Why have import licences riled laptop makers

At stake is the $10.08 billion worth of laptops, tablets, keyboards and printers that India imported in the year ended March 2023. Image: Shutterstock
 
Sample this: As a foreign manufacturer of laptops, tablets and handheld devices you’ve been importing them into a large, promising market without paying any duty. The products are made in spotlessly clean vacuum factories in China, Vietnam or Taiwan, loaded on containers only to be waived in through ports across India. At zero duty. From there they make their way across the country to wholesale distributors, resellers and malls. The ones bought online are shipped directly to consumer homes.

Now, overnight, the rules of the game change and one has to apply for an import licence. Then amid howls of protest the implementation is deferred to November 1, 2023. The Indian government makes all the right noises: The licences will be granted quickly, there will be no tariffs imposed and companies can import as much as they like.

There is however an important subtext that no one misses. India wants these products to be made in India and what is a nudge today could become a push tomorrow. It sees its large domestic market as enough of an incentive and companies that don’t fall in line may see themselves shut out.

The move to increase assembly and manufacturing in India comes at a time when global trade bonds are fraying. Economists and trade representatives Forbes India spoke to were sympathetic to the stance of the Indian government. While they may have differed in the manner in which it was done, there was agreement that supply chains must be brought closer home. “I’m not as mortified as others by this move,” said Abheek Barua, chief economist at HDFC Bank.

At stake is the $10.08 billion worth of laptops, tablets, keyboards and printers that India imported in the year ended March 2023. Bringing this manufacturing to India would boost jobs and save on foreign exchange, once a higher level of localisation is achieved. In time this could also spur manufacturers to use India as an export base as has been done in the case of entry-level mobile phones and the iPhone.

In bringing manufacturing to India the government has mainly relied on two arguments. First is the size of the domestic market: 1.4 billion consumers strong with an average income of $2,400 (Rs 199,000); second is a production linked incentive scheme that provides time-bound payments for meeting certain production milestones.

Lastly, there is the global context. “Right now the erstwhile champions of liberatisation and globalisation, especially the US, is championing muscular industrialisation with massive subsidies and protectionism in the name of national security,” says Sachchidanand Shukla, group chief economist at Larsen and Toubro.

 Against such a backdrop, India has to look after its interest. What’s at stake here is the redrawing of rules for imports, and the manner in which it has been done has global companies riled up.

Also read: Explained: 2 billion phones and India's quest for higher local value addition

Information technology imports

The genesis of laptop and computer-part imports lies in the Information Technology Agreement (ITA) by the World Trade Organisation (WTO), which India joined in 1997. It allows for duty-free imports of about 97 percent of the world trade in information technology products. A former commerce ministry official says that while it was known this would put out fledgling hardware industry at a disadvantage the government of the day favoured signing the agreement as our IT companies would get a boost through duty-free hardware. While the IT industry went on to be a major export earner with $320 billion in export revenue in FY23, according to a report by the DBS Group, the hardware industry never took off.

“India’s experience with the ITA has been most discouraging, which almost wiped out the IT industry from India. The real gainer has been China, which raised its global market share from 2 to 14 percent between 2000-2011. In light of the recent measures taken by the government to build a sound manufacturing environment in the field of electronics and information technology, this is the time for us to incubate our industry rather than expose it to the undue pressures of competition,” said a statement on the Ministry of Commerce and Industry’s website.



Under the WTO, the imposition of tariffs can be challenged, and the European Union had taken India to court over tariffs on IT productions. The ruling in April 2023 said that India’s tariffs (customs duties of 20 percent on mobile phones and mobile phone components) were unjustified. The appeal is pending.
 
It was as a result of this ruling that the Indian government decided to go through the licensing route. Any company importing laptops and other devices on the list of goods subject to licences would be first required to apply for a licence. This has riled our trade partners as licensing is completely compliant with WTO rules and there is little other governments can do through formal trade channels.

As a result, Apple, Dell, Intel, Lenovo and HP among others started lobbying for the curbs to be pushed back by nine to 12 months. Their main argument is that it would take time for them to set up assembly operations in India. Industry associations—the Consumer Technology Association, Information Technology Industry Council, the US Council for International Business—have urged the US Trade Representative to ensure India’s measures are consistent with international trade obligations and commitments.

“While it is desirable to get IT manufacturing to India, I am not sure this is the right way to do it,” said the former commerce ministry official. He fears that these companies could retaliate by not applying for licences for high end computers used by scientific institutions. He is also certain of a lot of back -channel lobbying and the November 1 deadline being pushed back.

While there is little doubt that the government will get its way with IT hardware manufacture, economists caution that the incentives offered must be phased out in a time-bound manner.  “This is a calculated step we can take in one or two sectors, and laptops is one such sector. If this is done across sectors it means we are turning into a protectionist, autarkic regime and there would be blowback from producers,” says Barua. He points to use of extending this to sectors as diverse as urea, antibiotics, lithium-ion accumulators, and photovoltaic cells among others as “worrying”.

Lastly, there is the localisation argument. Five years after India started assembling mobile phones, there is one school of thought that few components are made in India and the value-add in assembly is very little. The government will have to make sure that the share of local components steadily rises, else the industry would be dependent on component imports.