import substitution ,need for export and import

understanding the local economy

1. IMPORT SUBSTITUTION
PRATIK POURKAR
ROLL NO. 17
INDUSTRIAL
ENGINEERING

2. GROWTH AND DEVELOPMENT
Growthcanbethoughtofasexpandingthesizeofthecommunity
throughtheuseoflandandothernaturalresources.
Development,ontheotherhand,canbethoughtofasimproving
liveabilitythrough,jobs,education,culturalpreservation,publicsafety,
andsenseofcommunity.
Fortunately,thereexistwaysforcommunitiestodevelopwithout
growing.OneofthosewaysisthroughImportSubstitution.
Country GDP per
capita (US$)
US 53,042
Germany 46,268
China 6,807
India 1,498
Source: World Bank_nominal _gdp_2014

3. NEED FOR EXPORT/IMPORT
ExportandImportarepotentialweaponsofdevelopingtheeconomy
andcanplayanimportantroleinachievingthecountry’ssocio-
economicobjectives.
Inaneconomymajordeterminantofnetproduction&employmentis
growthinExport,asitisaroleplayerinforeignexchangewhich
facilitatestheimportofcapitalgoods.
Source: WTO

4. IMPORT SUBSTITUTION
Importsubstitutionisatradepolicyaimedtopromote
economicgrowthbyrestrictingimportsthatcompetedwith
domesticproductsindevelopingcountries.
Theimportsubstitutionapproachsubstitutesexternally
producedgoodsandserviceswithlocallyproducedones.
Importsubstitutioncanalsobediscussedasapolicy
strategythatattemptstoutilizeunderusedcapacities,
reduceregionalunemploymentorprotectinfantindustries.

5. UNDERSTANDING THE LOCAL ECONOMY
“leakybucket”model.
Moneycirculateswithintheregionwhenmoneythatisearnedlocallyis
alsospentlocally.Thisrequiresthatsomemoneyexistsinthebucketto
beginwith
—onewaythishappensiswhenlocalgoodsandservices
arepurchasedbyconsumersoutsidetheregion.
—Anothersourceofinflowcomesfrombusinesseswhich
decidetosetupshoplocallyandgeneratejobsthatpay
localworkers.
The“leak”inthebucketthatallowsmoneytoescapefromthe
communityiscreatedwhengoodsandservicesfromoutsidetheregion
arepurchasedwithlocalmoney

6. UNDERSTANDING THE LOCAL ECONOMY
PluggingtheLeaks
Onewaytopreventmoneyfromleavingthelocaleconomyistoconnectlocal
demandforgoodsandserviceswiththelocalsuppliersofthosegoodsand
services.
Many of the things that individuals or businesses need
can be found from suppliers within the area but, due to
lack of adequate information or convenience, those
things are often purchased from the outside. This
represents another flow of capital leaving the system.
Bysubstitutingdemandforexternallyproducedthingswithlocallyproduced
things,communitiescanretaincapitalforusewithinthecommunity.
Import
substitution

7. HISTORY OF IMPORT SUBSTITUTION
Thenotionofimportsubstitutionwaspopularizedinthe
1950sand1960sasastrategytopromoteeconomic
independenceanddevelopmentindevelopingcountries
Thisinitialeffortfaileddueinlargeparttotherelative
inefficiencyof3rdworldproductionfacilitiesandasa
resulttheirinabilitytocompeteinaglobalizing
marketplace.
Thusanexportorientedapproachhasbecamethenorm.

8. OBJECTIVES OF IMPORT SUBSTITUTION
PromotionofDomesticIndustry
EmploymentGeneration
PromotionofIndustrialization
Productionofconsumer’sgoods
ImprovementinBalanceofPayment

9. ADVANTAGES & DISADVANTAGES OF IS
Advantages
•Increase in domestic employment.
•Reduced dependence on labor non intensive industries.
•Resilience in the face of global economic shock (recessions &
depreciations)
•Less long distance transportation of goods.
Disadvantages
•The IS industries are inefficient as they are not exposed to
internationally competitive industries.
•Increase in unemployment internationally as world GDP decreases
through promotion of inefficiency.

