Why India should be cautious about imposing restrictions on import of PCs and allied devices?

While the decision to impose import restriction on electronic devices is to motivate and incentivise domestic manufacturers, it places India potentially at the risk of legal challenges by foreign investors.
Khaitan & Co - Kartikey Mahajan, Satjit Singh Chhabra
Khaitan & Co - Kartikey Mahajan, Satjit Singh Chhabra

The Directorate General of Foreign Trade issued an unanticipated notification imposing immediate restrictions on the import of personal computers (PCs), laptops, tablets, all-in-one PCs, 'ultra-small form factor' computers, and servers earlier last month. The notification means that the importers of electronic devices such as PCs, tablets etc. would now require a valid license for import. However, immediately after the notification was issued, the Ministry of Commerce and Industry pushed the implementation by three months due to extensive backlash by stakeholders and international trade bodies, specifically, due to lack of a transition period.

The Government’s move is aimed at furthering domestic production under the production-linked incentive (PLI) scheme for IT hardware, addressing security concerns arising from foreign technology products, and reducing the import of products from countries such as China. Even though, the decision is well-intended, the notification’s issuance and its instant postponement suggests that the notification may have been hastily issued, without any consultation with the stakeholders.

Undeniably, national security and promotion of domestic manufacturing should be prioritised by any Government. However, these objectives need to reconcile with the interests of foreign entities and investors who have made significant contribution and expenditure in the country. For instance, recently, Apple has opened two flagship stores in India and is expected to expand its retail presence but may be discouraged due to uncertainty triggered by these policy changes. Several predominant market players such as Acer, Samsung, Dell, Microsoft, LG Electronics, Google and Lenovo, that enjoy a major presence in India (with a proportion of their products manufactured and imported directly from China) are likely to be adversely affected by this restriction. This sudden move has far-reaching consequences for foreign investors and global tech giants in the country who may need to re-plan their supply chain structures by possibly renegotiating past orders and contracts with several suppliers.

Disputes and International Arbitration – A Possible Scenario

Not only does India risk losing foreign investments, but also exposes itself to potential disputes such as international investment treaty arbitrations – a recourse available under bilateral and multilateral investment treaties and free trade agreements. Several foreign companies and entities affected by the notification have already incurred substantial expenditure, and risk not being able to see their investments come to fruition. Such foreign companies may be inclined to bring action against India under respective investment treaties.

Alternatively, the foreign trade bodies, who have already expressed concerns and displeasure over the restrictions imposed, are likely to lobby with their respective national Governments to initiate action against India before the World Trade Organisation (WTO). A few years ago, India lost a case to ban poultry products from the US, both at the panel as well as the appellate level at the WTO.

The import restrictions imposed by India are arguably a trade distorting measure and may be violative of the General Agreement on Tariffs and Trade 1994, Agreement on Trade-Related Investment Measures, 1995, and the Agreement on Import Licensing. In the past, India has been in the spotlight due to certain policies that were deemed undeliberated and rushed, such as the import ban on pneumatic tyres and air conditioners. It is not unexpected that India would receive criticism and objections from the WTO, with several member states of the WTO potentially initiating a formal dispute. The likelihood of a formal dispute is especially high in the backdrop of a WTO dispute over Indian import duty on informational communications technology (ICT) products with multiple member states, that was recently decided against India.

While the decision to impose import restriction on electronic devices is to motivate and incentivise domestic manufacturers, and at the same time reduce dependence on import of Chinese products, it places India potentially at the risk of legal challenges by foreign investors under investment treaties and multilateral agreements, and also formal disputes at the WTO. Given the nature of the restrictions and its potential trade distorting effect, it is possible that the ban may be deemed as against global trade norms by the WTO or costs being awarded against India.    

Kartikey Mahajan is a Partner and Satjit Singh Chhabra is an Associate with Khaitan & Co.

The views expressed are personal.

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