Wrong way to Make In India: Why we must resist the temptation to return to import substitution mirage
Abstract:
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 industrialisation. But by early to mid-1960s Singapore, Taiwan and South Korea had broken away from this consensus and switched to export-oriented strategies.
They soon achieved growth rates of 8-10% for the following two to three decades. 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.