Import Substitution Industrialization (ISI) is an economic development concept and policy strategy that advocates replacing foreign imports with domestic production to foster industrialization and reduce foreign dependency. The theoretical foundation for ISI emerged from critiques in the 1950s by economists like Raúl Prebisch, who argued that the international division of labor kept developing countries poor by forcing them to export primary products and import expensive manufactured goods. ISI was a common response to colonial economic dependence, particularly in Latin America from the 1930s through the 1960s, and in post-independence India.
The mechanism of ISI works through protectionist policies designed to shield nascent domestic industries, often called "infant industries," from international competition. Key provisions include high tariffs, quantitative restrictions (QRs), import licensing, and government subsidies or direct investment in state-owned enterprises (SOEs). In India, ISI was the core of the trade policy from the mid-1960s until the economic reforms of 1991, and was closely connected to the Five-Year Plans, particularly the Second Five-Year Plan (1956–1961), which focused on rapid industrialization and the substitution of basic and capital goods. The policy led to the creation of a diversified industrial base but also resulted in inefficiencies, high prices, and poor quality due to a lack of competition.
The ISI strategy was largely abandoned in India after the 1991 economic crisis, which forced a complete rethink and led to the liberalization of the economy, including the removal of industrial licensing and a more open foreign direct investment (FDI) regime. However, the concept has recently resurfaced in a modified form, connecting to the modern push for self-reliance and resilient supply chains. The current government's strategy, which includes the Production-Linked Incentive (PLI) scheme, focuses on targeted domestic manufacturing to substitute imports in specific sectors like electronics and critical minerals, aiming to replace imports worth $189 billion across 1,272 products as of July 2026. This modern approach differs by being more targeted and using incentives rather than the blanket protectionism of the earlier ISI era.