The Hindu Business Line : More than chipping in

The policy on fabrication of semiconductor chips, recently announced by the Government, is significant for the massive scale of fiscal concessions offered to investors for setting up such units in the country. There is no question that India will turn into a huge market for electronic goods. Semiconductor devices are finding a place not just in electronic goods, such as computers and televisions, but practically in all consumer goods from automobiles to pop-up toasters.

With an economy slated to grow at 8-10 per cent in the foreseeable future, the volume of consumer goods that would be produced and, by extension, the requirement of electronic devices that would go into them is only going to rise. Electronic circuitry embedded in a silicon wafer is at the heart of these devices and the semiconductor fabrication policy addresses the need for its domestic manufacture. Equally, it is known that a number of countries, both developed and developing, offer a combination of capital subsidy and tax benefits to attract manufacturers to set up such facilities in their territories. In India's case infrastructural constraints, such as poor quality electricity and roads, conspire to reduce a manufacturer's competitive advantage.

No doubt, each of these arguments is perfectly valid. But taken together, they yet do not make a case for extending such a large investment subsidy for the manufacture of semiconductor chips. The policy does not address a basic question: Why it is necessary to subsidise their local manufacture merely because there is a growing appetite for these consumer goods? A country's choice of what it would produce and what it would source from outside depends on the evaluation of comparative advantages in making versus buying. If chip fabrication does not make economic sense, then providing fiscal sops to tilt the scales would set a dangerous precedent where drawing a line on denial of such benefits elsewhere can become virtually impossible.

Looked at from another perspective, India does not also produce all the gold and diamond (indeed practically nothing) that it needs as raw material for the gem and jewellery industry. But that has not prevented the country from virtually cornering the global market for cut and polished precious stones or making serious inroads into jewellery making. Indeed no economy can boast of such an insular existence that it sources everything that it needs from within its shores. No doubt we live in a world where nations compete with one another to attract investments. The chip fabrication industry is merely a manifestation of this trend. But if India must enter this race, then the Government has to make out a valid case for extending these fiscal benefits.