False Prophet Of New Age Protectionism Misleading India


(MENAFN- Asia Times) Expectations that import substitution in India might succeed this time around are premised on the twin assumptions that the policy is being implemented in a very different environment from the past and that the instruments being deployed are also different.

But the country's previous import substitution episodes also differed from one another along these dimensions and every one of them failed.

If proponents for import substitution industrialization judge its success purely on its ability to establish and sustain the targeted industry, one could concede to their argument. With merchandise imports at 21% of GDP in 2022 as opposed to less than 5% in 1970, the economy offers considerable scope for import substitution.

The large volumes of imports of many products testify to the existence of a domestic demand for them. Denying entry to their imports will create space for the emergence of domestic suppliers of those same products or close substitutes.

But such success would be no different from the previous rounds of import substitution, which India pursued for several decades after independence. During that era, India successfully established numerous industries - including steel, aluminum, fertilizer, chemicals and automobiles - behind a protective wall.

This time - with no investment licensing, less rigid labor and capital markets, no restrictions placed on large-scale production, freer entry of foreign investors and the absence of restrictions on technology imports - the domestic supply response is likely to be quicker.

The difference between import prices and domestic production costs is also smaller, limiting the welfare loss due to distortion caused by the import tariffs.

The true success of import substitution must be judged not by its ability to create and sustain protected industries, but by its capacity to accelerate the entire economy's growth, however. The case for import substitution crumbles along this metric.




India is ramping up its iPhone assembly operations. Image: Twitter

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