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Unit 7: Indian Industries

labour is comparatively plentiful and capital scarce, the development of labour-intensive Notes
consumer goods appears quite legitimate. But, the basic premise of this approach is inappropriate.
The issue is not how to economise the utilisation of capital (this has to be done as an inevitable
situation) but how to increase its supply. As most underdeveloped countries do not produce
these goods at home, the only option to increasing their supplies is via imports. This relies upon
the rate of growth in exports of primary commodities as well as manufactured goods. As it has
been indicated above, the countries are confronting an “export lag” in their exports of primary
commodities. Consequently, you must take into consideration that primary commodity exports
do not appear to be a reliable source of foreign exchange earning so as to increase the import of
capital goods.
The option to the increase of exports of primary products from under-developed countries
would be to establish export promoting manufacturing industries. However, the main trouble
is that in producing goods of this sort, say textiles, the advanced industrial countries themselves
are probably to have an overpowering comparative advantage. This does not essentially mean
that export promoting industries should not be developed; it only depicts that specialisation in
some industries for export is not an alternative for the growth of a diversified domestic industry.
In case, however, the growth in foreign exchange earnings cannot be reinforced by the promotion
of export industries, the spread of import replacing consumer goods industries can issue foreign
exchange for imports of capital goods. Import substitution is of two kinds:

(a) the substitution of home produced goods for imported goods, and
(b) the substitution of capital goods imports for consumer goods imports.
Hence, if a country cannot increase its export earnings adequately, it can still increase its import
of capital equipment by decreasing its imports of consumer goods. This process of import
substitution, itself develops import demand for specific ancillary goods which are required for
the production of those consumer manufactures. We are hence confronted with a problem of
choice between expansion of export-oriented industries or of import substitution industries.
The capital accessible for investment in an under-developed economy being restricted, the
allotment of funds to an export project decreases the scope of investment oriented towards
import-substitution. In case export-oriented industries are successful in inspiring exports, they
raise the supply of foreign exchange and if import substitution is effective, it issues foreign
exchange so that the influence of these alternatives on the supply of foreign exchange is similar.
How should we choose between these two alternatives?
Although, you must understand that the influence of the development of these two types of
industries on foreign exchange is identical, yet an import-substituting industry reinforces the
economic independence of the country, whereas export-oriented prospect, on the contrary,
increases its reliance on the fluctuations of prices and volume of trade in foreign markets.
Hence, in general, an import-substitution project should be chosen over an export-oriented
project.

Self Assessment

Fill in the blanks:
1. The …………………… which possesses a relatively high marginal propensity to save and
invest contributes significantly to the eventual achievement of a self-sustaining economy
with continued high levels of investment and rapid rate of increase in income and industrial
employment.
2. In many cases, the diversion of …………………… rural labour to non-agricultural
occupations is an urgent requirement for development.

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