In a shocking move on 3 August, the government placed imports of laptops, tablets, all-in-one personal computers, and ultra-small form factor computers, and servers under the ‘restricted’ category, making their imports permissible only under a valid licence.
Some minor exemptions were provided but all imports of the computer devices on which India’s digital services and exports are built were brought under government control with immediate effect.
There was an understandable outcry all around. Government officials and ministers first tried to sell the idea that this was done for advancing the cause of Make in India – to make India aatmanirbhar – in the manufacturing of computer devices. Then, they brought the security considerations into play. None of this justification-washing went too far.
Late at night, on 4 August, the day after, the government backtracked to make ‘liberal transitional arrangements’ and postponed the compulsory licensing to 1 November and announced that import consignments will be cleared till 31 October 2023 without a licence for restricted imports.
There is no doubt that the government is bringing the dysfunctional Licence Raj in the new-age economic value creator, that is, digitalisation.
Can this Licence Raj in the import computer devices, where 90 percent of devices are currently imported, serve the objective of making India an aatmanirbhar nation and securing its undefined security interests? Or will it scupper India’s digital economy and information technology exports?
Digital Services Economy is Built on Computer Imports
India did not invent computers and their constituent IT hardware components and parts – chips, batteries, cameras, and so on. Consequently, India does not build computer devices.
We have a very small computer hardware manufacturing industry in our country which is hugely dependent on imports of semiconductor chips and other computer software and parts.
Our computer devices industry is more 'Assemble in India' than Make in India. Even in this, we are not domestically competitive.
India, however, in the last 25 years successfully built a massive information technology services export industry using computer devices built by and imported from the rest of the world. And, we exported massively our information technology software services. As per RBI data, India received payments of $122 billion from the export of software services in 2021-22.
India’s total imports of automatic data processing machines and units, which constitute the HSN 8471 placed under the restricted list, was only $11.63 billion in 2021-22 (Directorate General of Foreign Trade data). Software services exports brought 10 times more foreign exchange than the cost of all the devices imported.
Software services are the mainstay of India’s services and total exports. In 2021-22, software services made up as much as 48 percent of total services exports and 18 percent of all our total exports, all goods and services combined. The table and charts below brings out the dominant role which software services play in India’s exports (based on Reserve Bank of India data).
The proposed restrictions on the free import of computer devices will dent India’s competitiveness in software services. It is quite likely that exports of software services will suffer.
Why do we want to harm the biggest export, which earns so much foreign exchange to provide us with the real and the strongest security on the foreign exchange front?
Free Imports Have Kept Inflation Low
The domestic electronics devices manufacturing industry has not been to raise the price of their products high. This is not because the imports of such devices have no import tariffs (under the global information technology agreement) but primarily because of a completely liberal and unrestricted import regime.
The wholesale price index of industry classification - manufacture of computer, electronic and optical products – which includes manufacturing of all computer devices covered by the HSN 8471, was 116.6 (base year 2011-12) in 2022-23.
This means that the wholesale inflation in this class of goods has been only 1.45 percent per annum for over a decade. In contrast, the wholesale index for all commodities and manufactured items read 152.5 (annual inflation of 3.62 percent) and 142.6 (annual inflation of 3.08 percent) respectively during this period.
Inflation in computer devices was the second lowest amongst all the 22 classes of manufactured products with only the manufacture of leather products recording lower inflation.
As soon as the government issued the compulsory licencing notification on 3 August, the share prices of the few local manufacturers of computer devices started rising. Share prices of some big importers also rose somewhat. Clearly, the market started factoring in significant increases in their pricing power and consequently profitability prospects.
The notification did not indicate that its objective was to restrict imports of computer devices from China.
About 60 percent of the computer devices imported under entry 8471 come from China.
It was widely feared that imports from China would be discouraged as part of the licencing regime. As other suppliers of computer devices are not as price competitive as Chinese imports are, the prices of the same hardware products would go up as imports get diverted towards more high-cost players. The era of almost no inflation in computer devices would undoubtedly receive a big jolt.
Pushing Make in India Devices Not the Right Policy
MEITY operates numerous schemes to encourage domestic production of computer hardware. Production-linked incentive (PLI) schemes are the flavour of the season for encouraging manufacturing in India.
The government announced a Rs 7,350 crore PLI scheme for IT hardware in March 2021. The scheme targeted hardware segments of laptops, tablets, all-in-one personal computers (PCs) and servers (all items covered by entry 8471).
The scheme extended incentives up to four percent on net incremental sales over the base year 2019-20 for a period of four years (2021-22 to 2024-25). The government approved 14 companies under this PLI promising to make produce IT hardware of Rs 1.6 lakh crore (approximately $20 billion).
The scheme has not done wonders. A total of Rs 2,900 crore was disbursed for all 8 PLIs in 2022-23. IT hardware PLI hardly saw any disbursement. The scheme is limping along.
The government came up with the PLI 2.0 for IT hardware in May 2023 with an increased budget outlay of Rs 17,000 crore. This scheme increased incentives to around five percent and the operational period to six years. The scheme application window was first opened until 31 July 2023 and the deadline was later postponed to 31 August 2023.
Media reports suggest that 44 companies have applied. Whichever applications get approved will only Assemble in India and not the most sophisticated devices, adding very small domestic value addition.
It will be years before there is any notable increase in the availability of these assembled devices. The manufacture of computer devices is not as globally concentrated amongst four to five players as the manufacture of smartphones is. Don’t expect an Apple in computer devices.
Focus on Services, Not Computer Device Manufacturing
India does not have a competitive advantage in computer device manufacturing or for that matter most digital hardware manufacturing. Whereas, India has a tremendous competitive advantage in the entire spectrum of information technology services.
It does not matter whether India saves some foreign exchange by assembling and exporting some computer devices.
If India focuses on further improving the eco-system for increasing digital services export by branching out in other areas like chip designing, software-as-service etc, India can easily cover the costs of IT hardware imports many times over.
Let us do what we are best at and not what we are not so good at.
(The author is former Economic Affairs Secretary and Finance Secretary of India. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)