The Hindu Business Line : Of chips and promises

The only odd note in this resounding policy success is that these investments have been attracted under an extraordinarily generous incentive scheme.

If the first objective of an industrial policy is to get investment commitments from serious private players, the government’s semiconductor policy has achieved that. The latest investment proposal, which the year-old policy for semiconductor and photovoltaic solar cell manufacturing has attracted, is from Reliance Industries, bringing up the total investment commitment so far from the private sector to about Rs 63,000 crore. Those preceding Reliance in this line inc lude Videocon Industries, Moser Baer PV, Titan Energy System, KSK Energy Ventures and Signet Solar.

The only odd note in this resounding policy success is that these investments have been attracted under an extraordinarily generous incentive scheme, the Government providing a subsidy of 20 per cent of the capital expenditure during the first 10 years for units in Special Economic Zones and 25 per cent of the capital expenditure for units elsewhere. The government’s contention has been that investments in semiconductor plants are strategic in nature. However, the question of whether there is a case for extending such substantial fiscal benefits, is still open. Objections have been raised from various quarters that taxpayers’ money should not be channelled into projects of this nature, where investments have been promised but little action is yet to take place, even though it has been a little over a year since the government announced the policy. From another perspective, it is evident that the electronics industry, which makes television sets, mobile phones and personal computers, provides a large number of jobs and that investments in this sector should be encouraged, even if it means importing semiconductor chips that make these gadgets intelligent.

The value of chips used in the Indian electronics industry is projected to add up to $320 billion by 2020. Given the explosive growth, the government did have to make its choice: Do we become self-sufficient with regard to chips used in electronics or do we import those chips while excelling in electronics manufacturing? The gems and jewellery industry is an example that supports the latter argument. Even though the nation does not produce all of the gold and diamond that it consumes, it has virtually cornered the global market for cut and polished precious stones. What would have been the handicap if the country strove to become specialists in assembling, packaging and testing of chips instead of diverting large chunks of the taxpayers’ money into subsidising chip-making? It is well known that profitability is hard to come by in the semiconductor manufacturing space; and that an Indian semiconductor unit despite the support on offer could well take up to seven years from now to compete with its Taiwanese counterparts. The arguments against offering fiscal benefits to investors were sound, but having committed itself and so deeply, the government has its job cut out in making sure that the investors deliver on their promise of creating new jobs and competitive products for the economy.

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