ED/U4 Topic 5 Role of Export Promotion and Import Substitution
Import Substitution Strategy:
For various reasons, many LDCs have ignored primary-exports-led growth strategies in favour of import substitution (IS) development strategies. These policies seek to promote rapid industrialisation and, therefore, development by erecting high barriers to foreign goods in order to encourage domestic production. A package of policies, called import substitution (IS), consists of a broad range of control, restriction and prohibitions such as import quotas and high tariffs on imports.
The trade restrictions are intended to “protect” domestic industries so that they can gain comparative advantage and substitute domestic goods for formerly imported goods. IS policies are largely based on the belief that economic growth can be accelerated by actively directing economic activity away from traditional agriculture and resource-based sectors of the economy towards manufacturing.
The broad range of tariffs, quotas and outright prohibitions on imports that are part of IS policies are clearly not a form of infant industry protection. The infant-industry argument states that sectors and industries that can reasonably be expected to gain comparative advantage, after some learning period, should be protected.
But the broad protection under IS policies usually protect all industries indiscriminately, whether they generate technological externalities or have any chance of achieving competitive efficiency.
IS policies were advocated due to a very sharp decline in the prices of commodities and raw materials exported by many LDCs. Prebisch and Singer convincingly argued that low-income elasticity of demand for primary products implied that, in the long run, the terms of trade of primary product exporters would deteriorate.
In short, the IS approach to development applies the strategic argument for protection to one or more targeted industries in the LDCs. That is, the government determines those sectors best suited for local industrialisation, erects barriers to trade on the products produced in these sectors in order to encourage local investment and then lowers the barriers over time as the industrialisation process gains momentum.
If the government has targeted the correct sectors, the industries will continue to thrive even as protection comes down. In practice, however, the trade barriers are rarely removed. In the end, countries that follow IS strategies tend to be characterised by high barriers to trade that grow over time.
PROBLEMS OF IMPORT-SUBSTITUTION IN INDIA
Following are the main problems of import substitution in India :
(1) High Production Cost at Initial Stage: Besides the raw material, certain other cost like interest rates, higher price of importable and non traded inputs, technological factors and low product,civil,y contribute to the high cost, of production in India Therefore, commodities produced in the country have high prices in comparison to the imported goods and consumers show, no interest in buying the goods produced for the intention of import-substitution.
(2) Poor Quality of Production: Poor quality and inadequacy of inputs, technology and facilities affect the product quality. Policy of import substitution proves unsuccessful due to poor quality products.
(3) Ignorance of Consumers: Generally, people believe that imported goods are better than the home products. This view attract them towards the imported goods and they do not take interest in buying goods produced in the country. Policy of
(4) Lack of Essential Resources import-substitution becomes impractical due to lack of resources essential for production. Inadequacy of capital and raw material, backwardness of technology create hinderane in the way of import substitution.
(5) Dampens Innovation: Critics observe that such subsidised import substitution generally limits competition, dampens innovation and productivity growth, and keeps the country’s real income low.
(6) Ignores Specialisation: This approach ignores the benefits of specialisation and comparative advantage. The consumers and the entire economy might be better off if the emphasis on import substitution were replaced by an emphasis on outward orientation.
(7) Discriminates Against Agriculture: Import substitution discriminated against agriculture and favoured industry. It led to stagnation and impoverishment in rural This, in turn, led to migration to the cities, necessitating the ‘unproductive’ type of investments.
MEANING OF EXPORT PROMOTION
Export promotion comprises all those government and non-government efforts, rules, procedures, courses of action and techniques which are adopted to boost our exports in terms of value as well as in volume. Thus all those measures, schemes, policies, procedures and methods which are adopted for increasing export are known as export promotion measures. In order to attain the objective of self-reliance every country is keenly interested to expand its exports.
CRITICAL EVALUATION OF THE POLICY OF IMPORT SUBSTITUTION AND EXPORT PROMOTION
The goal of self-reliance in vital sectors has been a long term objective of India since the beginning of the planning. The goal can be attained through foreign trade policy in two ways as given under :
- Import substitution policy, 2. Export promotion policy.
The two broad objectives of the programme of import substitution in India were : (a) to Save scarce foreign exchange for the import of more important goods, and (b) to achieve self-reliance in the production of as many goods as possible. The policy in India has gone through various phases. Broadly speaking, we can discern three distinct phases
(i) in the earlier phase, import substitution mostly took the form of domestic production of Consumer goods;
(ii) in the second phase, emphasis shifted to the replacement of the import of capital goods and
(iii) in the third phase emphasis was on reducing the dependence on imported technology by developing and encouraging the use of indigenous techniques. As a result of the policy of import substitution, the structure of imports has undergone significant changes. Many items which were previously imported are now being produced in the country itself. As a result of this policy, the country has been able to increase the production of many industrial products like iron and steel, automobiles, railway wagons, machine tools, diesel engines, power transformers, etc. and in the case of many other products has achieved a stage of self-sufficiency. As stated earlier, import substitution enabled the country to achieve diversification and depth so necessary for further growth• However, many economists have argued that the indiscriminate extension of import substitution to a wide range of sectors in India without regard to costs, was not the ‘best’, or the ‘most efficient’ policy. In this context Jaleel Ahmed states, “Valuable resources could have been saved if the process of import substitution had been more selective with a limited number of strategically chosen sectors and industries, where a concentration of effort and resources could have maximised the gains in efficiency. In the heavy industry sector, in particular, simultaneous development of a plethora of manufacturing activities may have deprived the economy of the advantages of large-scale production and of meeting the minimum critical thresholds. In short, the policy of import substitution was followed during sixties and up to early seventies whereas the export promotion policy was followed since early seventies. In order to succeed government of India has changed her EXIM policy from time to time to attain export promotion policy. In the year 1973, OPEC countries raised the prices of crude oil about four times. India has shifted her policy from import substitution to export promotion so that she could meet the challenge of sharp hike in oil •prices by the OPEC. Export promotion and import substitution are the two important measures for narrowing down and ultimately wiping out the balance of payments deficit. Infact, Import-substitution and Export Promotion are the two aspects of the coin.”
