Foreign trade

The essentials

From the 1950s to the 1980s India followed an inward-looking trade strategy, known as import substitution. The idea was to replace imports with domestic production: instead of importing cars or machines, India would make them at home. The policy aimed to protect domestic industries from foreign competition so they could grow.

Tools of protection

• Tariffs: taxes on imported goods, which make them more expensive.
• Quotas: limits on the quantity of a good that can be imported.
• Imports were classified into categories, such as capital goods and essential raw materials; non-essential consumer goods faced heavy restrictions.

Key points

• Infant industry argument: new domestic industries cannot compete with mature foreign firms, so they need protection until they become efficient.
• Saving foreign exchange: imports were restricted because foreign exchange was scarce and was needed for capital goods.
• Results: India built a range of industries and produced many goods at home.
• Criticism: protection continued too long, domestic firms became inefficient, quality suffered, and India's share in world trade remained low. Export promotion received too little attention.

Exam tips

Remember the difference between a tariff (a tax) and a quota (a quantity limit). Questions may ask which tool raises government revenue (tariff) and which directly fixes import volume (quota).

Common mistakes

• Equating import substitution with banning all imports; essential imports such as capital goods were allowed.