Opinion
Import licensing on its own is not an industrial policy
Summary
The use of such licences is hard to justify even if government props for some industries may work out wellThe sudden imposition of licensing on the import of laptops, computers and tablets does not make sense. It reverses a reform whose rich fruits have been tasted for three decades. The biggest reform of 1991 was industrial delicensing. In one swoop, it took away the power of bureaucrats to decide who would produce what, how much, where and for whom. We don’t need to invoke Kafka or Chekov, but horror stories from the licence-permit raj days are well known. The firms and conglomerates that thrived in those days were those that obtained scarce licences and not those in pursuit of cost efficiency or market- led innovation. They were responding to the incentive system in place, and those who landed prized licences could enjoy protectionism. Post-1991, delicensing led to spectacular growth in a variety of sectors ranging from automobiles, petrochemicals, pharmaceuticals, steel and metals to telecom equipment. Take just one example . The auto components industry in India today is much larger than the domestic automobile industry and caters to world demand, a phenomenon unthinkable in the old world of licensing.
How then can India justify a return to licensing computer imports? Firstly, it is against the foundational principles of the World Trade Organization, to which India is a signatory. Be prepared for punitive action or tit-for-tat measures from trade partners. Secondly, it cannot be in the interest of the Indian consumer because it would surely make supply scarce and prices go up. It is plainly protectionist and will encourage cost or quality inefficiency, as it did in the bad old days. Thirdly, it will not serve the interest of a great push envisaged by Digital India, which needs to deploy cutting-edge digital tools at mass scale. We need to import low-cost tablets in large volumes simply to remedy a covid-induced education deficit. We must not artificially reduce supply via licence requirements. As digital devices have a high rate of obsolescence, free and instant access to the latest products is imperative. Fourthly, it is worth noting that India became a powerhouse of software exports thanks to the liberalization of hardware imports. Were we still in the licence era, we would not be on the cusp of having a $500-billion industry. One bureaucrat who fought hard for delicensing and tariff reduction for computers in the 1990s was N. Vittal, who unfortunately passed away on 4 August, ironically on the very day that the draconian notification was issued.
Does the new licensing regime aim to spur investment in domestic capacity? This is a plausible justification in light of new thinking about industrial policy in the Western world. An article by Dani Rodrik and others in Mint argues that earlier scepticism about “picking winners" and governments providing domestic subsidies needs to be rethought as new learnings nudge us towards a nuanced look. Industrial policy, it says, should not be thought of as only inward looking, but can also target export markets; it need not breed inefficiency. The op-ed claims that it has been more ubiquitous than once assumed. The argument of a well-thought industrial policy makes sense in a larger and longer game-plan as India pursues strategic autonomy and tries to reduce import dependence on China. That plan will progress gradually as the country builds capabilities across different parts of the value chain. It takes time. Adopting a licensing regime won’t invite investments overnight. The bulk of India’s current computer imports are ‘Made in China’. Will licensing change that? Probably not, since that label can change with minor tweaks of a value chain. These networks crisscross several national boundaries, and evading a Chinese-origin tag might be easy. Witness how Russian crude oil reached the US via Indian refiners despite Ukraine-induced sanctions. India itself has benefited from being part of global value chains. It is now a major exporter of mobile phones, including Apple’s iconic iPhone, even though local value addition is very low. We did not impose import licences for mobile phones to develop indigenous capacity. Can the same strategy not work for computers and laptops? Instead of licence clad protection, we can use just the country’s production linked incentive scheme. Even here, we should be careful not to overdo protectionism under the garb of industrial policy, as that might encourage inefficiency instead of world-class quality and cost efficiency. And that too, at the cost of the public exchequer.
Finally, there is national security to consider. That fear can pervade not just laptops, but also telecom equipment, mobile phones and other gadgets. Besides, to check for trapdoors and Trojan horses in computer operating systems, you don’t need import licensing. You need good sample checks.
All trade restrictions, including import licensing, are ultimately anti-consumer. They only benefit a tiny set of traders or manufacturers. Recall the mercantile lobby that attacked Adam Smith, whose 300th birth anniversary was in June. Chiding a protectionist lobby that wanted to promote local wine-making, Smith once asked, “Would it be a reasonable law to prohibit the importation of all foreign wines, merely to encourage the making of claret and burgundy in Scotland" where it was 30 times more expensive to make? The small and diffused consumer base rarely rallies against protectionism. Mercantilist tendencies are alive and kicking. We have to invoke the timeless and pithy insights of Smith to resist such anti-consumer tendencies and policies.
