Is India back to ‘license raj’?

Many seem to think India is back to ‘license raj’, after the DGFT “restricted” imports of laptops, personal computers, tablets and other items (in HSN 8741 category) “with immediate effect” on August 3, 2023 – requiring “a valid Licence for Restricted Imports”. This is both right and wrong.

Right because MoS for MeiTY Rajeev Chandrasekhar met panicked industry representatives five days later on August 8, 2023 (post facto announcement and a freeze for three months) to assure that the licensing procedures, in the works, would be “simple and easy”. This means, there is no escaping the ‘license raj’ now – which had been supposedly dismantled in the reforms and liberalisation era starting with the mid-1980s’.

Wrong because, this isn’t the first time.

On July 30, 2020, the DGFT had “restricted” imports of 10 categories of TV sets with a declaration that the procedure for “license” would be notified separately. In fact, the DGFT says whenever it notifies “restrictions or quota or conditions on import of goods” it “may require a licence or registration”. Going by bans and restrictions on both imports and exports in the past few years, the DGFT is certain to have opened a full-fledged licensing unit now.

Wrong also because India is running a command-and-control economy. And no, India didn’t follow the de-globalisation march U.S. President Donald Trump is credited to have started (after 2016). India pioneered it (although it matters little to global trade) by re-adopting the import substitution policy of 1960s and 1970s in 2014.

Here is how.

Command-and-control economy

The import substitution practice began immediately after the new government took over in 2014. But it was so subtle that it took then Chief Economic Advisor (CEA) Arvind Subramanian (along with fellow economist Shoumitro Chatterjee) to decipher it in 2020 – two years after he quit the job.

In the paper, “India’s Inward (Re)Turn: Is it Warranted? Will it Work?” the economists wrote: “Between 1991 and 2014, average MFN tariffs declined from 125% to 13%. Since 2014, there have been about 3,200 tariff increases at the HS-6 digit level (on most-favored-nation imports), a strikingly large increase. As a result, the average tariff has increased from 13% to nearly 18%. The largest increases occurred in 2018 when there were nearly 2,500 tariff increases amounting to nearly 4 percentage points. We estimate that the tariff increases affected import categories that amount to about $300 billion or about 70% of total imports.” The tariff rise continues.

This (unofficial) import substitution policy coincided with the launch of ‘Make in India’ initiative in September 2014 and became ‘official’ as part of the “AatmaNirbhar Bharat” mission launched four years later – amidst the pandemic lockdown of 2020. This too was a smart move as even those who don’t support import substitution couldn’t quibble over India’s desire to become ‘AatmaNirbharar Bharat’ – self-reliant or self-sufficient in manufacturing (‘holy grail’ of being developed) – even though this journey had begun 72 years earlier with the First Industrial Policy of 1948, which adopted a government-led manufacturing push. The previous UPA government too pushed it through the National Manufacturing Policy of 2011. In September 2014, the new government launched ‘Make in India’ to manufacture in India or make India self-reliant.

The import restrictions on laptops and TV sets are mere extensions of that import substitution practice and policy of post-2014. The manner in which the latest restriction (on laptops, PCs and tablets) has been announced reflects new cues on running the economy.

That it was put on hold for three months within the next 24 hours (as imports got stuck in ports and spread panic in the industry) reflects (i) policymaking which doesn’t take into account ground realities, consult stakeholders, study or gather evidence and make preparations before taking a policy leap. This isn’t the first such instance though. Recall, in May 2022, India suddenly announced a ban on export of wheat and then relaxed it for some (to allow consignments handed over and registered with the Customs on or prior to the date of ban). Recall also how this was weeks after India promised to “feed” the world following the global food shortage the Russia-Ukraine war had sparked.

Ironically, the laptop restriction was announced four days after Reliance launched JioBook and the Amazon’s listing of it showed that the JioBooks are “manufactured” in China, not India. Such practices (ii) undermine competition and distort level-playing field – something to be expected in a ‘National Champions’ model (explained in Fortune India article “National champions: Costs and benefits of India’s new growth model).

