The biggest reform of 1991 was the dismantling of the licence permit raj. In one swoop the industries minister announced at noon on July 24, 1991, a new industrial policy which abolished industrial licensing for all but 18 industries. Later that evening the finance minister gave a historic speech ushering in an era of economic reforms, which had everything from foreign direct investment, banking deregulation, tariff reduction and market-oriented pricing. But the biggest bang was that decision announced at noon time by the minister holding the industries portfolio. That person was none other than Prime Minister P V Narasimha Rao. This one reform was the most important one and paved the way for the spectacular success of many industries such as automotives, steel, chemicals including petrochemicals, pharmaceuticals, and telecom.
By delicensing the reform took away the power of the bureaucrat to decide who would produce how much and where. There are many horror stories of the ills of the licence raj from those pre-reform days, about which the less said the better. Suffice to say that during the licensing days, many companies and large conglomerates specialised in simply obtaining and hoarding licences. So, the road to high profit was not in being cost efficient, or catering to market demand, but simply obtaining the scarce licence and producing what was allowed as per the licence. No wonder, black markets were not uncommon.
More than three decades later, when memories of the licence raj are fading, comes an announcement that the government now requires you to have a licence to import a laptop, or computer or a tablet. No wonder all hell broke loose after this announcement. So, within 24 hours of the announcement, the Directorate General of Foreign Trade (DGFT) clarified that the licence (permit) would be given very quickly, even within minutes. And that there was no limit to how many units you were allowed to import. And the government bowing to pressure, extended the date by three months.
Considering that the festive season is around the corner when a bulk of the sales of computers, laptops, etc. will happen, don’t be surprised if there is a huge spike in demand for imported stuff in the next three-month window.
Let’s examine this issue of introducing import licensing. Firstly, it is reversing an important reform that we have rolled out in 1991 and have tasted its success. We also are signatories and founder members of the World Trade Organization which prohibits such import licensing restrictions. We abolished all quantitative restrictions (QR’s) for imports more than 23 years ago. We can of course resort to raising import duties. In 2014 India’s average import tariff was 13.5 percent, which went up to 17.6 percent in 2019. After that it dropped to 15 percent. But generally, in the case of many imported items, the tariffs have gone up.
So, India has shown a tendency to become more protectionist. Which brings us to the second point. Secondly the import licensing for laptops is presumably to prop up domestic manufacturing. The same sentiment (of protectionism) has been manifest in the Make in India thrust, and more specifically in those sectors identified for the Production Linked Incentive (PLI) scheme. It is one thing to say that India should become a global hub for manufacturing, able to cater to the domestic and international demand both in terms of quality and cost. But it is quite another to become protectionist, and indirectly encourage higher costs and inefficiency.
Is not exposure to global competition the best way to spur quality and scale here in India? Import licensing alone is not going to be enough to stimulate local production. What if 95 percent of the laptop is imported and only 5 percent is domestic value added? This is the case of Apple’s iconic iPhone production in India, from where it is also exporting to the rest of the world. But Apple gets subsidy under PLI for top line (i.e., total revenue) not for value added in India.
The third issue is that of the Chinese connection. India’s imports from China have been increasing for the past several years, of which electronics including computers is a big part. The past year saw imports of computers worth 5.3 billion dollars, most of these being of Chinese origin. But even China-based manufacturers source components from the rest of Asia, including Taiwan. The Intel chip alone is a big cost item in the laptop. It is manufactured in the U.S. as well as other parts of Asia. There is very little chance of the high-end chip being manufactured in India in the near future. So how is the Chinese influx to be stopped? This cannot be done overnight, and suddenly imposing import licensing will not stop Chinese imports. They will simply get rerouted, with some small tweaks in value addition across the value chain which straddles several countries. A fourth aspect is that of national security. This popped up, after the furore. Almost as an afterthought to justify import licensing. Surely there are other ways to check for trapdoors, trojan horses or other cyber hacks that compromise security of laptops and computers. Import licensing will hardly make a difference.
Finally, for India’s digital push, it does not make sense to hurt ourselves and deny high end computers which necessarily have to be imported. Remember India’s super success in becoming a software and outsourcing powerhouse, was because imports of computers were liberalised long before the 1991 reforms. It was the vision of civil servants like N. Vittal who pushed for the import liberalisation of computers in the late 1980’s and early 1990’s which has led to the 250 billion dollar industry that it is today. Mr. Vittal passed away on August 4, the day the import licensing was announced. He would have been most disappointed to witness this regression.
India’s destiny as a pre-eminent economy power in the world is predicated on maintaining openness in trade, commerce, investment and technology. We also have to think about maintaining a strategic autonomy in terms of our capabilities. This is easier said than done. Even then, imposing a licence to import high end computers and laptops is not the way to go forward, especially in a world where value chains criss-cross national borders, and the value added in each geography is a small fraction.
(Dr Ajit Ranade is a noted economist. (Syndicate: The Billion Press, email: editor@thebillionpress.org)
