Trade Policy and Import Substitution

Import substitution is a strategy under trade policy that abolishes the import of foreign products and encourages production in the domestic market. The purpose of this policy is to change the economic structure of the country by replacing foreign goods with domestic goods.

Post-independence India adopted the policy of import substitution by imposing heavy tariffs on import duty. The industrial policy that the country endorsed was linked to the trade policy. In the first seven Five-Year plans, trade in India was distinguished by the inward-looking trade strategy. This strategy is known as import substitution, which aims to boost domestic production and shield domestic products from international competition.

Trade Policy

Trade policy can be defined as goals, rules, standards, and regulations that are involved in the trade between countries. These policies are particular to a specific country and are formed by its public officials. A country’s trade policy covers taxes imposed on inspection regulations, import and export, and tariffs and quotas.

Under this policy, the government protects domestic manufacturers from foreign competition. The protection from import is done in the following two forms:

Quota: It specifies the number of goods that can be imported.

Tariff: It is a tax that is imposed on imported products. This tax makes imported products more costly and discourages their use.

The purpose of quotas and tariffs is to restrict imports and therefore, protect domestic industries from foreign competition.

Also explore: Indian Industries During British Rule

Trade Policy on Industry Development

The accomplishments of India’s industrial sector for the first seven Five-Year plans were impressive. The GDP in the industrial sector increased from 11.8 percent between 1950-51 to 24.6 percent between 1990-91. By 1990, the Indian industry saw a huge growth and was no longer restricted only to jute and cotton textile industries.

Also, the promotion of small-scale industries gave an opportunity to people who did not have money to start a company and facilitated the development of domestic industries in the electronics and automobile sectors.

Public Sector

The Five-Year plan saw extensive growth in the public sector with major industries like air travel, telecom, defence, and railway. However, a few economists are critical about the performance of many public sector enterprises, despite the fact that they have contributed hugely to the growth of the Indian economy.

Post-independence, public sector companies were considered to be an essential part of the Indian economy and continued to produce goods and services by sometimes monopolising them. However, a few economists made a judgment that these public sector companies were actually hindering the entrance of private players into the market.

In this regard, the best example is the telecommunication industry. Until 1990, the state had the monopoly over this industry. Though the private sector companies were competent in implementing this service, the state never permitted any licenses, giving the consumer a very slow and poor service.

Many public firms faced huge losses but continued their functions because closing a government-run organisation is difficult even if the natural resources are drained. Therefore, for some decades, the government authorised these organisations to run inefficiently.

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Solved Questions

Q 1. Explain how import substitution can protect domestic industry. (NCERT)
Explanation During the first seven Five-Year plans, the trade policy was characterised by the inward-looking trade strategy. This strategy is known as import substitution.

This policy aimed at substituting imports with domestic production.

In this policy, the government protected the domestic industries from foreign competition.

For example, instead of importing vehicles made in a foreign country, industries would be encouraged to produce them in India.

(B) Two forms of protection
(1) Tariff


It is a tax on imported goods.

It makes imported goods more expensive and discourages their use.

(2) Quota It refers to fixing the maximum limit on the imports of a commodity by a domestic producer.

They specify the number of goods that can be imported.


Q 2. Why was there a need for an import substitution policy?


Why did the government protect the domestic industries from foreign competition?

Need for protecting domestic industries The government protected the domestic industries from foreign competition because of the following:

Our industries were not in a position to compete against the goods produced by more developed economies.

It is assumed that if the domestic industries are protected, they will learn to compete in the course of time.

If no restrictions were imposed on the imports, there was the possibility of foreign exchange being spent on the import of luxury goods.

It helped in solving the unemployment problem, as industrialisation takes place at a fast rate and absorbs unemployed people.

This helped in building a strong industrial base in our country and directly led to economic growth.


Important Topics in Economics:

Agricultural Sector during the Independence

Demographic Condition in Colonial India

 Foreign Trade during Colonial Rule


Q 3. What are the drawbacks of the protection of domestic industries through the import substitution policy?
(1) Limited range of products Due to the restrictions on imports, the Indian consumers had to purchase whatever the Indian producers produced.
(2) Low-quality products The producers were aware that they had a captive market and had no incentive to improve the quality of their goods.


Q 4. Though the public sector is very important for industries, it still undergoes heavy losses and becomes an obstacle to the economy’s resources.

Discuss the facts and effectiveness of the public sector. (NCERT)

(A) Explanation It is true that a lot of the public sectors suffer enormous losses but are still very effective and crucial for the economy. They are needed for the following reasons:

i. To create a strong industrial base

ii. The public sector plays an important role in the development of those industries that require heavy investment and have a long gestational period.

iii. To develop infrastructure

iv. To promote the development of backward areas

v. To generate employment opportunities

vi. To control and manage the industries of strategic areas (like national defence, atomic energy, etc.)

(B) Conclusion Moreover, the public sector is not meant for earning profits but to promote the welfare of the nation.

So, they should be evaluated on the basis of their contribution to the welfare of the people and not of the profits they earn.

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