Check sibling questions

What is Trade Policy?

It is the Government Policy regarding International trade

It refers to regulations and agreements that control imports and exports with other countries

Meaning of Trade Policy - Teachoo.JPG

What was Trade Policy of India from 1950-1990?

Till 1990, India had inward looking trade strategy

This Strategy was called Import Substitution

Different Types of Trade Policy - Teachoo.JPG

What is Inward Looking Trade Policy - Teachoo.JPG

What is Outward Looking Trade Policy - Teachoo.JPG

What is Import Substitution Policy?

This Policy aimed at replacing imports with domestic production


Instead of Importing vehicles from outside India, Government encouraged vehicle industries to Produce in India

What is Import Substitution - Teachoo.JPG


Why did Government Protect Domestic industry?


Why did Govt follow the Policy of Import Substitution?


Protect Domestic Industries

Govt believed that Domestic Industries were not in position to compete with goods produced by industries of

developed economies

If domestic industries were protected, they could compete with imported products in future

Prevent Foreign Exchange on Imports

Govt feared that if there were no import restrictions

People will import more luxury goods and foreign exchange will move outside India

Why was Import Substitution Done - Teachoo.JPG

What Steps were taken by Government for Import substitution?

Government protected domestic industries from foreign competition

Government did it by introducing tariffs and Quotas



It means charging tax on Imports (custom duty)

This made foreign goods expensive compared to domestic goods

Import Substituition through Increasing  Tariff on Imported  Goods - Teachoo.JPG

Import Substiution through Increasing Quota on Imports - Teachoo.JPG


Government specified the quantity which could be imported

Hence, goods cannot be imported in large quantities to make domestic product expensive

Meaning and Purpose of Quotas in Import Substituiton - Teachoo.JPG

What were the Positive effects of Policy on Import substitution?

What as the Reason for Import Substitution in India - Teachoo.JPG

What was Benefits of Import Substitution to India - Teachoo.JPG

Benefits of Import Substitution - Teachoo.JPG

  1. Contribution to GDP
    Share of Industrial Sector in GDP increased from 13% in 1950 to 24.6% in 1990
    There was 6% Growth Rate of Industrial Sector during this Period

  2. Diversification of Industrial Sector
    At the time of Independence, Indian industry was restricted to cotton textile and jute|
    Later Indian industry diversified to variety of sectors like electronics, car manufacturing etc

  3. Opportunity to Small Sector
    It gave opportunity for businessmen with limited capital to start business

  4. Generated Employment Opportunities
    As more industries were set up, more workers and employees got hired
    Hence, it lead to increase in jobs and employment


NCERT Questions

Question 17

Explain how import substitution can protect domestic industry.

View Answer

MCQ Other Books

Question 1

In the following questions, select the correct answers:

To Protect goods produced in india from imports, Government made use of :

  1. Quotas
  2. Tariffs
  3. Export Promotion
  4. All of these
View Answer


Question 2

Need for import substitution policy is due to:

  1. Shortage of foreign exchange.
  2. Adverse Balance of Trade.
  3. Devaluation of money.
  4. All of the above.
View Answer


Question 3

Which of the following statement is not true about the need for import substitution for Indian economy?

  1. Unfavorable balance of trade.
  2. Devaluation of rupee.
  3. Abundance of foreign aid.
  4. Shortage of essential commodities.
View Answer


Question 4

In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R).

Mark the correct choice:

Assertion (A): India adopted import substitution policy during the first seven Five-year plans precisely.

Reason (R): Import substitution was to substitute the imports of our economy with domestic production.

  1. Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of the Assertion (A).
  2. Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of the Assertion (A).
  3. Assertion (A) is true, but Reason (R) is false.
  4. Assertion (A) is false, but Reason (R) is true.
View Answer


Learn in your speed, with individual attention - Teachoo Maths 1-on-1 Class


Meaning of Trade Policy TRADE POLICY International Trade Policy of Govt What is Trade Policy It is the Government Policy regarding international trade It refers to regulations and agreements that control imports and exports with other countries Example Goods and Services whose Imports Allowed Goods and Services which are allowed to be exported Different Types of Trade Policy Inward Looking Trade Policy Inward Looking Trade Policy Goods of Domestic Industry is preferred to Foreign Made Goods Imported Goods Replaced with Local goods It is also called Import Substitution Policy This Policy was followed by India between 1950-90 (Covered in this chapter) Outward Looking Trade Policy Outward Looking Trade Policy No Discrimination made between Domestic or Imported Goods Imported Goods Allowed to compete With Domestic Goods This policy was followed from 1991 Onwards (Covered in Next chapter) What is Import Substitution IMPORT SUBSTITUITION Imported Goods Replacing with Domestic Goods It is Policy of Govt to Replace Imported goods with locally made goods to promote Domestic industry Example Before Independence Cars were Imported After Independence Cars were produced in India This is Inward Looking Trade Policy of Govt adopted from 1950-1990 Why was Import Substitution Done? IMPORT SUBSTITUITION Imported Goods less used This Prevents Foreign Exchange to move out of India Replaced or Substituted with Domestic Goods Domestic Goods create Employment and Boost Economy Why Import Substitution done? To Protect and promote Domestic industry To Prevent Foreign Exchange from Moving Out of India How Import Substitution Done? Method 1-Tariffs on Imported goods Indian Good Price Rs 1000 No Custom duty On Local Goods Local goods were Cheaper, so more people Purchased them Imported Good Price Rs 600 Add 100% Custom duty Rs 600 Total price Rs 1200 Tariffs Govt increased tariffs (Custom duty) on imports Imported goods became more expensive, so Less people purchased them How Import Substitution Done? Method 2- Quota on Imports Indian Good Indian Onion Price Rs 20/Kg Imported Good Pakistani Onion Price Rs 10/Kg Which Onion should we Purchase-Indian or Pakistani? Quotas Govt specified Quantity which could be imported Example Annual Demand of India Indian Farmer Produced Quantity Allowed to be Imported Case 1 10000 ton 8000 ton 2000 ton Case 2 10000 ton 11000 ton Not allowed Hence, Imported goods could not be imported in large quantities to affect Indian Industry Benefits of Import Substitution Before Independence Goods Imported from Britain Limited Domestic Industries (only cotton and jute) Less Small Scale Industries Less Employment Less Contribution to GDP of Industrial Sector After Independence Many Goods produced in India More Diversification of Industrial Sector (New Industries Set up like electronics ,cars etc ) More Small Scale Industries More Employment Opportunities More Contribution to GDP of Industrial Sector Opportunity to small businessman with Limited capital to start business All these are Benefits of Import Substitution

Ask a doubt
Maninder Singh's photo - Co-founder, Teachoo

Made by

Maninder Singh

CA Maninder Singh is a Chartered Accountant for the past 13 years and a teacher from the past 17 years. He teaches Science, Economics, Accounting and English at Teachoo