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Trade Policy: Import Substitution

The industrial policy adopted by our government was closely related to the trade policy and in the first seven plans, inward looking trade strategy characterized trade. This strategy, in simple terms, is called import substitution. As the name suggests, this main purpose of this policy was to use domestic productions to replace or substitute the imports. For example, industries were encouraged to manufacture vehicles and cars within India itself, instead of having them imported from foreign countries. The government aimed to protect domestic production from foreign competition using this policy. The protection from imports was in two forms:
  • Tariffs
  • Quotas
Taxes imposed on imported goods to make them more expensive are called tariffs. Quotas set a limit on the quantity of goods that can be imported. These quotas and tariffs restrict the import of foreign goods and protect the home made productions.

This policy of protection against import was based on the belief that the industries of growing economies can not face competition from those of the developed nations. They would learn to compete over a period of time and till such a stage is reached they need protection to promote their growth. The planers of our nation also were wary about foreign exchange being spent on luxury goods if there were no restriction on imports. No serious thought was given to exports also till the mid 1980s.

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