road Transport Corporation (BRTC), city corporations, educational institutions, and private fleet operators.

A policy mandating that all government-procured buses contain a minimum of 40% local content—rising to 60% over a five-to-seven-year period—would instantly create a large, bankable domestic market for local manufacturers. Combined with duty-free imports of components not yet producible locally (on a declining schedule to incentivise backward linkages), this procurement guarantee would de-risk investment in assembly plants, component manufacturing, and workforce training in ways that no tax exemption alone ever could.

Bangladesh must also build the institutional infrastructure necessary to implement such a policy credibly. This means reforming the Public Procurement Act to include local-content preference provisions, establishing a technical body capable of defining and auditing local-content thresholds, and creating a transparent grievance and appeals mechanism.

The FY2026–27 budget has laid important fiscal groundwork. It has demonstrated a political willingness to support domestic industry through the tax code. But a nation that aspires to become a trillion-dollar economy by 2034 cannot afford to use only half its toolkit. Public procurement is not a technical footnote in the government's financial operations—it is one of the most powerful instruments of industrial transformation ever devised. The state must stop thinking of itself merely as a regulator and financier of industry and start thinking of itself as industry's most important first customer. That shift in mindset, more than any individual budget line, is what separates nations that industrialise from those that merely aspire to.

Sketch: TBS

Dr Kazi Iqbal is the Research Director at the Bangladesh Institute of Development Studies (BIDS). 

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.