question_answer 17)

Explain how import substitution can protect domestic industry.

Answer:

In the first seven plans, India followed an inward looking trade strategy. This strategy aimed at replacing or substituting imports with domestic production is called import substitution, e.g., instead of importing electronics goods made in a foreign country, industries would be encouraged to produce them in India Itself. Thus the government protected the domestic industries from foreign competition through this policy. Protection from imports took two forms (i) Tariffs i.e., a tax on imported goods to make imported goods more expensive and discourage their use and (ii) Quotas specify the quantity of goods which can be imported. The policy of import substitution provides protection to domestic industries from foreign competition. The rationale for this policy is that industries of developing countries like India are not in a position to compete against the goods produced by developed economies. It is assumed that if the domestic industries are protected in the infant stage they with gain strength by being able to produce on large scale and through experience to compete in the course of lime.