Raghuram Rajan Warns Against Import Substitution – Free PDF Download

What has happened?

• Former Reserve Bank governor Raghuram Rajan on Wednesday cautioned against import substitution under the ‘Aatmanirbhar Bharat’ initiative of the government,
• Saying the country has gone down this route earlier but could not succeed.
• “If the focus is on import substitution by erecting tariffs, which we have done lot of in the last few years,
• Then I think it is a direction we have tried before and it has failed.
• I would caution against going in that direction,” Mr. Rajan said.
• He was addressing a webinar organised by The Centre for Financial Studies.

What is ‘Import substitution’?

• The policy of encouraging domestic production by raising barriers against the import of goods
• from foreign economies.
• It is usually recommended by some economists as a way to encourage self-sufficiency, and also to aid the development of local industries.
• It was most popular in Latin America in the 20th century, and India too adopted it prior to the liberalisation of its economy in 1991.
• Critics have argued that protectionist measures like import substitution make consumers poorer in the long run, By preventing them from enjoying the benefits of free trade.
• Also, given the restrictions imposed on foreign trade,
• It can lead to bureaucratic corruption.

Why rajan think so?

• Rajan said in order to export, One needs to be able to import things that go into those exports as cheaply as it can.
• “China’s rise as an export power came on the back of assembly.
• It brought in the stuff, put it together and exported it
• Thus Don’t erect huge tariffs and focus on creating right environment for production in India.”

So what should be done?

• According to Mr. Rajan, targeted spending by the government can be fruitful in the longer term.
• “This is not the time to have a free cheque book. But targeted spending can repay a lot if it is done wisely and carefully,” he said.
• “If a number of firms have shut down never to reopen again, the supply side of the economy is affected.
• If a number of households have stopped sending their kids to school because they can’t afford to do so,
• This again inhibits our growth potential for the future as these are going to be poorly educated kids who are going to be capable of much less quality jobs,” He stated.

Infrastructure development

• Rajan said one big impediment to infrastructure development is the land acquisition process and that requires some technical changes, including better land mappingand clearer ownership.
• “Some States have moved ahead on this but we need to move ahead across the board,” he pointed out.

Q) After “Great Depression of 1929” who among following suggested for ‘strong state intervention’?

1. Adam Smith
2. JM Keynes
3. Paul Samuelson
4. Paul Kruger

Q) In the mid-1980s, the concept of Globalisation was popularised by which of the following organisation?

1. OECD
2. World Bank
3. IMF
4. World Economic Forum

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