Hardware protectionism | When licence controls hurt

The Union government’s decision last month to restrict the import of laptops and computers has led to a lot of consternation in industry circles. While the government justifies the move that mandates a licence for importers—to be implemented from November 1—as one that will encourage domestic production of laptops and computers, there is widespread concern that the decision negates the fruits of liberalisation set off three decades ago. Some experts also view this as a return of the ‘licence-permit’ raj. They fear more products across a wider range coming under import controls, what they call a ‘protectionist’ approach that runs contrary to the foundational principles of the World Trade Organization (WTO).On August 3, the Directorate General of Foreign Trade (DGFT) imposed import restrictions on seven items, including laptops, tablets, personal computers and servers. However, a day later, the DGFT said it was deferring the implementation of the restrictions till October 31. Only laptops, tablets, all-in-one PCs, ultra small form factor computers, and servers that are integral to capital goods will be exempted from import licensing requirements. Moreover, 20 such items per consignment won’t need a licence if they are to be used for purposes such as R&D, testing, benchmarking, evaluation, repair and re-export, and product development.With the rise in digitisation, the demand for computers and laptops in India has grown exponentially. In the past decade, annual imports in this segment jumped from $1.5 billion (Rs 12,392 crore) to $5.3 billion (Rs 44,179 crore). Imports were at $7.4 billion (Rs 60,395 crore) in 2021-22. As much as 70-80 per cent of the imports in this segment are from China. According to a report by economic think-tank Global Trade Research Initiative, India’s imports from China are mostly in three key product categories—electronics, machinery and organic chemicals. India needs to rely on China for essential day-to-day items and industrial products, such as mobile phones, laptops, components, solar cell modules and integrated circuits, it said. Rising import dependenceIn a gazette notification on May 29, the Union ministry of electronics and information technology said that over the years, “the IT hardware manufacturing capability and capacity in the country has progressively declined and many units have either ceased operations or are operating at low capacities”. Currently, the demand for laptops and tablets in India is largely met through imports. The unutilised installed manufacturing capacity is a low-hanging fruit as regards quickly scaling up manufacturing in the country, it said. India has the fastest-growing digital ecosystem with over 1.17 billion mobile subscribers and over 836.86 million internet users. Deeper internet penetration, increase in digital data traffic, public cloud services, IoT (internet of things) devices and the government’s push for data localisation will lead to an influx of local and international players setting up data centres in India, which will further boost server demand in the country, the ministry added.Most of the seven categories restricted for imports by India are targeted at China. In 2022-23, of the total imports of personal computers and laptops worth $5.3 billion (Rs 44,179 crore), goods worth as much as $4.1 billion (Rs 34,003 crore) came from China. During April-May 2023, India’s imports from China for these restricted categories were valued at $743.6 million (Rs 6,143 crore), reflecting a 5.6 per cent decrease from $787.8 million (Rs 6,508 crore) in the corresponding period of the previous year, says a report by the business publication India Briefing. The highest share of imports among these categories was in the segment of personal computers, including laptops and palmtops. For this category, imports from China amounted to $558.4 million (Rs 4,613 crore) in April-May 2023, compared to $618.3 million (Rs 5,107 crore) in the same period last year, the report added.One of the expectations of the import restrictions is to boost domestic production. India already has in place a production-linked incentive (PLI) scheme for IT hardware, offering a 4 per cent incentive on incremental production. In May, the scheme was revised, with its budget increased to Rs 17,000 crore, more than double the initial approval in 2021. The scheme aimed at reducing the dependence on imports.The IT PLI scheme 2.0 covers laptops, tablets, all-in-one PCs, servers and ultra small form factor devices. Reports say it is expected to generate $40.5 billion (Rs 3.3 lakh crore) in incremental production, $293.6 million (Rs 2,426 crore) in incremental investment, and create 75,000 jobs over the scheme’s six-year implementation period. The Centre said it had received 38 applications for the revised PLI scheme for IT hardware as on August 31. ‘Protectionist move’Much as the Centre would want to justify its move to curb imports, experts say it can be counter-productive. “The sudden imposition of licensing on the import of laptops, computers and tablets does not make sense,” economist Ajit Ranade recently wrote in a newspaper article. “It reverses a reform whose rich fruits have been tasted for three decades.” Post-1991, delicensing led to spectacular growth in a variety of sectors, ranging from automobiles, petrochemicals, pharmaceuticals, steel and metals to telecom equipment. Moreover, the move to impose import licences is against the WTO principles and would invite tit-for-tat action and punitive measures from trade partners. It can also choke the supply of these hardware and increase prices, much to the disadvantage of the consumer. “It is plainly protectionist and will encourage cost or quality inefficiency. Also, it is imperative to have free and instant access to the latest products if we are to bridge the gap in the education segment created by Covid-19,” Ranade argues, “Moreover, adopting a licensing regime will not invite investments overnight. It will be difficult to change the China tag since