10. ImportLicenses:-Importlicenseisanimportantinstrument.There
canbealargevarietyoflicenses-forusersorforwholesalerstheycan
beobtainedbydirectpermissionfromsomeministryorthecentral
bank.Theycanbecombinedwithspecificimportprogramsandthey
mightbecombinedwithlistsofprohibitedimportproducts.
GuaranteeDeposits:-Othermeansareguaranteedepositswhich
havetobemadebytheimporterfortherighttoimportanitem.
Foreignfirmscanberestrictedintheirrighttorepatriatedividendsand
profits.Domesticexporters,ontheotherhandmaybeallowedtoresell
partoftheirforeignearningsatadvantageousexchangerates.
MEASURES FOR IMPORT SUBSTITUTION

11. TariffWalls:-Tariffsandsurchargesarecommonprotectiondevices.Tariff
ratesdifferbetweencountriesandalsovaryovertime.Itisconvenientto
characterizeacountry’scontroloverforeign
tradeaccordingtothepolicyimplemented.
PhysicalRestrictions:-Themethodofphysicalrestrictiononimportoreven
outrightbanningofimportisusedincuttingoutimports.Reductioninimports
isbroughtoutbysuchdevicesasquotas,licensing,banoncertainimportsetc.
Itisasurewayofprotectingthedomesticproducersfromtheforeign
competition.
MEASURES PF IMPORT SUBSTITUTION

12. CONSIDERATIONS FOR EFFECTIVE IMPORT
SUBSTITUTION
WhethertheISindustrieswillmakeacontributiontoIndia’seconomic
developmentthroughefficientutilizationoflocalresourcesandalso
realizeforeignexchangeformoreessentialuses.
ThoseindustriesshouldbeincludedintheprogramofISwhereaclear
cutcostadvantagecouldbeestablished.
Onlythoseindustriesshouldbeincludedintheprogramofimport
substitutionwhoseproductshaveadequatedomesticorinternational
demandexistingorpotential.
Importsubstitutionprogramshouldbechalkedoutintotalityrather
thanintermsoffragments.

13. Conclusion
Thepolicyofimportsubstitutioniswell-suitableforacountrylike
IndiabecauseIndiahasalargevarietyofresourcesforindustrial
growth.Itsdomesticmarketissmall.Henceitisnecessarytoexpand
thedomesticmarketbycurtailingtheimports.
Despitethedrawbacks,ISstrategiesareabletoplugtheleaksofcapital
fromthelocaleconomyandprovidemoremoneythatcouldpotentially
bespentlocally.
Butwecannotrelysolelyonpeople’sgoodwilltopurchaselocally
especiallywhenmanylocallyproducedgoodsarefarmoreexpensive
thanalternatives.
Instead,consumersmustbothhaveanunderstandingoftheimpactsof
theirpurchasesonthelocaleconomyandalsofindrealvalueinthe
goodsthatarelocallyavailablewhichgivesgoodreasontobehopeful
thatimportsubstitutioncanprovidelocalcommunitiesapathto
economicprosperity.

14. REFERENCES
KulkarniKG.(2009),Troublewithimportsubstitutionand
Protectionism:acaseofIndianeconomy,IndianJournalof
EconomicsandBusiness.Denver.
PahariyaN.C.(2008),Importsubstitutionandexport
promotionasdevelopmentstrategies,Briefingpaper.CUTS
International.
http://www.indiaonestop.com/inflation.htm
http://www.cia.gov/cia/publications/factbook/geos/in.ht
ml#Econ

15. Questions
1.Explain the need of export/import in development of a
country.
2.What is import substitution? What are its objectives?
3.State the advantages & disadvantages of import
substitution.
4.Explain the various measures of import substitution.
5.Explain in brief the considerations to be followed before
setting up import substitution industry.