IMPORT SUBSTITUTION

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 GROWTH AND DEVELOPMENT
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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 1,498
Source: World Bank_nominal _gdp_2014

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 NEED FOR EXPORT/IMPORT
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Export and Import are potential weapons of developing the economy

and can play an important role in achieving the countrys 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

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 IMPORT SUBSTITUTION
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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.

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 UNDERSTANDING THE LOCAL ECONOMY
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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

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 UNDERSTANDING THE LOCAL ECONOMY
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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
Import
represents another flow of capital leaving the system. substitution

By substituting demand for externally produced things with locally produced

things, communities can retain capital for use within the community.
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 HISTORY OF IMPORT SUBSTITUTION
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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.

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OBJECTIVES OF IMPORT SUBSTITUTION
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Promotion of Domestic Industry

Employment Generation

Promotion of Industrialization

Production of consumers goods

Improvement in Balance of Payment

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 ADVANTAGES & DISADVANTAGES OF IS
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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.

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MEASURES FOR IMPORT SUBSTITUTION
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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.

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 MEASURES PF IMPORT SUBSTITUTION
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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 countrys control over foreign
trade 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.

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 CONSIDERATIONS FOR EFFECTIVE IMPORT
SUBSTITUTION
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Whether the IS industries will make a contribution to Indias 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.

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 Conclusion
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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 peoples 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.

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