Import Substitution and Export
Promotion
Introduction
What is Import Substitution?
Import substitution means generally the satisfaction of a greater proportion
of a country's total demand for goods (production plus imports) through its
own domestic production. Import substitution as carried out by modern
developing countries usually takes place in a number of stages. As
Hirschman puts it, the process "starts predominantly with the manufacture
of finished consumer goods that were previously imported and then moves
on, more or less rapidly and successfully, to the higher stages of
manufacture, that is, to intermediate goods and machinery, through
backward linkage effects.
What is Export Promotion?
The terms “export-led growth,” “outward oriented,” “export promotion,” and
“export substitution” are all used to define policies of countries that have
been successful in developing their export markets. While different
countries have had different policies, their common features are that there
is at least as much incentive to earn as to save foreign exchange and that
incentives to export are fairly uniform and not discriminatory across
commodity groups.
Purpose of Import Substitution and Export
Promotion
Import substitution is essential because it increases trade independence in
small and developing nations, it develops different sectors within the
domestic market, it buys local manufacturers some time to scale up
production efficiency and the growth of local industries also creates
employment opportunities in the economy.
Export promotion is essential as exports are an important part of the
exporting country's economy, adding to that nation's gross output. Exports
can boost sales and profits for a company if the goods create new markets
or expand ones that already exist, and may also offer an opportunity to
capture global market share. Exports also aid in the creation of jobs as
companies expand and grow their workforces.
Balance of Payments
Balance of Payments According to Kindle Berger, "The balance of
payments of a country is a systematic record of all economic transactions
between the residents of the reporting country and residents of foreign
countries during a given period of time". • It is a double entry system of
record of all economic transactions between the residents of the country
and the rest of the world carried out in a specific period of time when we
say “a country’s balance of payments” we are referring to the transactions
of its citizens and government.
A disequilibrium in the balance of payment means its condition of Surplus
Or deficit.
● A Surplus in the BOP occurs when Total Receipts exceeds Total
Payments. Thus, BOP= CREDIT>DEBIT.
● A Deficit in the BOP occurs when Total Payments exceeds Total
Receipts. Thus, BOP= CREDIT<DEBIT.
Disequilibrium in BOP can be fixed through export promotion and import
substitution:
● Export Promotion: To control disequilibrium, the country may adopt
measures to stimulate exports like: export duties may be reduced to
boost exports ;cash assistance, subsidies can be given to exporters
to increase exports ;goods meant for exports can be exempted from
all types of taxes.
● Import Substitutes: Steps may be taken to encourage the
production of import substitutes. This will save foreign exchange in
the short run by replacing the use of imports by these import
substitutes.
Import Substitution in India
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. It benefited the economy of the nation in the
following ways:
● The industrial sector contributed significantly to the economy’s GDP.
For instance, between 1990 and 1991, it contributed 24.6% to the
economy, which was noted as a drastic improvement from the
previous contribution of 11.8% made towards the GDP between 1950
and 1951.
● India’s industrial sector expanded beyond jute and cotton textile.
There was significant diversification of the industrial sector, and there
was a noticeable growth in small-scale industries.
● The protected market pushed the demand for domestically produced
goods and also helped to lower foreign exchange.
● Indigenous sectors like automobile industries, electronics, etc. also
flourished during this time.
● Significant growth was noticed in the public sector. Industries like
defense, railway, telecom, and airway came into prominence and
established dominance in the country.
Export Promotion in India
The Government of India launched export promotion schemes under
Foreign Trade Policy which aims to make Indian Goods/Services Cost
Competitive in the Global Market, including various incentive schemes and
Authorizations for Importers to save import Duty. The Government
Schemes are designed in such a way that it provides the solution at every
stage of exporting goods and services. The key schemes/interventions
taken are:
1. Market Access Initiative (MAI) Scheme provides assistance to
Export Promotion Organizations/Trade Promotion
Organizations/National Level Institutions/ Research
Institutions/Universities/Laboratories, Exporters etc., for
enhancement of exports through accessing new markets or
through increasing the share in the existing markets.
2. ‘Transport and Marketing Assistance (TMA) for Specified
Agriculture Products’ provides assistance for the international
component of freight, to mitigate the freight disadvantage for the
export of agriculture products, and marketing of agricultural
products, is under implementation.
3. Assistance to the exporters of agricultural products is also
available under the Export Promotion Schemes of Agricultural &
Processed Food Products Export Development Authority
(APEDA), Marine Products Export Development Authority
(MPEDA), Tobacco Board, Tea Board, Coffee Board, Rubber
Board and Spices Board.
4. ‘Districts as Export Hubs Initiative’ for products and services with
export potential have been identified in all districts of the country.
5. Trade Infrastructure for Export Scheme (TIES) provides
assistance to Central and State Government agencies for
creation of appropriate infrastructure for growth of exports.
6. Remission of Duties and Taxes on Exported Products (RoDTEP)
provides remission of Central, State and Local
duties/taxes/levies which are incurred in the process of
manufacture and distribution of exported products, but are
currently not being refunded under any other duty remission
scheme.
7. Common Digital Platform for Certificate of Origin to facilitate
trade and increase FTA utilization by exporters.
8. 12 Champion Services Sectors have been identified for
promoting and diversifying services exports by pursuing specific
action plans.
9. Active role of EPCs, Commodity Boards and Indian missions
abroad towards promoting India’s trade, tourism, technology and
investment goals has been enhanced.
Current Import-Export in India
India’s trade exhibited an impressive performance with India’s overall
export (Merchandise and Services combined) of USD 58.22 Billion in
November 2022. The exports exhibited a positive growth of 10.97 per cent
over the same period last year. Overall import in November 2022 is
estimated to be USD 69.33 Billion, exhibiting a positive growth of 5.60 per
cent over the same period last year.
Due to the deficit in BOP, the government must promote exports to increase
the total receipts of the country. The government announced the Foreign
Trade Policy of 2023, which is aimed at increasing exports manifold. The
Key Approach to the policy is based on these 4 pillars:
1. Incentive to Remission
2. Export promotion through collaboration - Exporters, States, Districts,
Indian Missions
3. Ease of doing business, reduction in transaction cost and e-initiatives
4. Emerging Areas – E-Commerce Developing Districts as Export Hubs
and streamlining SCOMET policy
Conclusion
The use of either import substitution or export promotion to facilitate the
economic development of a country has its merits and demerits. While
import substitution provides protection to nascent industries, export
promotion exposes these infant industries to competition. Both methods
can be used to encourage industrial development thus encouraging
economic development.
