2.5. TRADE POLICY: IMPORT SUBSTITUTION

The industrial policy that India adopted was closely related to the trade policy. In the first seven plans, trade was characterised by what is commonly called an inward looking trade strategy. Technically, this strategy is called import substitution. This policy aimed at replacing or substituting imports with domestic production. For example, instead of importing vehicles made in a foreign country, industries would be encouraged to produce them in India itself.

The import substitution policy means that instead of relying on foreign goods, India encouraged its own industries to produce similar goods domestically. This strategy was designed to boost local production and reduce import dependence. For instance, instead of buying cars or vehicles from outside the country, the focus was on manufacturing them within India. This encourages growth in local industries, creates jobs, and keeps money circulating within the national economy.

Imagine a community that usually imports its food from neighboring towns. If they decide to grow their own vegetables and fruits, they can not only save money but also support local farmers. This helps the community to become self-sufficient and reduces reliance on outside sources.

In this policy, the government protected the domestic industries from foreign competition. Protection from imports took two forms: tariffs and quotas. Tariffs are a tax on imported goods; they make imported goods more expensive and discourage their use. Quotas specify the quantity of goods which can be imported. The effect of tariffs and quotas is that they restrict imports and, therefore, protect the domestic firms from foreign competition.

To protect local industries, the Indian government implemented tariffs and quotas. Tariffs increase the cost of imported goods, making them less attractive to consumers compared to locally produced items. Quotas limit the quantity of foreign goods that can enter the market, ensuring that local products have a better chance of succeeding. This way, domestic manufacturers can grow without as much pressure from foreign competitors.

Think of it as having a local bakery that makes delicious pastries. If a big store starts selling imported pastries at a low price, the bakery might struggle to keep customers. By imposing a tax on the imported pastries, the local bakery can stay competitive and continue to thrive because its products are now closer in price to those imported goods.

The policy of protection was based on the notion that industries of developing countries were not in a position to compete against the goods produced by more developed economies. It was assumed that if the domestic industries were protected they would learn to compete in the course of time. Our planners also feared the possibility of foreign exchange being spent on import of luxury goods if no restrictions were placed on imports.

The underlying assumption was that emerging industries in India could not compete with more established and technologically advanced foreign industries. The idea was that by providing a cushion through protection, these local industries could develop and eventually compete on equal footing. Additionally, there were worries about the country's foreign exchange reserves being depleted by excessive imports of non-essential luxury goods, which could harm the economy.

Imagine a small, growing business. If it faces tough competition from much larger, established companies, it might struggle to survive. If you give that small business a little bit of time and some support, like exclusive rights to sell in a certain area without competition, it can develop its products and eventually compete effectively.

The achievements of India’s industrial sector during the first seven plans are impressive indeed. The proportion of GDP contributed by the industrial sector increased in the period from 13 percent in 1950-51 to 24.6 percent in 1990-91. The rise in the industry’s share of GDP is an important indicator of development. The six percent annual growth rate of the industrial sector during the period is commendable.

The results of the import substitution policy were significant. Over four decades, the industrial sector's contribution to the GDP more than doubled, indicating that the policy helped stimulate industrial growth. Maintaining an annual growth rate of six percent is a commendable achievement and demonstrates how supporting local industry can lead to substantial economic development.

Consider a startup that begins to create a new type of smartphone locally. As it grows, it employs more workers and sparks the creation of other businesses to support it, like suppliers and service providers. Over time, this startup contributes significantly to the region's economy and GDP, just as India's industries did under the import substitution policy.

In spite of the contribution made by the public sector to the growth of the Indian economy, some economists are critical of the performance of many public sector enterprises. It was proposed at the beginning of this chapter that initially public sector was required in a big way. It is now widely held that state enterprises continued to produce certain goods and services (often monopolising them) although this was no longer required.

While the public sector played a vital role in industrial growth, it faced significant criticism. Many public sector enterprises did not perform efficiently and became monopolies in certain areas, which stifled competition. Critics argue that as the economy evolved, the need for some of these state-run services lessened, yet many continued to operate without effective competition. This inefficiency could drain resources from the economy.

Think of a public library that is the only library in town. While it provides an essential service, if it does not keep up with the community's needs or improve its offerings, people may stop using it, leading to wasted resources. New libraries or digital services might provide more efficient and varied access to information without monopolizing the service.

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