Import substitution

Subject: Economy

Context:

Promoting self-reliance in sectors such as electronics, defence equipment, pharmaceuticals, among others, can lead to import substitution of over USD 186 billion for the country, says a study by Export and Import Bank of India (Exim Bank).

Concept:

• Government strategy that emphasizes replacement of some agricultural or industrial imports to encourage local production for local consumption, rather than producing for export markets.
• Import substitutes are meant to generate employment, reduce foreign exchange demand, stimulate innovation, and make the country self-reliant in critical areas such as food, defense, and advanced technology.
• It seeks to provide added protection to domestic industries via tariffs, import quotas, government loans at subsidised rates of interest. This encourages people to start new production units.
• The economies adopt this policy to protect its budding industry from international competition that has easily attained economies of scale due to large-scale production.
• Import substitution gained widespread prominence and adopted by many countries after World War II to bolster domestic industry and growth. This was also done to reduce dependence on other countries.
• India too had resorted to import substitution which was later reversed during 1991 currency crisis.