Last month, the Centre announced a licensing requirement for the import of laptops and tablets. However, media reports over the weekend suggest that the plan to do so may be deferred by a year. This turnaround seems to have been the result of pushback from industry and the US government.
This is perhaps just as well. The public debate has not focused on the impact of such a move on innovation strategies pursued by firms — especially in the low-tech manufacturing space that employs millions of workers.
A licence requirement would have led to an increase in prices of computer equipment, slowing down the investments in computer equipment by firms in low-tech industries. Given the low margins that low-tech firms operate with, they may find it difficult to pursue an innovation strategy they depended on in the previous decade. The resultant impact on competitiveness can reduce exports and increase prices across their products, which will pinch the end-consumer.
The long-term competitiveness of many labour-intensive and low technology sectors in the economy such as textiles, leather, food products, wood, and paper products depends on low cost inputs. As per the Annual Survey of Industries published by the government, in 2019-20, 5.8 million people were directly engaged in these low technology industries in India. Firms in these industries serve both the domestic as well as export markets, with those serving the export market persistently trying to be more competitive.
Depending on the industry, innovation can be product or process led. The scope for product innovation is relatively lower for firms in the above-mentioned low technology industries, making them dependent on process innovation that helps improve productivity. These firms are constantly on the look-out for strategies that induce process innovation. Economic literature states that process innovation in these low-tech industries is caused by investment in plant and machinery and human capital.
Plant and machinery include industry or product specific machinery and, computer equipment and software. Lack of an advanced and competitive computer hardware industry as well as capital goods industry in India meant that many of the above machines have to be imported. Tariffs on computer equipment are zero as India is a signatory to the Information Technology Agreement (ITA-1), and modest tariffs exist on most of the industry specific machinery.
For example, a recent empirical work found that investment in computer equipment and software followed by investment in plant and machinery are two important process strategies adopted by firms in low-tech industries. The strategy of investments in computer equipment has been found to be the preferred one across diverse sectors such as textiles, leather, food products, wood products, and paper products.
Firms in low-tech industries have the option of investing in human capital. However, compared to the other two strategies, firms will require state support in training and improving their human capital. This adds to workload of the overstretched State that is trying to reduce the inherent high infrastructure cost of manufacturing in India. It was in this context that firms in low-tech sectors embraced the strategy of investing in computer equipment.
One reason for such strong preference towards investment in computer equipment was that for some part in the last decade computer equipment prices were relatively lower compared to other inputs.
Though government is incentivising domestic manufacture of computer hardware through its Production Linked Incentive (PLI) scheme, even from an optimistic and rosy outlook, it may take at least half a decade for hardware manufacturing to achieve scale and global competitiveness. Any licencing policy would have the effect of reducing the available range of innovation strategies for firms in low-tech industries, a major employer in the manufacturing sector across the country.
Whether the PLI needs another tariff environment is a different question.
The writer is Associate Professor, Centre for Development Studies. Views are personal