IMPORT consumer goods imports, which took away the

IMPORT
SUBSTITUTION

Import substitution is a trade and economic policy which
advocates replacing foreign imports with domestic production. It is based on
the premise that a country should attempt to reduce its foreign dependency
through the local production of industrialized products. In the immediate
post-Second World War era, following the then consensus view, nearly all
emerging independent countries chose the path of import substitution to achieve
industrialization. India chose to stay course, deepening import substitution
yet further. Our imports as a proportion of the gross domestic product (GDP)
dropped to just 4% in 1969-70 from the peak of 10% in 1957-58. By mid-1960s we
had banned consumer goods imports, which took away the pressure on domestic
producers to supply high quality products. The “domestic availability”
condition additionally denied our producers access to world class raw materials
and machinery whenever equivalent domestic products, no matter how poor in
quality, were available. Quality of our products plummeted and they failed to
compete in the global marketplace. Poor performance of exports in turn created
foreign exchange shortages, which led to yet greater tightening of import
controls. This vicious cycle took its toll on growth, with per capita income
rising at the paltry annual rate of 1.5% during 1951-81. India had adopted the
policy of import substitution post-independence till Economic reforms in 1991
by imposing heavy tariffs on import. The only way to break this cycle of import
controls leading to poor export performance and poor export performance forcing
yet tighter import controls was to do away with import controls and let the
rupee depreciate sufficiently to incentivize exporters and producers of
import-competing products. That is exactly what we did beginning in 1991. With
top quality products beginning to flow into the country, consumers became more
and more discriminating and producers could access world class raw materials,
machinery and technology. This change eventually brought vast improvement in
the quality of our products allowing exports to grow alongside imports. Our
exports of goods and services multiplied six-fold from just $75 billion in
2002-03 to $450 billion in 2011-12. We are now a $2.3 trillion-dollar economy
and our imports stand at $450 billion. Unfortunately, however, the latter fact
has created renewed temptation for a return to import substitution to make a
success of Make in India. What better way to get there than to replace this
large volume of imports by domestic production, goes the argument. Is this
market not ours for taking? Sadly, this line of reasoning can take us back to
ruin yet again. When we think of replacing imports by domestic production, we
are invariably thinking this would be a net addition to Make in India. This is
a false premise. Equivalent reduction in exports is almost sure to accompany
the reduction in imports. This is because macroeconomic stability requires
Reserve Bank of India (RBI) to maintain the exchange rate at a level that keeps
the current account deficit (total imports minus total exports) to around 1-2%
of GDP. With rare exceptions, RBI has adhered to this policy since we adopted
flexible exchange rates. if foreigners cannot sell their goods to us, they will
not have the revenues to pay for the goods they buy from us. If we cut back on
their goods, they will have to cut back on ours. Even the large decline in our
oil import bill during 2015-16 was accompanied by a near equivalent decline in
our exports. What is added to Make in India through import substitution will
get subtracted by losses in exports. The key to the gains from international
trade is that we export products that we produce at the lowest cost and import
those that our trading partners produce at the lowest cost. In this way, we
maximise the gains from trade. Import substitution, which relies on raising
barriers against imports or subsidising our products, undermines these gains.
Only if import substitution is the result of increased efficiency of our
producers does it add to the gains from trade. If politics compels us to
intervene to help producers, the least damaging course is to do so on behalf of
those able to export to world markets. In doing so, we are likely to assist
producers on the verge of becoming competitive against the best in the world.
In contrast, the risk in import substitution is that we may end up propelling
sectors in which we are among the costliest producers.

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EFFECTS ON
DIFFERENT SECTORS AND FDI

Before Make in India, India used to allocate about 1.8% of
its GDP towards defence spending, of which 40% was allocated to capital
acquisitions and only about 30% of India’s equipment was manufactured in India,
mainly by public sector undertakings. Even when defence products were
manufactured domestically, there was a large import component. All these
factors made the Indian defence market one of the most attractive globally and
provided an immense opportunity for both domestic and foreign players in the
defence sector. The Centre is attempting to boost MSME sector’s contribution
towards indigenous manufacturing in defence from the present 20-30 to 70 per
cent in the next five years under its ambitious ‘Make in India’ programme. Make
in India initiative has helped the defence ministry save more than Rs 1 lakh
crore worth of foreign exchange. In the past two years, as many as six air
defence and anti-tank missile projects have been built indigenously by the DRDO.
In keeping with the ‘Make in India’ initiative, the defence ministry has asked
the Defence Research & Development Organisation to create a “master list”
of its technologies that can be commercialised and given to private Indian industries
for manufacturing and export, besides looking at tax concessions for domestic
producers. Many Senior Defence Officials believe that Make in India is also
going to help the development of the indigenous defence industry as the money
which would have been transferred to foreign vendors would now be spent within
the country and will also develop the capabilities of the indigenous players. The
projects where the government has decided against the foreign vendors and gone
for DRDO’s Made in India products include some of the missiles which will
substitute imports have been under development for the last several decades.

The Government of India has treated the electronics sector
as a priority under its “Make in India” program. This scheme promotes manufacturing
in India to boost job creation and skill enhancement, facilitate investment,
foster innovation, protect intellectual property, and build best-in-class
manufacturing infrastructure. In line with this, it has announced several
policy initiatives. It has also taken steps for creating a business-friendly
and governance-oriented financial and economic environment. This has resulted
in various Indian and global manufacturers announcing their expansion plans.

While Make In India Campaign is in the full swing,
especially in Defence, Electronics, Automobiles sectors etc., experts have
varied opinion on how successful the campaign has been. A majority believes
that the policy has not been able to achieve the desired results with FDI not
been directed in the focus areas.

Make in India campaign was launched to create employment and
self-employment opportunities for the youth. And the way to do this, according
to Make in India, is to increase the share of manufacturing in India’s GDP to
25% by 2022, which is expected to generate approximately 100 million jobs for
Indian workers. Responding to the lifting of foreign direct investment (FDI)
caps in several sectors, efforts to improve the ease of doing business and of
course Prime Minister Modi’s frenetic wooing of investment in foreign travels,
gross FDI flows to India jumped 27% to $45 billion in 2015-16, an all-time high.
Even the Finance Ministry’s usually measured Economic Survey 2015-16 touted the
FDI increase as a success for Make in India. Make in India specifically
concerns manufacturing. After an encouraging jump to a record $9.6 billion in
2014-15, FDI in manufacturing actually fell to $8.4 billion in 2015-16. Furthermore,
the percentage of FDI flowing to manufacturing, which has been in the range of
35-40% for the past four years, dropped to 23% in 2015-16.