Policy incoherence

Import management system for IT is licence raj by another name

The government has partially, but not wholly, retreated from its decision to impose a ban on the import of laptops and other pieces of information technology (IT) hardware without a specific licence. Instead, according to the Union minister in charge, an “import management system” will be introduced. The purpose, officials have said, is to reduce the degree of import dependence in the laptop supply chain and — to the extent that some imports are unavoidable — to import from a “trusted source”. There is some incoherence in the motivation here: Is it to incentivise the production of hardware and its components domestically, as the association of the ban with the production-linked incentive scheme for laptops would suggest? Or is it a question of national security, given the concern over electronic equipment from, say, China? If the latter, then what is the explicit risk-return analysis of such regulations? After all, much of the world uses laptops with some components from China and — even in the current age of decoupling and de-risking — few suspect that using regular Chinese-made components creates systemic dependence. On the security front, a distinction must obviously be drawn between the processor units that support servers running India’s critical infrastructure, and random components or cases that go into consumer hardware.

In effect, the new “import management system” will begin by scrutinising the actual components and sources of the IT hardware import basket. From November 1, companies importing laptops would have to register on this system. However, the government has warned that, by a year from now, importers may be assigned quotas on how and what they can import — based, apparently, on their import value of the previous year, their quantum of domestic manufacturing, and electronics exports. In effect, this might allow large manufacturers such as Apple to escape some of the restrictions as long as they have some value added domestically and also grow their basket of exports. This will, of course, severely disadvantage consumers and create a strong incentive for smuggling. It also builds in an advantage for incumbents by reducing competitive pressures in the sector — and further disadvantages consumers by damaging growth-enhancing productivity. The government needs to be commended for listening to some large manufacturers’ concern and meeting them halfway. But clearly there are no advocates for consumers or for overall growth involved in the decision.

The reinstallation of quotas and licences — for this is what an “import management system” is — under the guise of security policy or the promotion of domestic industry is a clear step backwards. India’s import dependence for electronics is understandably a concern. But incentives and subsidies have already been designed around these issues. Quotas and licences are worse than tariffs, in that they do not even work through the price system. They create severe distortions in the market. Black-marketing, smuggling, and rationing become rife. The government cannot reasonably expect Indians to return to the age of shortages that they left behind in the 1990s. This new policy will certainly be counter-productive, as it has not been designed with modern value chains in mind. Nobody can doubt, given how the original ban was issued and now a management system has been promised, that policy for this crucial sector is being framed in an arbitrary and ad hoc manner. The prognosis for growth of domestic value addition, under these circumstances, cannot be good.