Many non-communist "third world" states embarked on a state-driven import-substitution industrialisation model assuming that this would increase political independence and generate middle class job growth. The pioneers in that regard were in Latin America - Mexico, Argentina and Brazil.
When this kind of autarky is combined with enforced limitations on domestic competition, investment in quality and innovation really suffer.
Well, not so fast...It is fashionable to term some of these things like "auturky" in hindsight...But one has to make a distinction between what was possible in the '50s vis a vis what became possible in the late '60s and thereafter...The big factor is global trade...GLobal trade outside commodities wasnt such a large piece of the global economy in the first half of the last century...WWII changed that a bit, but all third world nations by definitions had a skewed terms of trade..In other words, import substitution was pretty de rigeur in the '50s even in the Washington crowd...And the success of Japan, South Korea and EAst Asia has got a lot to with that initial burst of setting up domestic capacity...The difference with India was simply a function of efficientcy - the relative fortunes of POSCO and SAIL is synptomatic of the difference...The initial pain was taken by all -whether that generated enough surplus was the question...
If you go back to my post you will see that my criticism is not of ISI per se, but the lack of focus on competing, or building towards competing on the world market. It is perfectly possible for a state owned, but market focused enterprise to be globally competitive. Many French companies fell in this category.
Secondly, the kind of license raj mentality that accompanied the ISI prevented companies inside countries like India with a huge, but protected internal market from achieving higher levels of competitiveness.
This is something that took place even in economies like Japan, where the state allowed real internal competition only in a few areas that were targeted for export growth. The result is that while Japan has many world-class automobile and consumer electronics companies, there huge areas where they ought to be competitive that they are not. In this respect I believe India's reforms have been more radical than Japan's, and it is reaping the benefits.
Brazil for example like India started out heavily dependent on commodity exports, and those remain an important part of their economy - but they were also keen at a much earlier stage to make expensive projects like Embraer produce civil aircraft for the global market.
Now obviously this sort of strategy becomes much harder after 1974 when the Nuclear Suppliers Group tightens up high technology commercial exports to India, but it doesn't explain the ideological disinterest in building industrial exports before that.
The nuke sanctions after 1974 is an absolute non sequitor of an excuse for performance..First up, the sanctions were in few areas, and not enormously important to the economy per se...Second, even in defence areas, while the US imposed sanctions, Europe/Russia diddnt..the Embraer example is important - it is the rank underpefromance of the public sector that was the issue...Difference in the trajectory of HAL and Embraer is just one more example..
If you are talking about an industrial growth pattern that concentrates on the lowest entry level of price, quality, and complexity, then yes, its a non sequitor. India could have certainly competed with countries like China and Hong Kong.
However Taiwan, Japan and yes Brazil are another story. Aircraft, electronics, etc require access to a wide range of high end dual-use components and machinery. Avionics, microprocessors, CNC controlled lathes, certain kinds of software, etc, etc.
One of the little known facts of the Cold War is that despite elaborate NATO-Japanese technology denial regimes, industrial espionage gave the Soviets access to a great deal of contemporary Western technology. However strict levels of classification slowed the rate of transfer to transfer to Soviet military industry, and what made it to military-supervised industry never made it to Soviet civilian supervised industries. Soviet military industries often had much more efficient production technology, as well as better designed products than equivalent civilian industries for everything from ball bearings to footwear.
Again China circumvented these problems by starting out at the low end, but further growth did rely on the US easing controls on access to commercial technology in the Clinton years in order to allow manufacturing outsourcing.
Still without such agreements I don't see how HAL could compete in the world market with Embraer.