products today can change with minor tweaks in the value chain.”Others say the move has to be seen together with other actions such as banning the export of rice in July, and of onion in 2020. On July 20 this year, India surprised the world market by banning exports of non-basmati white rice to control rising domestic prices. This followed a ban on broken rice exports last year. The ban trapped thousands of tonnes of non-basmati white rice at ports, and left traders in the lurch. In September 2020, the government banned exports of all varieties of onions, anticipating a shortfall as exports shot up 30 per cent in the April-July period. However, in October of that year, it partially eased the curbs, and the following January, lifted all restrictions on onion exports as prices started to ease in the domestic market after the arrival of the new crop. The US and Japan had taken up the issue at the WTO meetings later.“The decision to impose import licensing is a kneejerk reaction that does not send positive signals to the world,” says Madan Sabnavis, chief economist with the Bank of Baroda. The only relief seems to be that this is not an outright ban, but a move to control and track imports of IT hardware. According to him, the move seems to be driven by the desire to target the PLI scheme more productively. “India has a PLI scheme that is running fairly successfully when it comes to electronics—computers and mobile phones. We are importing a lot from China and then processing it and exporting it. The latest move (to impose licensing) will help authorities track how much value-addition is being done on products in this segment,” says Sabnavis. The other motive is to prevent the dumping of Chinese goods into India. Under the Aatmanirbhar Bharat scheme, we are aiming to produce everything on our own. However, the flip side of this, according to him, is that the prices of IT hardware were likely to go up.Raghuram Rajan, the former governor of the Reserve Bank of India, had been a strong critic of the government’s PLI scheme. Citing the example of mobile phones, he argued that the PLI subsidy claimed by many companies is “paid only for finishing the phone in India, not on how much value is added by manufacturing in India”. What India has done essentially is to assemble mobile phones here, but the components that go into those phones are mostly imported. However, others like Rajiv Kumar, former vice chairman of the NITI Aayog, have countered this argument, saying what was first needed was not a big focus on value-addition, but a need for scale and integration with global trade flows. Once that is achieved, backward integration into component production follows, he said.Creeping tariffsIndia has been increasing import tariffs over the past several years. According to news reports, the WTO, in its review of India’s trade policy for 2021, pointed out that since the previous review in 2015, India’s simple average tariff had increased from 13 per cent to 15.4 per cent. The share of goods with tariffs below 10 per cent declined to 67.8 per cent of the overall trade basket in 2020-21, from 79.1 per cent in 2015. By comparison, the share of goods with tariffs between 10 per cent and 30 per cent increased to 22.1 per cent of the overall trade basket in 2020-21, from 12.1 in 2015. Reports also say that India has done about 3,200 tariff increases since 2014. In a paper published in October 2020, economists Shoumitro Chatterjee and Arvind Panagariya said, “Over the last few years, India has turned inward. Policy is moving closer to a development strategy led by import substitution in a deglobalising world. The import substitution has been sustained by average tariff increases of close to 5 percentage points since 2017.”The Centre has justified its import licensing move by citing the need to boost domestic manufacturing. “It is the government’s objective to ensure trusted hardware and systems, reduce import dependence and increase domestic manufacturing of this category of products,” Union minister of state for electronics and information technology Rajeev Chandrasekhar said on microblogging site X. “This is not at all about ‘licence raj’; it is about regulating imports to ensure...India’s tech ecosystem uses trusted and verified systems only that are imported and/or domestically manufactured trusted systems/products.”Media reports say that the Manufacturers’ Association for Information Technology (MAIT), which includes top laptop, personal computer and server makers such as Dell, HP, Apple, Lenovo and ASUS, has sought an extension of nine months to a year for the implementation of the new import restriction rules. HP Inc. has a 34 per cent share in India’s PC market, followed by Lenovo (16 per cent) and Dell Technologies (14 per cent).Nitin Kunkolienker, president emeritus of MAIT, and director, Electronics Product Foundation, has said that if the government needs to make India a success in the PLI scheme, it will need to promote manufacturing in a better fashion. “One of the greatest challenges in India is finding lean manufacturing on the logistics and supply chain side, it’s unreliable. The ports are not so friendly as of now. Over and above, if there’s one more layer added of getting an import licence, then we are only making it more unfriendly,” he said. Moreover, many models do not have the economies of scale for manufacturing in India. Getting a licence can mean bureaucratic delays and the cost of dealing with such transactions is high, he said.The Centre’s move on IT hardware imports certainly caught the industry by surprise. What it needs to ensure is that the manufacturers are given enough time to transition to local manufacturing, without expecting them to make even high-end products here in the absence of the right ecosystem to do so. Most importantly, it should make sure that the customer gets the best deal out of the whole exercise, which means superior products at reasonable prices.Edited By: Aditya Mohan WigPublished On: Sep 7, 2023

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