What did India fear during the first seven plans regarding foreign exchange spending by Indians?

Spending on luxury goods

The correct answer is option 2: Spending on luxury goods

The industrial policy that India adopted was closely related to the trade policy. In the first seven plans, trade was characterised by what is commonly called an inward looking trade strategy. Technically, this strategy is called import substitution. This policy aimed at replacing or substituting imports with domestic production. For example, instead of importing vehicles made in a foreign country, industries would be encouraged to produce them in India itself. In this policy the government protected the domestic industries from foreign competition. Protection from imports took two forms: tariffs and quotas.

The policy of protection was based on the notion that industries of developing countries were not in a position to compete against the goods produced by more developed economies. It was assumed that if the domestic industries were protected they would learn to compete in the course of time. Our planners also feared the possibility of foreign exchange being spent on import of luxury goods if no restrictions were placed on imports.