Giving Up On The World

Context: Import protection helps firms compete in the domestic market, leaving them disabled for the global one.

Arguments against the Import-Substitution and Inward Looking Policies

• No country that has achieved rapid transformation by being inward-looking, as opposed to outward-oriented.  

• Government interventions, if any, did not interfere with the expansion of trade.
• Moreover, those interventions slowed down rather than accelerate growth.

• Ignoring the fundamental sources of disability i.e. competitiveness: Domestic firms remain dependent on the State interventions, limiting their capacities and hurting the consumers For E.g. in the automobile industry.
• Not a Positive Sum Activity: Import substitutions leads to subtracted output in other sectors. For E.g. When a protected sector, such as auto, expands, it takes away resources from other sectors.

• Alternatively, if protection allows the auto industry to expand by investing more, it leaves less investible resources for some other sectors.

• Import substitution typically attracts inefficient firms by creating quick rents:  For E.g. experience in the electronics industry in the past six years illustrates this point.

Advantage of Open Trade Regime 

• It benchmarks firms against the best in the world and increases their global competitiveness.
• Commitment to openness forces firms to remove their disabilities that handicap them vis-à-vis the best in the world. 

Conclusion: India must conduct a course correction on its trade policy by considering the productivity effects of import substitution versus export orientation.