Import Substitution vs Technological Sovereignty: Why “Made in India” Is Not Enough

A product can be manufactured in India, sold by an Indian company and counted in domestic manufacturing statistics without being technologically Indian. The difference is not where the final assembly takes place, but who owns the design, intellectual property and capability to change or reproduce it.

Imagine two products labelled “Made in India”. One relies on imported high-value components and a foreign-owned design that cannot be modified without approval. The other is designed in India, with Indian-owned intellectual property and the freedom to upgrade, license and export it. Both support local production. Only one gives India control over the underlying technology.

What import substitution measures

Import substitution means producing domestically what was previously imported. It can create jobs, develop supplier networks, reduce imports of finished goods and establish the scale needed for more advanced manufacturing. But it measures where a product is made, not necessarily where its technology comes from or who controls its value chain.

That distinction is visible in electronics. Government figures put India’s electronics production at about ₹12 lakh crore in 2024–25, up from roughly ₹1.9 lakh crore in 2014–15. Yet the Ministry of Electronics and IT reported in April 2026 that domestic value addition in electronics manufacturing was estimated at 18–20%. These figures are not contradictory: production can grow quickly while many components, materials and production technologies remain imported.

Solar manufacturing shows the same gap

India’s solar manufacturing capacity has expanded rapidly, especially in modules. But module capacity alone does not mean the country controls the full photovoltaic supply chain. A June 2026 Business Today analysis put annual module capacity above 200 GW against about 27 GW of cell capacity, and reported that India imported all of its polysilicon and around 98% of its wafers, with only about 2 GW of ingot-and-wafer capacity. Cell capacity has since passed 32 GW, but the upstream gap remains.

The strategic gap is upstream: polysilicon, ingots, wafers, specialised equipment and process know-how. China’s position was built by investing across these stages, not by focusing only on final assembly. India’s next challenge is therefore to deepen domestic capability, not simply add more module lines. Reports in October 2026 indicate the government is preparing a dedicated incentive scheme for polysilicon, the most import-dependent stage.

The technology ladder

Technological capability can be viewed as a ladder:

• Assembly: putting imported components together.
• Components: manufacturing the parts that make up a product.
• Materials: producing specialised inputs such as refined minerals and advanced alloys.
• Process equipment: building the machinery used to manufacture components and materials.
• Design and intellectual property: owning the architecture, software, patents and technical know-how.

Import substitution often begins with assembly and component manufacturing. Technological sovereignty requires progress further up the ladder, particularly in design, intellectual property, critical materials and manufacturing equipment. A country can export products at scale and still depend on others for the technologies that make those products possible.

Why ownership matters in strategic sectors

The practical test is what happens when a supplier relationship breaks down. If production depends on foreign licences, source code, specialised equipment or a concentrated source of materials, a disruption or export restriction can affect the ability to manufacture, repair or upgrade a product.

China’s rare-earth export controls announced in October 2025 showed how such measures can extend beyond raw exports to processing technologies and to foreign-made products containing Chinese-origin rare earths. Most of that package was suspended in November 2025 until 10 November 2026, while licensing for seven rare earths introduced in April 2025 remains in force. The lesson holds either way: supply-chain exposure can persist even when final manufacturing happens elsewhere, and it can be switched on or off by decisions taken abroad.

India’s defence policy is moving towards design ownership

India’s draft Defence Acquisition Procedure (DAP) 2026, released by the Ministry of Defence in February 2026, proposes a stronger preference for the “Buy (Indian-IDDM)” category (Indigenously Designed, Developed and Manufactured) and would raise the minimum indigenous content for that category from 50% to 60%. It also defines indigenous design for the first time. As of September 2026 the draft had not been finalised, and procurement continues under DAP 2020.

The direction matters: domestic procurement is increasingly being discussed not only in terms of where equipment is made, but also of who owns the design and can maintain, modify and develop it. This is the difference between local production and durable technological capability.

Import substitution is the beginning, not the finish line

This is not an argument against import substitution. Local assembly can create the demand, workforce, supplier base and cash flow that make deeper investments possible. India’s Electronics Components Manufacturing Scheme, for example, is intended to build capacity beyond finished products. By August 2026, 106 projects had been approved under the scheme, representing expected investment of ₹69,548 crore across 15 states.

The mistake is treating a lower import bill as proof that the technology gap has closed. Progress should also be measured by domestic value addition, Indian-owned intellectual property, local component and equipment capability, and the ability to keep producing when external supply is disrupted.

The question investors should ask

For an investor, customer or policymaker assessing an Indian technology company, the more revealing question is not simply “Where is it made?” It is: “What could stop this company from producing, upgrading or exporting it and who would have to give permission?”

If the answer depends on a foreign design authority, a single supplier or restricted process technology, the company may have a valuable manufacturing operation but still face a strategic dependency. Building technological sovereignty means steadily reducing those dependencies while developing the know-how to create and control critical technologies.

MGF Kavachh invests in early-stage Indian companies developing sovereign and strategic technologies across defence and aerospace, space, critical communications, critical minerals and advanced materials, cybersecurity, and semiconductors.

STRONGER INDIA. SAFER WORLD.