A sudden ban (iii) jeopardises not just ‘Digital India’ initiative but hits education, business, employment and day-to-day functioning of millions of Indians. 

The DGFT’s notification didn’t give any reason for the import restriction on laptops, PCs and tablets. Official sources were quoted as saying that this was due to (a) “genuine apprehension of a future security risk” even while admitting that not a single such case had come to notice and/or (b) to promote domestic manufacturing of these products under the PLI scheme.

The command-and-control regime continued through the demonetisation and GST. The demonetisation of 2016 was to eliminate black money, counterfeit currency and terror funding - but none of it was achieved. The GST was launched with a mid-night session of the Parliament in 2017 to end multiplicity of indirect taxes. Both ended up derailing the economic growth (the 'twin shocks').

Beyond ‘Make in India’ and ‘National Champions’ model

The ‘Make in India’ initiative and the ‘National Champions’ model can’t fully explain the economic policy intransigencies. Nor are numerous other economic policies. Here are a few more examples for illustration:

• Demonetisation of 2016 had nothing to do with either – the stated goals of ending black money, counterfeit currencies and terror funding.

• The oil sector was “partially” decontrolled in 2010 by the previous UPA government but “fully” by the new government in 2014 and the phrase “under-recovery” disappeared from the economic lexicon. The goal was to free the sector (predominantly PSUs) from government control. But when the Brent crude prices fell to half in 2015 (of over $100 per barrel in FY12-FY14), the retail prices didn’t go down but went up – as more and more taxes (Excise, Customs, IGST, CGST, Service Tax, Cess, Royalty, Surcharge) were imposed. In 2022 and 2023, India has received a bulk of cheap oil from Russia but the fuel prices have either stagnated (petrol and diesel) or steadily gone up (LPG and CNG).

• Trade has become wholly unpredictable in the past few years, marked by– sudden bans and restrictions on trade in wheat, rice, sugar, iron ore, steel, gold, coking coal, ferronickel etc. It continued after the Foreign Trade Policy (FTP) of 2023 was announced on March 31.

• A quantum jump in writing-off NPAs – ₹14.5 lakh crore during FY15-FY23) to improve bank balance sheets. It involves many corporate loan defaulters. It involves banking frauds by banking and non-banking operators along with others (the PMC Bank, Punjab National Bank, ICICI Bank, Yes Bank, Lakshmi Vilas Bank, IL&FS, HDIL, DHFL etc.).

• In fact, RBI’s June 8, 2023 policy of “Framework for Compromise Settlements and Technical Write-offs” allows fraudsters and willful defaulters to get away and eligible for more loans after a lapse of 12 months – thus, incentivising banking frauds and willful defaults.

• RBI’s irrational withdrawal of ₹2,000 notes on May 19, 2023 – while declaring such notes to continue as “legal tender” is another such step.

• Continuous expansion of the PLIs and DLI without studying their impacts on the economy and without trying to decipher why the manufacturing’s share is stuck at 17-18% of GDP for 16 years.

• “Big ticket” IBC reform of 2016 has failed to achieve its objective – free stuck-up capital and promote entrepreneurship – with a total yield of 17.6% of the “admitted claims” during FY18-FY23 and 75% of the firms ending in scrap sale (far worse than the previous FRBM yield of 25%). Yet, there is no attempt to study what ails it (lack of political will, poor regulatory culture and gaming of the system) or redraft it.

• Corporate tax cut of September 2019 led to revenue loss of ₹2.28 lakh crore in two fiscals of FY20 (₹1.02 lakh crore) and FY21 (₹1.28 lakh crore) – as the Parliament has been told. There is no evidence of direct benefits of it to the economy since corporates used it for “debt servicing, build-up of cash balances and other current assets rather than restarting the capex cycle” as per the RBI’s annual report of 2019-20.

The surest signs of a command-and-control economy is when economic logic, planning, preparations, evidence don’t matter to policymaking, nor do adverse consequences lead to disbanding of the policy. The above instances demonstrate just that.