Import Substitution: A Tried and Tested Policy for Failure

    • By,
      Harsha Kavi – Student, Kautilya

Import substitution is a policy by which the state aims to increase the consumption of goods that are made domestically by levying high tariffs on foreign goods. This gives an advantage to the domestic manufacturers as their goods will be cheaper and preferable in the market compared to foreign products. India adopted this model post-independence, and it continued till the 1991 reforms. Due to import substitution, the domestic producers captured the entire Indian market, but there was slow progress in technological advancements, and the quality of Indian products was inferior to the foreign manufactured ones. But after the reforms, the Indian market was opened to everyone, and the consumer got the best value for the price he paid. The Make in India policy of the present government is reminiscent of the pre-1991 inward-looking Indian state.

Even though Make in India is not a classic import substitution case, it aimed to reach that end. Manufacturing in India was consistent as its contribution to GDP stayed between 12% and 18% from the 1960s to now, and the reforms of 1991 made little changes to that while the services kept growing. Hence, it is tempting for any government to aspire to an India which is a manufacturing hub and is not dependent on anyone. But the problem is that manufacturing a complete product requires different parts, each of which is imported from various places. There is value addition at every step of the supply chain. For example, the Production Linked Incentive (PLI) Scheme supports the manufacturing of mobile phones in India but we cannot be completely Atmanirbhar as the customized semiconductor chips are all produced and imported from Taiwan.

Another issue of concern is the apparent change in the political mindset. The thrust of the ruling dispensation has also somewhat been to that end. Various statements have been made and publicized to urge the Indian consumer to buy local. This directly supports an inward-looking economy that goes against an open market’s heart.

This is the pre-1991 era mindset making a comeback. A ’good product’ is an objective fact, and if a product is not competitive abroad, how can it be competitive at home? It is asking the consumers to compromise on the value while spending more. Former NITI Aayog Vice-Chairman Aravind Panagariya says that import substitution can decrease the growth of Indian GDP by 2 percentage points annually. He also mentions that when import substitution was implemented for electronics, the imports almost doubled in value in 5 years, but the exports barely increased in comparison. This is due to the lack of competition.

The main problem with import substitution is that it decreases quality by killing competition. When the foreign products are effectively stopped from entering the market, the domestic producer will not have any incentive to better their product. As the standards go lower, the quality of the product follows, and Indian products will not be able to compete globally. For any country to become an exporting power, it needs to import a lot. China and US, the top two exporters globally, are also the top two importers in the world. You cannot export much by going soft on import substitution as you will not have access to the latest technology, best practices, and human resources, which will hamper productivity.

Hence, import substitution will only weaken India by creating an inefficient economy that can neither produce adequately at home nor compete actively abroad. The revival of this policy will not yield any new results.

Insanity is doing the same thing over and over again and expecting different results – Albert Einstein


India can grow at 10% but import substitution policy could hurt that, Arvind Panagariya says. (2020, August 29). ThePrint.
India can grow at 10% but import substitution policy could hurt that, Arvind Panagariya says

India’s trade policy: Import substitution or tariff intervention? – India business & trade, an initiative of trade promotion Council of India. (2021, July 15). Trade Promotion Council of India – Official website of Trade Promotion Council of India.
India’s trade policy: Import substitution or tariff intervention?

Manufacturing, value added (% of GDP) – India. (n.d.). World Bank Open Data | Data.
Manufacturing, value added (% of GDP) – India

Panagariya, A. (2020, July 22). Don’t resurrect failed policy: Why import substitution industrialisation is doomed to flounder, again. Times of India Blog.
Don’t resurrect failed policy: Why import substitution industrialisation is doomed to flounder, again

Rawat, M., Raj, R., & Agarwal, T. (2020). A critical review of make in India as an import substitute. SSRN Electronic Journal.
A Critical Review of Make in India as an Import Substitute

*The Kautilya School of Public Policy (KSPP) takes no institutional positions. The views and opinions expressed in this article are solely those of the author(s) and do not reflect the views or positions of KSPP.