India’s import substitution plan: India’s import dependence becomes costly whenever oil routes through West Asia are disrupted. Higher crude and fertiliser prices raise the trade bill and put pressure on the rupee. The government’s latest response is a product-level manufacturing drive rather than another broad round of tariffs and import controls.
A Centre-state strategy has identified 1,272 products accounting for nearly $189 billion of annual imports. The list covers chemicals, electronics, machinery and speciality steel. Each product records imports of more than $50 million a year and is either not made in India or produced in inadequate quantities. States have been asked to develop specialised clusters, speed up clearances and consider fiscal incentives.
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The exercise is more discriminating than the old pursuit of self-sufficiency across industries. But drawing up a list is the easy part. Building firms that can match global suppliers on price, quality and technology will take much longer.
India’s import bill sets the scale
India imported goods worth about $775 billion in FY26. Merchandise imports rose another 19.9% in the first quarter of FY27 to $216.18 billion, widening the quarterly trade deficit to $86.86 billion.
Much of this bill cannot be replaced soon. India will continue to import crude oil, gold, coking coal and minerals that are scarce or unavailable domestically. Another set of products is already manufactured in India, but overseas suppliers offer lower prices or better quality.
Imports that can reasonably be replaced account for about a quarter of the total. The 1,272-product list gives industrial policy a defined field of action. It also prevents import substitution from becoming a general excuse for raising tariffs.
The products on the list require more than additional factory capacity. Specialty chemicals need process knowledge. Precision machinery depends on machine tools and metrology. Electronics production needs components, materials and testing facilities. In many cases, India lacks several links in the production chain.
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Import substitution after PLI
Production-linked incentives have shown that targeted support can alter investment decisions. Electronics production and exports have risen, semiconductor investment has begun, and India now manufactures almost all the mobile phones sold in its domestic market.
Mobile phones also show the limits of the achievement. The government estimates domestic value addition across electronics at 18-20%. India may assemble and export a finished device while continuing to import many of its expensive components and the machinery used to make them.
That distinction matters for the new import programme. A final assembly plant can be established within a few years. A supply base of toolmakers, component producers and specialised engineering firms takes longer. It requires reliable power, industrial land, trained workers and firms willing to invest before demand is assured.
States can provide land, infrastructure and quicker approvals. They can also bring anchor companies and suppliers into the same industrial area. Tax concessions alone will not create engineering knowledge or turn a weak supplier into a competitive one.
The China lesson is about industrial depth
India has long sought a larger manufacturing sector without changing its weight in the economy by much. China and South Korea built deeper production systems in which component makers, machinery firms and exporters grew together. India’s expansion has been stronger in services and in selected areas of labour-intensive manufacturing and assembly.
China’s advantage is not confined to wages. A manufacturer can source components, tooling and industrial services from a large domestic network. Suppliers compete for orders, invest in equipment and improve products alongside their customers. This cuts costs and reduces the time required to move from design to mass production.
India has developed such networks in automobiles, pharma and parts of engineering. They remain thin in electronics, advanced machinery, solar equipment and several chemical industries. A new factory in these sectors often imports both its production equipment and its important inputs.
Low wages also reduced the immediate incentive for some Indian firms to automate or invest in advanced machinery. This allowed labour-intensive production to grow, but left the country dependent on imported capital goods and precision components.
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Why import substitution is harder than it looks
Domestic production helps only when its costs and quality approach international levels. A factory kept alive by permanent subsidies or tariff protection shifts the cost to consumers and other manufacturers. An expensive domestic intermediate product can make an Indian exporter uncompetitive.
Import controls may also weaken the pressure on firms to improve. Protected manufacturers can retain the domestic market without investing in better machinery, design or worker skills. The policy then replaces a foreign supplier with a high-cost domestic one.
The automobile industry followed a more durable course. Import restrictions gave local production time to develop, but Indian firms also invested in vendors, engineering and export markets. Competition among manufacturers forced suppliers to improve. Protection did not remain the industry’s only source of profit.
The same discipline is required for the 1,272 products. Support should help firms cross an initial cost or technology barrier. It should not compensate indefinitely for poor productivity.
Import substitution must lead to exports
India should not treat imports as an enemy. Many imports are inputs for domestic production and exports. Restricting them without a competitive local alternative will raise costs across the economy.
South Korea, Taiwan and Vietnam built manufacturing strength by joining global supply chains and selling abroad. Their factories imported technology and components before local suppliers acquired the scale to replace some of them. Export markets imposed standards that domestic protection could not.
India’s import programme should follow the same course. The immediate objective may be to manufacture products now bought overseas. The durable objective is to build firms that can compete outside India.
Lower imports can provide temporary relief to the trade balance. Manufacturing will have changed only when Indian companies can sell these products abroad without permanent protection.