Licence raj returns

Creation of import barriers must be avoided

The government last week announced it had decided to control the import of televisions. Fully built televisions have been put on the “restricted” list for imports, which means that licences will have to be granted for import by the Director General of Foreign Trade. TVs worth about Rs 7,000 crore are imported, especially from Vietnam and China. Many brands choose to make their mass market TVs in India — it is only the high-end TVs, which have a relatively small market in India, that are imported. Other goods are also going to see such restriction, including set-top boxes and closed-circuit televisions. Tyres have seen similar restriction, as have agricultural machinery. It is expected that dozens of more goods may be in the pipeline. The Union commerce ministry has claimed that these restrictions are part of the effort to create a “self-reliant” India, as promised by Prime Minister Narendra Modi in an address to the nation on the subject of recovery from the pandemic.

The return of import licensing is a giant step back for India and the Indian economy. It betrays that completely wrong economic instincts — proved to be counter-productive by India’s economic history — have taken hold in New Delhi. Creation of import barriers in every case leads to exploiting consumers here by domestic producers. As India’s experience has shown, it does not even lead to great job creation; ineffective and inefficient domestic production can choose to become capital- rather than labour-intensive. This eats away at much-needed capital, while only minimally expanding the formal labour workforce. In today’s world, where complex and disparate inputs and processes go into manufacturing, the consequence of controlling end products such as televisions will not even shift enough value added to manufacturing in India. After all, the most value added in TVs is from the production of screens, as in mobile phones from the chipset and screens. These are in any case being imported in most cases, even among those that are technically made in India. India will go back to being a country where manufacturing means the ability to lobby for protection against imports, hogging capital from state-owned banks, and building “turn-a-screwdriver” plants that have low marginal product, low skills, and low wages, and yet can claim to “Make in India”.

It is inexplicable that all the lessons as to why import licensing is counter-productive have either been forgotten or ignored by the Union government. It not just reduces the pressure to be competitive and efficient and extracts consumer surplus from the great mass of the Indian people to transfer to inefficient producers, but also provides ample opportunity for corruption. Lobbying for placing some goods and not others on the restricted list will become a priority. Others will struggle to gain one of the import licences themselves, which will become lucrative ways to essentially earn arbitrage profits. Even by the standards of protectionism, tariffs always outweigh quotas and licences as a method of restriction. And tariffs themselves do not solve the other problems. It is clear that the Union government has set out to undo 25 years of openness. But it should remember that growing openness is what provided prosperity and growth to India.