India’s Import Substitution

 By Ichiro Suzuki In an attempt to promote local manufacturing industries, the Indian government has recently announced restrictions on color television set imports. The Directorate General of Foreign Trade (DGDT) has changed its import policy of color TV sets from “free” to “restricted”. India has been importing the vast majority of color TV sets from China and Vietnam. The announcement came amid strained Sino-Indian relationships following military skirmishes on their Himalayan borders. The Indian government has been already taking several steps against Chinese apps and investments from the country. The government had banned 57 Chinese apps, including Tiktok, citing security risks. Restrictions have been placed on bidding on Indian assets from countries that share land border with India. Import restrictions could be “Back to the future” for India. The Indian government once tried this policy on a very large scale. In the 1960s, India’s post-independence, socialist-leaning governments employed a policy of ‘import substitution’, promoting domestic manufacturing industries while restricting imports to protect them. It was a popular development policy in the third world back then. The policy did created a variety of home-grown industries, many of which were in the hands of the government, including banks, steel, railways, airlines etc. India boasted of its capability to make almost everything locally. It was supposed to make India an industrial giant, but that didn’t happen. Products that came out of factories in India under protectionism were not able to compete in the international market. The Indian government found an acute lack of competitiveness in their products, once the age of globalization started in the early 1990s. As long as the country was secluded from global trade it was all right, but a new age began for the global economy. No one outside India wanted made-in-India products. Only captive customers in the domestic market who had no choice but made-in-India products bought them grudgingly even though they were expensive and unattractive. The same was true in the communist bloc until the fall of the Berlin Wall. East Germany was believed to have inherited the traditions of the great manufacturing industries of the Third Reich. The Travant, East German car, was supposed to be the pinnacle of German engineering, and was best-selling in the Eastern European communist satellites. The Travant required a few years wait before a car was delivered. Then, shortly after the Wall had collapsed, the Travant became immediately available on placing an order. The change was not attributed to dramatically improved production under the capitalist system, but to collapsed demand for the stinker. As soon as Volkswagen became available in Eastern Europe, no one showed any interest in the ugly and fuel-inefficient Travant. (Interestingly, Volkswagen acquired Czech carmaker Skoda after the Berlin Wall’s fall. Skoda continues to produce cars today as a Volkswagen subsidiary.) In contrast to India half a century ago, East Asia embarked on a different development strategy. In the post-war era, Japanese entrepreneurs eyed on the world outside Japan and competed in the global markets, mainly the U.S. and Europe at that time, not being wedded to the domestic market that was large enough to support them. (The government did provide these industries with some support in the form of import restrictions, especially in the case of cars, until they were able to stand on their own feet.) East Asian Tigers entered the global markets from the beginning, necessitated by the size of their markets or a lack of it, with a goal of overtaking Japan. They became fiercely competitive. Prime Minister Modi is hardly known for his grasp of the workings of the economy. If the protected industries become too contented in the large domestic market, such complacency would keep these industries from taking off. In addition, though India is certainly capable of replacing Chinese apps with local ones that are ‘designed in Bangalore’, manufacturing TV sets does not seem to fit the traditional prowess of the Indian industries. While India is probably capable of assembling TV sets, the vast majority of their parts would have to be imported, such as LCD displays, chips and connectors from Korean, Taiwanese and Chinese makers. Otherwise, Indian consumers would be given no choice but to buy expensive and low quality TV sets. Hopefully, India avoids making the same mistake again in the 21st century. About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan.