Trade Policy encompasses a comprehensive framework of laws, regulations, and international agreements established by a government to influence a nation’s exports and imports in terms of both quantity and value. This policy includes measures like tariffs, import and export quotas, and import and export subsidies.

2.6.1 Pre-1991 Trade Policy

  • 1. At the onset of India’s planning era, the country adopted an inward-looking development strategy, often referred to as the import substitution strategy for industrial development. This approach heavily relied on bolstering domestic production capacity and providing domestic producers with a secure, protected market, shielded from external competition by imposing high tariff barriers. In essence, India’s trade policy was designed to be highly regulated and restrictive right from the early stages of its planning era.
  • 2. As industrialization efforts began in the Second Five-Year Plan, the foreign trade policy became even more restrictive. Only essential capital goods, machinery, equipment, components, spare parts, and technical know-how were permitted for import. Imports of non-essential items were significantly curtailed, with essential consumer goods imported occasionally to address scarcity.
  • 3. Over time, as India’s industries developed, there was a growing need for spare parts, raw materials, and other items to maintain their operations. Consequently, imports were allowed with certain conditions. Following the devaluation in 1996, some imports were liberalized. To encourage industries to export more of their output, they were permitted to import machinery and other essential inputs to enhance the quality of their products. Additionally, large-scale imports of items like fertilizers, pesticides, and seeds were permitted to support the Green Revolution program in the agricultural sector. Throughout this period, India’s foreign trade policy primarily focused on import substitution, meaning the production of domestic alternatives to imported goods. As a result, many items such as machine tools, diesel engines, and automobiles were produced domestically. While import substitution was prioritized, export promotion received limited attention, and little effort was made to diversify exports into new markets or enhance the composition of the export basket.
  • 4. In the 1970s, India’s trade policy saw some liberalization.
  • 5. The 1980s witnessed the introduction of special measures to boost export growth, including various export promotion schemes such as the duty drawback scheme, cash compensatory scheme, and market development assistance. These schemes aimed to provide concessions to exporters.

2.6.2 Composition of Foreign Trade

The composition of foreign trade pertains to the specific items that a country exports and imports.


  • 1.Agriculture and allied products have lost their significance in India’s foreign trade due to declining shares of jute, tea, foodgrains, and minerals.
  • 2.Notably, there has been a substantial increase in the export of manufactured products such as engineering goods, gems and jewelry, chemicals, ready-made garments, and cotton yarns and fabrics.
  • 3.The export of iron ore, leather and leather products (including footwear) has made a significant contribution to India’s exports.


The category labeled ‘others,’ which includes chemicals, pearls, precious and semi-precious stones, among other items, holds the largest share of India’s imports.

2.6.3 Direction of Foreign Trade

The direction of foreign trade refers to the countries from which India imports and the countries to which it exports. Exports and imports from Africa and America increased over time. India’s imports from Europe rose, while exports to Europe declined.

2.6.4 Import Substituting Industrialization/Inward-Looking Trade Strategy

Import substituting industrialization was the central objective of India’s second Five-Year Plan (1956-61) until the seventh Five-Year Plan (up to 1990). The Mahalanobis strategy of development was rooted in the idea of import substitution. This strategy was based on the argument for nurturing infant industries, suggesting that, in the initial stages of industrialization, it is necessary to shield domestic industries from foreign competition by imposing high import tariffs or quantitative restrictions. This strategy is believed to kickstart the industrialization process, which then becomes self-sustaining.

The reasons for adopting import substituting industrialization were as follows:

  • 1.It aimed to save foreign exchange by significantly reducing imports. The saved foreign exchange could be utilized for developmental imports, such as capital goods and advanced technology.
  • 2.It created a protected market with substantial demand for domestically produced goods.
  • 3.It addressed unemployment issues by promoting rapid industrialization, which absorbed unemployed workers.
  • 4.It laid the foundation for a robust industrial base in India, contributing directly to economic growth.

 Critiques of the import substitution strategy included:

  • 1.Neglect of the export sector’s potential.
  • 2.Performance comparisons with outward-oriented economies showed that inward-oriented strategies were less efficient.
  • 3.It did not lead to substantial economic growth.
  • 4.It was often seen as wasteful.

Objective Type Questions

1.What was the primary focus of India’s trade policy at the onset of its planning era?

a) Export promotion

b) Import substitution

c) Free trade

d) Tariff reduction
Answer: b) Import substitution

2.During India’s Second Five-Year Plan, what types of imports were permitted for industrial development?

a) All types of imports

b) Essential capital goods and machinery

c) Non-essential consumer goods

d) Only agricultural products
Answer: b) Essential capital goods and machinery

3.When did India begin to liberalize some of its imports, particularly to encourage industries to export more?

a) In the 1950s

b) After devaluation in 1996

c) In the 1970s

d) In the 1980s
Answer: b) After devaluation in 1996

4.Which sector received support through large-scale imports, such as fertilizers, pesticides, and seeds?

a) Information technology

b) Healthcare

c) Agriculture

d) Manufacturing
Answer: c) Agriculture

5.In which decade did India’s trade policy see some liberalization?

a) 1950s

b) 1960s

c) 1970s

d) 1980s
Answer: c) 1970s

6.Which category of items experienced a significant increase in India’s exports, as mentioned in the composition of foreign trade?

a) Agriculture and allied products

b) Gems and jewelry

c) Ready-made garments

d) Foodgrains
Answer: b) Gems and jewelry

7.Which category holds the largest share of India’s imports in the “Composition of Foreign Trade” section?

a) Agriculture and allied products

b) Machinery and equipment

c) Others (including chemicals and precious stones)

d) Textiles and clothing
Answer: c) Others (including chemicals and precious stones)

8.What does the “direction of foreign trade” refer to?

a) The direction of the wind during international trade

b) The countries from which India imports and exports

c) The mode of transportation for foreign trade

d) The quality of products in foreign trade
Answer: b) The countries from which India imports and exports

9.What was the central objective of India’s trade policy until the seventh Five-Year Plan?

a) Export-led industrialization

b) Import substitution

c) Free trade agreements

d) Capital goods development
Answer: b) Import substitution

10.What was one of the critiques of the import substitution strategy?

a) It was highly efficient in promoting economic growth.

b) It encouraged a strong export sector.

c) It was often seen as wasteful.

d) It aimed to save foreign exchange.

Answer: c) It was often seen as wasteful.

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