EXPORT PROMOTION AND IMPORT SUBSTITUTION STRATEGY INTRODUCTION Economics

EXPORT PROMOTION AND IMPORT SUBSTITUTION STRATEGY

INTRODUCTION Economics development through foreign trade applies two important measures: �EXPORT PROMOTION �IMPORT SUBSTITUTION �Export promotion aims at increase in exports. �Import substitution aims at reducing current imports by making some of them at home and use the savings in foreign exchange to import the desired goods.

MEANING OF EXPORT PROMOTION: It refers to the policy of the government designed to encourage the exporters to export more goods from the country than before. To achieve this end, several incentives are given to them, viz. �Cash subsidies �Bank loan at cheap rate of interest �Facilities are provided to import machinery and raw material Concessional freight rates are charged by railways and shipping companies on the goods exported. �Tax concessions are given to the exporters �Certain percentage of export earnings are permitted to be utilized for the import of machines and raw materials needed by exporters.

FORMS OF EXPORT PROMOTION �Export promotion of primary product. �Trade policies relating to the export promotion of primary product are called Primary Outward Looking Policies. �Export of manufactured products. �Trade policies relating to the export promotion of Manufactured Product are called Secondary Outward Looking Policies.

BENEFITS OF EXPORT PROMOTION 1. 2. 3. 4. 5. 6. 7. 8. Trade helps in breaking vicious circle of poverty Inducement to invest Expansion in the extent of the market Technical progress Efficient use of means of production Import of capital goods and export of primary goods Basis of import of foreign capital Healthy competition

Arguments against export promotion Ø Ø Ø Lopsided development Limited possibility of gain Adverse effects of foreign capital Adverse effect of demonstration effect on investment Secular deterioration in the terms of trade

OBSTACLES IN THE WAY OF EXPORT PROMOTION o o o o Foreign competition High prices Substitutes Low quality Tariff policies Limited market Lack of publicity

SUGGESTION FOR EXPORT PROMOTION STRATEGY v Proper management of information v Export sector should be declare priority sector v Control room for exports v Product planning for exports v Training for export marketing v State trading v Cost benefit analysis v Joint ventures abroad v Foreign collaboration v Multilateral and bilateral agreement v Encouragement to tourist trade v Tax concession v Special export schemes

IMPORT SUBSTITUTION Import Substitution Means, Total Or Partial Replacement Of An Imported Product Of The Same Functional Requirement Mainly From Indigenous Material And Know-how. Acc. To M. P. TODARO, “Import substitution entails an attempts to replace commodities usually manufactured goods formerly imported with domestic source of production. ”

TYPES OF IMPORT SUSTITUTION �SIMPLE SUBSTITUTION: In this case, almost an imitation of import good is sought to be produced in the country. There is very little variation in shape and functioning from the imported good. Example: production of cycle, food grain, etc. �ALTERNATIVE SUBSTITUTION: In this case, the substitutes produced indigenously vary in shape and function from the imported product. But its working is more or less the same. Example: use of copper tubes in sugar making machine, etc.

STAGES OF IMPORT SUBSTITUTION � First Stage: It entails the replacement of the imports of non-durable consumer goods, such as clothing , shoes, and household goods, and of their inputs such as textile fabrics, leather and wood, by domestic production, since these commodities suit the combination existing in developing countries that are at the beginning of industrialization process. � Second Stage: in this the underdeveloped countries expand their manufacturing industries oriented towards domestic markets. This purpose is said to be served by industrial protection that is said to bring additional benefits through improvements in terms of trade.

NEED OF IMPORT SUSTITUTION Unfavorable balance of trade. Devaluation of rupee. Shortage of foreign exchange. Declining foreign aid. India mostly imports food grain, petroleum, fertilizers, machinery, metals and chemical products. To achieve the objective of self-sufficiency, their substitution is inevitable. 6) Developing nations has been experiencing the shortage of many important goods like petrol, fertilizers, etc. 1) 2) 3) 4) 5)

OBJECTIVES OF IMPORT SUBSTITUTION POLICY a. Import of raw material, spare part, etc. should be substitute by domestic products. b. Reduction of import components in each unit of domestic output. c. Production of chemical goods by domestically produced raw material. d. To explore alternatives of imported goods and seek their domestic production. e. To increase the domestic production of such imported items as food grains, etc. so that dependence on imports is minimized.

Arguments in Favor of Import Substitution (1) Helpful in correcting Adverse Balance of Payments (2) Savings of Foreign Exchange (3) Helpful in Improving the present techniques of Production (4) Helpful in Research (5) Helpful in Increasing Production (6) Reduction in Dependence (7) Self sufficiency (8) Establishment of More Industries (9) Increase in Government Revenue (10)Helpful in Expansion of Export

Arguments Against Import Substitution (1) (2) (3) (4) (5) (6) Inability to produce all imported goods Shortage of capital and skilled labor Technical know-how is to be imported Tough time Less Possibility of Increase in Employment Against the Theory of Comparative Cost

METHOD OF IMPORT SUBTITUTION Ø Tariff policy. Ø Increase in production. Ø Research. Ø Swadeshi spirit.

EVALUATION OF IMPORT SUSTITUTION POLICY �According to Dr. Manmohan Singh, “Along with the control on the import of non-essential goods, their domestic production should also be encouraged. ” �According to Prof. Padma Desai, “as an instrument of development of an underdeveloped economy, policy of import substitution seems to be unable to generate any fundamental change in economy. ” �In short, Prof. Helleiner has rightly summed up that; “It is difficult to find any rationale for the pattern of import substitution industrialization which has, whether consciously or not, actually been promoted. It has given undue emphasis to consumer goods in most countries. It has given insufficient attention to potential long run comparative advantages; and it has employed alien and unsuitable capital intensive technology to an extraordinary unnecessary degree. ”

SUGGESTIONS: �Import substitution should be in respect of the production of those goods which are incidental to industrialization, such as, steel, news print, etc. �Allocation of investment for import substitution should be in favour of primary industries. �Public and private sectors should co-operate with each other for success of import substitution. �Assistance of foreign capital should be sought to establish import substitution industries.

CONCLUSION: According to Krueger, “Experience has been that growth performance which has been more satisfactory under export promotion strategies than under import substitution strategies. While it is impossible to specify a particular model of growth process that will be simultaneously satisfy all observers, the relation ship between export performance and growth is sufficiently strong that it seems to beer up under many different specifications of the relationship. ”