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.
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