DIFFICULTIES IN EXPORT PROMOTION
If we view from the world angle we shall find that in the world export, India’s export have been regularly decreasing from the time of independence. India’s share in the total foreign trade of the world was 11% whereas now it has greatly decreased, A brief account, of the major drawbacks of India’s export sector is given below
- Technological Factors: Technological problems have very seri0US effect on India’s exports. The Tandon Committee and Alexander Committee have referred to the adverse ‘impact of technological backwardness on India’s exports through poor quality, low productivity, high costs, etc.
- High Costs: In a large number of cases, high domestic costs are an inhibiting factor. This problem has been clearly stated by Abid Hussain Committee, “India is often at a disadvantage vis-a-vis competing countries because its costs of production, and hence export price, are higher than in competing countries. It is not only because of the higher prices of importable and non-traded inputs, or because of time and cost over-runs implicit in managerial inefficiency, but also because of much lower level of productivity, all of which stem from the aforesaid problems.”
- Poor Quality Image: India has a poor quality image abroad. Despite the measures taken under the Exports (Quality Control and Inspection) Act and other laws, our exports continue to suffer because ofquality problems. Poor quality and inadequacy of inputs, technology and facilities affect the product quality. In several instances, carelessness or lack of commitment on the part of the exporters is also responsible. Adulteration and dumping are also not uncommon. There is a general impression that a proper export culture is lacking in India.
- Unreliability: Besides quality, Indian exporters have been regarded as unreliable on certain other factors. As the Tandon Committee has observed, a very important black mark on the Indian exporters is reneging a term used in the USA to refer to going back on a contract and refusing to fulfil it on its original terms.
- Supply Problems: A serious drawback of the Indian export sector is its inability to provide continuous and smooth supply in adequate quantities in respect of several products. The problem is that much of the exporting is the result of the residual approach rather than conscious effort of producing for export. The tendency for exporting what we produce rather than producing for export still continues to characterise the export behaviour.
- Faceless Presence Although India is an important Supplier of several commodities in foreign markets, her presence in these markets is faceless in the sense that the consumers do not, know that these commodities are Indian. Major export items of India like sea-foods, leather manufactures, spices, etc., have in many cases, a faceless presence in foreign markets. Although these exports may undergo further processing or repackaging in many cases. In several cases the Indian exports are sold in the foreign markets in the same condition as they are exported but under foreign brand names. It has also been found that when the product carries a foreign brand name sometimes they fetch a much higher price than the same product with an Indian name. This is indeed a vicious circle. The poor quality image of the Indian products, many a time apparent than real, makes it difficult to sell under Indian brand names. The faceless presence, on the other hand, perpetuates the problem. The faceless presence is the result of the failure of the exporters and- export promotion agencies in India to build up an image for Indian goods abroad. In fact, most bulk importers of Indian goods want this situation to be perpetuated as this enables them to hold control over the market while the exporters, being at the mercy of the foreign traders, lose bargaining power.
- Infrastructural Bottlenecks: Infrastructural shortages such as energy shortages, inadequate and unreliable transport and communication facilities hinder growth in exports. Power shortages and breakdowns disrupt production schedules, increase cost and adversely affect timely shipments.
- Uncertainties, Procedural Complexities and Institutional Rigidities : One of the defects of our trade policy regime has been the uncertainty about future policies, incentive schemes etc. The procedural complexities of the Indian trade regime have been indisputably acknowledged. There is a general feeling that not only that there are too many controls and overlapping of policies but also “the principle of Indian policy is to elaborate rule (and exceptions) to them, which are not only detailed and specific, but also subject to wide discretion.” These are vindictive of the structural weakness of the institution system in India,
- Inadequacy of Trade Information System: An efficient Trade Information System is essential for success in the dynamic global market. But, “our marketing infrastructure as well as marketing techniques are neither effective nor efficient. We do not have any machinery to keep prompt track of business informati0n overseas, as done by JETRO in Japan, KOTRA in Korea, CETDC in Hong Kong and STDB in Singapore with a wide network of offices abroad. These organisations have evolved an efficient system, which help them to get information pertaining to tenders and the like much before these are released officially. In India, we get this information, at times, after the expiry date. India has, no doubt, a plethora of organisations; governmental, semi-governmental and also non-governmental engaged in this task in one way or other. Yet we do not have an easy access to market intelligence and information.