IMPORT SUBSTITUTION

PRATIK POURKARROLL NO. 17INDUSTRIAL ENGINEERING

GROWTH AND DEVELOPMENT

Growth can be thought of as expanding the size of the community through the use of land and other natural resources.

Development, on the other hand, can be thought of as improving liveability through, jobs, education, cultural preservation, public safety, and sense of community.

Fortunately, there exist ways for communities to develop without growing. One of those ways is through Import Substitution. Country GDP per

capita (US$)

US 53,042

Germany 46,268

China 6,807

India 1,498Source: World Bank_nominal _gdp_2014

NEED FOR EXPORT/IMPORT

Export and Import are potential weapons of developing the economy and can play an important role in achieving the country’s socio-economic objectives.

In an economy major determinant of net production & employment is growth in Export, as it is a role player in foreign exchange which facilitates the import of capital goods.

Source: WTO

IMPORT SUBSTITUTION

Import substitution is a trade policy aimed to promote economic growth by restricting imports that competed with domestic products in developing countries.

The import substitution approach substitutes externally produced goods and services with locally produced ones.

Import substitution can also be discussed as a policy strategy that attempts to utilize underused capacities, reduce regional unemployment or protect infant industries.

UNDERSTANDING THE LOCAL ECONOMY

“leaky bucket” model. Money circulates within the region when money that is

earned locally is also spent locally. This requires that some money exists in the bucket to begin with—one way this happens is when local goods and services

are purchased by consumers outside the region.

— Another source of inflow comes from businesses which decide to set up shop locally and generate jobs that pay local workers.

The “leak” in the bucket that allows money to escape from the community is created when goods and services from outside the region are purchased with local money

UNDERSTANDING THE LOCAL ECONOMY

Plugging the Leaks One way to prevent money from leaving the local economy is to

connect local demand for goods and services with the local suppliers of those goods and services.

Many of the things that individuals or businesses need can be found from suppliers within the area but, due to lack of adequate information or convenience, those things are often purchased from the outside. This represents another flow of capital leaving the system.

By substituting demand for externally produced things with locally produced things, communities can retain capital for use within the community.

Import substitution

HISTORY OF IMPORT SUBSTITUTION

The notion of import substitution was popularized in the 1950s and 1960s as a strategy to promote economic independence and development in developing countries

This initial effort failed due in large part to the relative inefficiency of 3rd world production facilities and as a result their inability to compete in a globalizing marketplace.

Thus an export oriented approach has became the norm.

OBJECTIVES OF IMPORT SUBSTITUTION

Promotion of Domestic Industry

Employment Generation

Promotion of Industrialization

Production of consumer’s goods

Improvement in Balance of Payment

ADVANTAGES & DISADVANTAGES OF IS

Advantages• Increase in domestic employment.• Reduced dependence on labor non intensive industries.• Resilience in the face of global economic shock (recessions &

depreciations)• Less long distance transportation of goods.

Disadvantages• The IS industries are inefficient as they are not exposed to

internationally competitive industries.• Increase in unemployment internationally as world GDP

decreases through promotion of inefficiency.

Import Licenses: - Import license is an important instrument. There can be a large variety of licenses- for users or for wholesalers they can be obtained by direct permission from some ministry or the central bank. They can be combined with specific import programs and they might be combined with lists of prohibited import products.

Guarantee Deposits: - Other means are guarantee deposits which have to be made by the importer for the right to import an item. Foreign firms can be restricted in their right to repatriate dividends and profits. Domestic exporters, on the other hand may be allowed to resell part of their foreign earnings at advantageous exchange rates.

MEASURES FOR IMPORT SUBSTITUTION

Tariff Walls: - Tariffs and surcharges are common protection devices. Tariff rates differ between countries and also vary over time. It is convenient to characterize a country’s control over foreigntrade according to the policy implemented.

Physical Restrictions:- The method of physical restriction on import or even outright banning of import is used in cutting out imports. Reduction in imports is brought out by such devices as quotas, licensing, ban on certain imports etc. It is a sure way of protecting the domestic producers from the foreign competition.

MEASURES PF IMPORT SUBSTITUTION

CONSIDERATIONS FOR EFFECTIVE IMPORT SUBSTITUTION

Whether the IS industries will make a contribution to India’s economic development through efficient utilization of local resources and also realize foreign exchange for more essential uses.

Those industries should be included in the program of IS where a clear cut cost advantage could be established.

Only those industries should be included in the program of import substitution whose products have adequate domestic or international demand existing or potential.

Import substitution program should be chalked out in totality rather than in terms of fragments.

Conclusion

The policy of import substitution is well- suitable for a country like India because India has a large variety of resources for industrial growth. Its domestic market is small. Hence it is necessary to expand the domestic market by curtailing the imports.

Despite the drawbacks, IS strategies are able to plug the leaks of capital from the local economy and provide more money that could potentially be spent locally.

But we cannot rely solely on people’s good will to purchase locally especially when many locally produced goods are far more expensive than alternatives.

Instead, consumers must both have an understanding of the impacts of their purchases on the local economy and also find real value in the goods that are locally available which gives good reason to be hopeful that import substitution can provide local communities a path to economic prosperity.

REFERENCES

Kulkarni K G. (2009), Trouble with import substitution and Protectionism: a case of Indian economy, Indian Journal of Economics and Business. Denver.

Pahariya N. C. (2008), Import substitution and export promotion as development strategies, Briefing paper. CUTS International.

http://www.indiaonestop.com/inflation.htm

http://www.cia.gov/cia/publications/factbook/geos/in.html#Econ

Questions

1. Explain the need of export/import in development of

a country.

2. What is import substitution? What are its objectives?

3. State the advantages & disadvantages of import

substitution.

4. Explain the various measures of import substitution.

5. Explain in brief the considerations to be followed

before setting up import substitution industry.