Strategy for Trade Policy in India: General Developments during Planning Period11th February 2020
The trade strategy of nation has impact not only on the volume and composition of foreign trade, but also on the pattern of investment and direction of development, entrepreneurial and business behaviour, consumption pattern, etc. Since the commencement of planned development, India followed a strong inward-oriented policy.
Import substitution industrialization (ISI) is a trade and economic policy that advocates replacing foreign imports, with domestic production. ISI is based on the premise that a country should attempt to reduce its foreign dependency through the local production of industrialized products.
Import substitution implies indigenous production of raw materials, intermediate goods and final consumer and capital goods. Import substitution was the major plank of India’s foreign trade policy during the early-years of economic planning.
Later, however, it was realized that large imports of capital goods and equipment would help the country build up domestic production capacity and help meet the domestic requirements. The presumption was in-built in the Mahalanobis strategy of heavy- industry-led growth. A further assumption of the strategy was that once the production capacity within the country was built up, it would be possible to give up imports to a large extent.
The progress of import substitution in the country was quite satisfactory. For instance, in the sphere of consumer goods we acquired the capacity to produce exportable surplus in which we are competing effectively in the international markets. Likewise, indigenous production of capital goods also expanded fast with the country gradually becoming self-sufficient in their production too.
But all this does not mean that the country’s requirements of imports have decreased or show signs of falling. On the contrary, India’s imports have been mounting.
The approach of ‘import and adapt’, continuously fell short of global advancement in technology. More importantly, imports keep our industry on its toes in terms of price, quality and technology. Hence, our policies and efforts should be geared to develop ways and means with which to finance the rising needs of imports in the country.
The terms ‘export promotion’, ‘outward-orientation’, and ‘export-led growth’ have all been used interchangeably to describe the policies adopted in the successful developing countries. Import substitution and export promotion are not competitive, but each requires a different set of policies to be pursued. Three distinct phases can be seen in India’s approaches and policy towards exports.
(i) The early phase, which lasted up to about 1972-73, was one of extreme export pessimism with a fear that exports are subject to low growth in demand, high fluctuations in prices and lead to economic dependency.
(ii) The second phase began in 1973 after the first oil crisis and lasted for about ten years. In this phase, although-it was not explicitly stated, it was recognised that policies of import substitution by themselves could not bring about viability in India’s BOP.
(iii) In the third and more recent phase, exports are being seen as an integral part of industrial and development- policy. The anti- export bias of the policy has paved way for pro-export policy.
The policy has emphasized technological upgradation, increase in the size of plants, freer imports and domestic and international competition for the entire industrial sector as being essential for export promotion.
The ‘import substitution’ strategy of industrialization relied on encouraging domestic production to cater to the domestic market. This was sought to be realized by high tariffs and a high degree of protection granted to the domestic industry. The major drawback of this strategy was that it led to an inefficient and high cost industrial structure, which also adversely affected the prospects for export growth.
Thus, it worked as a ‘bias’ against exports. The argument for import liberalization rests on the need to reduce the protection granted to the domestic industry for domestic production, thereby reducing the ‘bias’ against exports.