Foreign Trade during 1950-1990|Trade Policy: Import Substitution

What is Foreign Trade?

Foreign Trade refers to the exchange of goods & services between two or more nations or within boundaries. India has been one of the major trading countries since the time of independence, and primarily exports goods like cotton, silk, jute, indigo, wool, etc. India is also an importer of finished products like woollen clothes, silk, cotton & capital goods, like light machinery made in Britain, etc. 

During the colonial period, Britain held a monopoly over India’s imports & exports. However, in the 1950s India entered into a planned development era. At that time, Import Substitution was a major part of the Trade and Industrial Policy of India. In 1950, India’s portion of trade was 1.78% of the total world trade.

Trade Policy: Import Substitution

To be a self-reliant nation in some essential sectors, India adopted the strategy of replacing imports with domestic production. In the first seven plans of India, trade was characterised by an inward-looking Trade Strategy, technically known as Import Substitution. Hence, Import Substitution is a policy that replaces or substitutes imports with domestic production. For example, instead of importing machines from foreign countries, India can encourage its domestic industries to produce these machines in the country itself. Therefore, it can be said that the basic motive of Import Substitution was the protection of domestic industries from foreign competition. 

The Import Substitution policy can serve the following two definite objectives:

1. Achievement of self-reliance, and
2. Savings of precious foreign exchange.

Protection from Imports through Tariffs and Quotas:

To protect India from foreign countries or imports, the government used two ways, i.e., Tariffs and Quotas.

1. Tariffs: These are taxes levied on imported goods. By imposing a heavy duty on imported goods, the Government of India aimed at making them more expensive to reduce their use.

2. Quotas: These are the non-tariff barriers imposed by the Government of India on the number of imports and exports. Simply put, it means fixing a maximum limit on the import of goods by a domestic producer. 

Hence, tariffs on imported goods and fixing quotas helped domestic industries by restricting the import level and removing the fear of competition from the foreign market, which ultimately encouraged them in expanding their business.

Reason for Import Substitution:

1. One of the main reasons behind the implementation of Import Substitution is that various developing countries like India are not in a position to compete against more developed countries and the goods produced by them. However, with the protection of industries in these countries from foreign products, they will be in a position to compete with them in the due course of time.

2. Besides, because of imports of luxury goods from foreign countries, there was a risk of draining of foreign exchange reserves of the country. Therefore, restriction on imports was necessary.