Scale economies and exports in an import substituting regime: Some observations for Indian industry

Abstract

At the present stage of India's industrial development, the continuation of import protection of the final goods sectors, characterised by oligopoly market structure conditions, could be justified on the ground that it provides scope for scale economies, by giving the oligopoly firms sole access to the domestic market. This, in turn, could provide relative advantage in exports. But the Indian experience over the last four decades shows that the possible welfare improving outcomes of oligopoly or monopoly domestic market structure in terms of scale economies and also technological innovation did not take place. At the present juncture, it might be more beneficial to let a large number of firms to compete for the domestic market, even at the cost of possible scale economies at the initial stage. Later on, if the market turns into a natural monopoly, through internal scale economies, that might be socially more beneficial than protecting the firms through artificial entry barriers.