Licensing in India – Should it be restricted or promoted?

I am teaching a course on International Business here at Georgetown University. This Spring, we have concentrated on writing editorials on international business and trade issues. All my students have written and handed in one editorial dealing with an issue of their concern. I was very impressed by their work, particularly since these young tigers, as we call them here, are the ones ascending in their societal position. They will be the ones running their family’s firm, electing the next government, and deciding what their aging parents should do. So to my mind, their opinions matter.
Take a look:

By Nicole Colarusso

The two words “royalty restrictions” are not as attention-grabbing as “terrorism” or “nuclear war.” Yet they have sparked a royal debate in India. For many years, the country’s licensing rules constrained international companies. According to The Economic Times, India’s outgoing royalty payments for technology transfers were limited to 5% of domestic sales and 8% of exports. These restrictions were lifted in 2009. India’s Department of Industrial Policy and Promotion wants to re-impose the constraints. This attempt is blocked by India’s Ministry of Finance. Doing so is a prudent decision. Indian government officials should endeavor to preserve and promote free licensing in the future.

The opposition argues that an absence of royalty limits would cause a great increase in financial outflows from India. As a result, local businesses would lose money. The Indian current account deficit would grow. Tax revenue would decrease, and Indian licensees would become dependent on foreigners.

Free royalty flows are important. India already has a difficult business environment. The nation’s bureaucracy has burdened businesses with immense paperwork and petty inspections. A World Bank press release bemoans the country’s “inefficient transportation, notably roads, maritime services, and ports.” Licensing, by allowing citizens to take advantage of technology and processes that have already succeeded, provides a way for local entrepreneurs to bypass inefficient business activities. Restrictions would decrease foreign direct investment and stunt local economic growth.

Foreign businesses and entrepreneurs would benefit from free licensing as well. It enables companies to speed up market penetration, test out business environments, and become familiar with other cultures.

A decrease in investment could also negatively affect India’s trade balance. The Wall Street Journal acknowledges that annual outgoing royalty payments have almost tripled from $1.7 billion in 2009. But, the deregulation will have long-run positive effects on the balance of payments. Gains from international licensors will enable foreigners to purchase more Indian goods, thereby creating a larger demand for Indian exports.

Royalty limits could also hurt the people of India. Licensing provides Indians with the skills and knowledge to use advanced products, services, and processes. Technology transfer can substantially increase the competitiveness of local companies, particularly in industries such as pharmaceuticals where licenses can be more valuable than capital. Consumers’ exposure to high-tech, revolutionary items can substantially improve their lives. For instance, Microsoft’s presence in India has significantly increased local access to computers. If licensing becomes less attractive to investors due to restrictions, Indians would have fewer opportunities to learn about new products.

Finally, there is the matter of unemployment. According to a 2013 International Labour Organisation report, only 21.1% of Indian working men had steady, salaried jobs. Decreased licensing could intensify an already pressing issue. Also, multinationals that currently license heavily in India, such as IBM, Nestlé, and Unilever, could decide to focus their energy on other countries. Corporations looking to begin licensing abroad may be deterred from starting future large-scale projects on the subcontinent.

Free licensing is an engine for growth. Limits on outgoing royalty payments could have long-term negative consequences for India. There can be a time and a place for restrictions, but Indian officials should show that it is neither here nor now.

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Nicole Colarusso HeadshotNicole Colarusso is a sophomore studying international business and finance at Georgetown University.

This editorial was published in Ovi Magazine on 24 April 2015.
Congratulations! Outside validation is always good.

WTO Favors US in AG Trade Dispute with India

Christopher Doering for The Des Moines Register

The trade panel struck down a 2007 agricultural ban put in place by India to prevent avian influenza from making its way into the country even though the United States has not had a case of the highly pathogenic disease since 2004. The only other U.S. outbreak detected since then was low-pathogenic, which does not support an import ban.

The WTO ruled India breached numerous international trade rules, including imposing the ban without adequate scientific evidence.

The United States challenged the ban in March 2012.

U.S. trade and agricultural officials declared the WTO decision a major victory for American farmers. “Our farmers and producers deserve a level playing field – and this dispute reflects that we will accept nothing less,” said Agriculture Secretary Tom Vilsack.

The WTO ruling would help U.S. agricultural producers, including Iowa, the nation’s largest egg producer, that have been affected by India’s restrictions. The poultry industry estimates U.S. exports to India could jump to more than $300 million annually after the restrictions are lifted. India has 60 days to appeal the ruling.
Read Full Article

OECD proposals to have impact on transfer pricing in India

NEW DELHI: Once implemented, the measures proposed by OECD to curb tax avoidance activities would have “far reaching implications” in India’s transfer pricing landscape as well as a significant impact on US multinationals with overseas operations, according to experts.

Paris-based Organisation for Economic Cooperation and Development (OECD), which sets the global tax standards, published a seven-point BEPS ( Base Erosion and Profit Sharing) recommendations on Tuesday.

Companies having international operations would have to work towards not only adhering to compliance obligations but also review the operating structures in various jurisdictions, he said in a statement.
The proposals, which have been prepared after extensive consultations with various stakeholders including G20 nations.

Read Full Article in The Economic Times

Global Update: India’s Economic Growth

A poll of 18 economists by The Wall Street Journal indicates India’s economy expanding by less than 5% between April and June 2013. This would mark the third consecutive quarter of sub-5% growth in the country.

The government will release the GDP data on Friday, August 30, 2013. Currently, the estimates by the economists range from as high as 4.9% and as low as 4.0% with an average of 4.6% growth.

Economist Glenn Levine said, “The instability created by the weak central government continued to weigh on confidence and demand.”

What do you think is causing India’s GDP to remain stagnant? Post your views in the comment section below!

Global Update: IKEA India Expansion

Earlier this week, IKEA identified its first four future store locations in India. The Swedish furniture company is in the process of purchasing land in Andhra Pradesh, Maharashtra, Haryana, and Karnataka. These locations are all near or within major cities which is strategically important to the company as it needs to be close to both main roads and public transportation.

“The company plans to spend 105 billion rupees ($1.72 billion) to open 25 stores across the country” (WSJ).

As usual, IKEA is joining forces with local suppliers to source its products. The company will diversify its product lines to match local tastes with items made of bamboo in addition to hand-loom fabrics and handicrafts. Sourcing from India will continue to increase during the next five years as the stores are being built.