Laptops and tomatoes: Changes that show how little has changed

An example of a purely adverse exogenous event was the tomato supply shock starting July, preceding a generalized explosion in vegetable prices, although the severity of the shock can be traced to policy failure there too (on which more below).

Imports of laptops, personal computers and other items in category 8741 of the HSN (Harmonised System of Nomenclature) will be restricted, by notification 23/2023 dated 3 August from the Directorate General of Foreign Trade (DGFT), hedged with exemptions which are such a startling throwback to pre-1991 import controls that I initially thought it might be fake news. Starting 1 November, bulk imports will be open only to holders of valid import licences. Licence-free imports will be permissible for only one unit at a time. Is that one unit per buyer per year; one unit per lifetime of the buyer; or one unit until proof of the initial imported unit having crashed? R&D laboratories will be allowed a consignment of up to 20 units, which requires monitoring of whether those are being used in the lab or re-sold to individuals. Import under baggage rules will be allowed, which means non-resident Indians will be besieged by their resident Indian families and friends to bring a laptop every time they visit.

The ostensible reason for this nightmarish return to the 1950s’ import regime is India’s push to replace imports with domestic production, without violating the terms of Information Technology Agreement (ITA)–1, under which India cannot levy tariffs on 250 electronic items. We already have in place the Production Linked Incentive (PLI) scheme, part of the post-pandemic recovery package, with graded subsidies for enhancements in domestic import-competing production. The 14-sector profile of the PLI scheme was laid out in the Lok Sabha on 2 August, just a day before the DGFT notification. Since subsidies to domestic competitors are an accepted textbook alternative to import restrictions, the PLI route was the way to go even if, as recently pointed out by Raghuram Rajan, it has merely replaced import of final products with imported components for local assembly. A subsidy like PLI enables domestic production to compete with a lower priced import even without the aid of any import restrictions.

A quantity restriction raises the domestic price of the imported good as surely as a tariff, as any introductory textbook on trade demonstrates. Every quantity restriction has a tariff equivalent. The only difference is that a tariff flows into the exchequer, whereas the price rise consequent upon the physical restriction accrues to the licence holder. Unless licences for the restricted import are issued through a bidding process, the restriction is tantamount to a transfer from the public exchequer to chosen licence holders. Who will be chosen? Or will imports be channelled through a public sector company to keep the surplus over the world price within the public exchequer?

The National Association of Software and Service Companies has protested the import restriction. Computers and laptops are producer goods. The demand for them therefore is more quality sensitive than price sensitive. That is why the PLI has only resulted in assembly of imported components. If an import restriction is added, it will merely result in a rise in the domestic price of the restricted items, despite the PLI subsidy. India’s head start as a supplier of electronic-based services will be eroded.

Imports of cameras, printers and hard disks are set to be restricted too. The PLI is much the better alternative, even if it has so far only met with an assembly response. It offers a transparent way by which to assess the fiscal cost and outcomes achieved. And with a suitable follow-up policy, it might even strengthen the supply chain in India. Was the import restriction triggered by a suspicious surge in bulk imports of electronic goods? If so, why was that justification not made public?

Moving on, prices of tomatoes and other such perishables spiked sharply with crop destruction by heavy rains in July. Prices of perishables like tomatoes swing wildly with supply, because price smoothing through conversion in surplus years into more durable derivatives like paste and puree has not happened. Food processing has not advanced beyond improved storage of less perishable vegetable crops like potatoes and onions.

For the moment, headline inflation going from 4.81% in June to 7.44% in July is the sharpest consecutive-month rise that I can remember. The only solace is the corresponding mild decline in core inflation, which (correctly measured) went down from 5.30% to 5.12%. (These rates are slightly higher than those widely cited for the incorrectly defined core.) By either calculation, core inflation has declined steadily since January 2023, with just one small wobble in May.

Despite a steady core, the perceptional impact of the supply shock on food prices will outlast the normalization of vegetable prices, which is expected to happen in a month or two, if September rains do not fail. Extreme price volatility shakes economic security, especially among the new middle class.

Indira Rajaraman is an economist.