The two presumptions that the plan is being implemented in a very different setting than in the past and that various devices are being deployed are the basis for expectations that trade substitute in India may be successful this time around.  ,
However, each of the nation’s prior import substitution shows failed because they varied from one another along these dimensions.
One could accept their argument if import substitution industrialization proponents base their success solely on their ability to create and maintain the intended industry. The market offers significant room for trade substitute, with goods exports at 21 % of GDP in 2022 as opposed to less than 5 % in 1970.  ,
Numerous products are imported in large quantities, which indicates that there is local need for them. By preventing their imports, regional suppliers of those same items or comparable substitutes will be able to emerge.
However, this level of success may be comparable to India’s earlier attempts at buy substitution, which it pursued for a number of decades after gaining its independence. India properly established many sectors during that time, including steel, copper, fertilizer, substances, and automobiles, behind a defensive wall.
The domestic supply answer is probably going to be quicker this time around because there are no purchase licensing requirements, less stringent labor and capital markets, no limitations on large-scale creation, more freedom for foreign investors to enter, and no restrictions on tech imports.  ,
Because there is less of a distinction between import prices and domestic production costs, the security loss brought on by the import taxes is also reduced.
But, the true success of import substitution may be determined by its capacity to speed up the expansion of the whole economy, not by how well it can establish and maintain guarded industries. Along this parameter, the trade substitute argument falls apart.  ,
The opposite is true for exposed products, which frequently cost more to produce domestically than worldwide. Protection encourages tools to walk into and out of higher-cost products in order to support them.
The idea that import replacements can be successfully pursued alongside export promotion to increase GDP is a common mistake among policymakers. That overlooks the fact that supporting a small number of business means discouraging others when there is merely ONE set amount of resources available at any given time.
An analysis of the full import and export series for any nation over a ten-year period or long shows that when import substitution effectively reduces overall imports, complete exports also decrease.
Import taxes on inputs are one way that import taxes hurt exports and the ultimate import of alternative goods. Whether the inputs are exported or sold internally, these duties lower the profitability of the final products using them.  ,
Real exchange price appreciation is a more widespread way that tariffs hurt imports. The supplier receives fewer Indian pounds for every US currency’s value of exports as a result of currency appreciation.
The success of an advocate buy substitution industrialization policy has been further undermined by two new developments that are mutually reinforcing.  ,
Second, the cost of moving products and information over long distance has significantly decreased thanks to advancements in communication and transportation technologies.  ,
Next, present technology has produced sophisticated mass-consumption products like smartphones and tablets with extensive style and information-related content. Additionally, it has made it possible to more effectively divide up the production of both new and old materials.
Due to these advancements, it is now possible to achieve productivity by locating product development, product design, component production, and assembly across numerous countries, depending on their cost advantages.  ,
The phone is a good example; its innovation, design, manufacture, and assembly of various components are dispersed across twenty-two nations. Modernization that emphasizes buy substitution discourages industrialization by putting barriers in the way of this global specialization.
It is important to avoid mistaking India’s economic prospects for despair when expressing skepticism about trade substitution industrialization. India has been making the right decisions in almost all other areas, despite reverting to a moderate form of ISI.  ,
Through expanding economic reforms, it has also been removing barriers from the product and factor markets. It has been rapidly expanding its infrastructure, concentrating on roads, railways and waterways as well as ports, ports and digital platforms.
In their” China Plus One” strategy, the central government and a few state governments have also been courting multinational corporations to become the” Plus One.” Despite the achievement of import substitution industrialization, these services understand how crucial it is to interact with global markets.  ,
By involving like-minded nations in free trade agreements (FTAs ), India can increase its appeal to multinational corporations as the” Plus One” destination.
India has opened the India-Middle East-Europe Economic Corridor to its north. The assumption of FTAs with the EU and the UK can significantly increase its impact. Perhaps more crucial is India’s relationship with its eastern allies.  ,
Joining the Regional Comprehensive Economic Partnership (RCEP ) would have been the best way to achieve this, in my opinion. However, this has lost social traction in the wake of the recent uprising over the border with China.  ,
The Comprehensive and Progressive Agreement for Trans-Pacific Partnership, the other significant FTA of the area, should be joined by ASEAN as the next best course of action. India runs the risk of ceding control of the area to China absent these actions.
The imports of some products have been reduced as a result of the American coverage regime, which includes transfer substitution, but no import and exports overall.  ,
Full goods exports have remained strong, increasing from a pre-Covid- 19 peak of US$ 518 billion in 2018 to$ 721 billion by 2022. Exports of goods increased from$ 337 billion in 2018 to$ 456 billion by 2022. Exports of services have performed also better.
If history is any indication, ten years from now, proponents of buy substitution may assert that India’s accomplishment was a result of its pursuit of it, in defiance of opposing advice from free trade ideologues.  ,
After all, the story that industrial policy played a role in South Korea, Taiwan, China, and Singapore’s success is still pervasive. However, this assertion is untrue. India may succeed despite import replacements, not as a result of it.
At Columbia University, Arvind Panagariya holds the positions of Jagdish Bhagwati Professor of Indian Political Economy and Economics.