Cities As Growth Hubs: From Import Substitution to Import Replacement

Union Minister of Finance and Corporate Affairs, Smt. Nirmala Sitharaman, while presenting Budget 2025-2026 in the Parliament said that the Government will set up an Urban Challenge Fund of 1 lakh crore to implement the proposals for ‘Cities as Growth Hubs’.

How have these growth hubs emerged in India?

Post-colonialism, several nations relied on import substitution industrialization (ISI) as the dominant policy for development. India also followed this policy from the 1950s to the 1970s. A major shortcoming of the ISI policies, as highlighted by the National Commission on Urbanization (1988), was that these policies disregarded the spatial context or the way villages and towns were distributed over space. The challenge, therefore, was to include the spatial context in ISI policies by transiting to what is called “import-replacement”, an idea made famous by the well-known urbanist Jane Jacobs.

According to Jacobs, the engine of economic life is “import-replacement”. Jacobs believed that the best way to achieve such sustainable economies was to examine what is being imported into a region and develop the conditions to produce those goods from local resources with local labor. She referred to this process as “import replacing”. In import-replacement, the city becomes the central organizing geography around which economies are structured. Thus, the present-day imperative is to build a regional economic development strategy having import-replacement as its goal.

An example is how import replacement worked in the city of Venice. Venice started its life as a supply region for the much more advanced, imperial capital of Constantinople (present day Istanbul) exporting salt and timber and importing manufactured goods. Slowly, Venice started to act like the Constantinople of its own region and began to replace - cheaply at first - the imports it received from Constantinople, and export these cheaper replacements to other backward cities in its own region. These cities in turn fed Venice with their raw material exports only for them to eventually replace their Venice-imports in turn, forcing Venice further up the value chain.  This started a virtuous cycle - old work created new work, to produce exports other backward cities could not yet manage, and so on. 

If Venice had remained in Constantinople’s orbit, it would not have developed. The gap between them was simply too large to be bridged, showing that advanced-backward trade is a dead-end. According to Jacob, ‘backward cities need each other’. Tokyo repeated this pattern internally for Japanese cities while Hong Kong did the same and became ‘the Venice of the Pacific Rim’ taken over by China’s Shenzhen and other cities of the Southeast.

Thus, import-replacement differs from ISI in one crucial way - it recognizes that cities are the places where import-replacement happens. Furthermore, as we have seen in the case of Venice, networks of backward cities pull each other upwards by trading with each other. In other words, networks of backward cities form complementarities by competing with each other in their respective import-replacement processes.

In India, complementary relationships between networks of backward cities did not develop as the ISI ignored the spatial context and mainly focused on subsidizing prominent industries, encouraging nationalization and protectionist trade policies. As a result, the original four metropolitan cities continued to dominate the urban landscape without spawning even one Venice in their backyards.

This began to change once the ISI policies ran out of steam and import-replacement processes started in cities, like as Bengaluru, Gurugram and Hyderabad. Hyderabad, for example, grew out of the influence of big cities (e.g. Chennai) due to the confluence of several factors. By the late 1980s, Hyderabad already had a well-developed eco-system of public sector units and small and medium industries. Hyderabad was also richly endowed with vacant land all around the city for developers/builders to construct facilities to receive outsourced services from the west. Furthermore, higher education in erstwhile Andhra Pradesh was deregulated during the 1990s. As a result, large numbers of private engineering colleges were established, which produced thousands of engineers within a short period of time. Thus, Hyderabad was well prepared to move up the value chain when outsourcing of services started during the 1990s. The same is happening again with the spread of Global Capability Centers (GCC).

Like Hyderabad, import-replacement in Detroit also shows path dependency. Detroit, which started with milling flour, then moved to mill machine repair and marine machine manufacture, spawning an entire jungle of suppliers of parts and tools. Thus, when Henry Ford turned up in 1905 to make the Model-T, everything he needed was at hand in the city.

The way forward is to examine what is now being imported into a region and develop conditions to produce these goods from local resources with local labor. Of course, there would be exports and imports with other regions, but the core would be the capacity to meet the economic, social and cultural needs of the people of the region from within the region, not in a spirit of isolationism but in a spirit of self-determination. This would have a domino effect and over time other regions would achieve similar high levels of economic growth.