Licence raj returns

Computer import curbs should be rolled back

It goes without saying that governments should always make decisions carefully, particularly when such decisions affect a large number of people and can have significant long-term economic consequences. But bureaucracies often miss the obvious. After widespread public criticism and concern, the Directorate General of Foreign Trade on Friday postponed its earlier decision of imposing restrictions on imports of laptops, personal computers, tablets, and other related items. The decision will now be effective from November 1. This clearly indicates not enough thought went into the decision to abruptly impose restrictions on imports of such critical items and push them under the licensing regime. It can thus be argued that had the commerce ministry held consultations even within the government, including economists, it would not have made such a decision.

It’s hard to explain why one of the largest economies in the world, which also sees itself as an information technology (IT) and services hub, would suddenly put restrictions on the import of computers and related items. The primary stated reason was security risks. It was later clarified that the larger objective was to ensure the availability of trusted systems and hardware, along with increasing domestic production to reduce import dependence. These are worthy goals, but certainly don’t require going back to the licence raj. If the government is concerned about security risks, it could simply restrict imports of relevant systems from specific countries. A number of countries, for instance, are not buying Chinese telecom hardware. Putting the entire ecosystem at the mercy of licences must be avoided. There are very strong reasons why India abandoned the licence regime.

It has been reported that licences will be issued smoothly. But once the practice is in place, it will lead to predictable problems. Licensing would inevitably affect availability and prices. The allocation of licences will also lead to usual problems, such as favouritism. It is important to understand that computer hardware is an essential input in today’s services-driven economy. Shortage and price increases will affect output with longer-term consequences. Thus, instead of postponing the licensing decision, the government would do well to withdraw it. If the concern is overall imports, the new regime is unlikely to help. In 2022-23, India’s import of items being put under the licensing regime was worth $8.8 billion, compared to the overall merchandise import bill of over $700 billion.

However, it appears that the bigger objective is to push manufacturers to increase production in India. The production-linked incentive scheme for the IT hardware sector has not seen the anticipated level of participation. The government, as a result, more than doubled the allocation. But as India’s own history clearly shows, import restrictions and licensing do not result in higher domestic production. If anything, such measures undermine the competitiveness of the country’s exports and its ability to tap into global value chains. Computers and other such items are produced through complex value chains and it would be difficult to build them overnight in India. At the broader level, it is important to recognise that because of policy choices over the years, despite having the advantage of competitive wages and vast engineering talent, India locked itself out of global value chains. To compensate for this policy error, it is increasingly shielding businesses with higher tariffs and extending fiscal support to increase production. It may work in some sectors for some time but is unlikely to make India an industrial powerhouse.