Five Things Raghuram Rajan Got Wrong About The PLI Semiconductor Scheme

For the umpteenth time, Raghuram Rajan voiced his scepticism against India’s manufacturing ambitions.

In an interview to Rahul Kanwal of India Today, on the sidelines of the World Economic Forum in Davos, the former Reserve Bank of India (RBI) governor critcised the Production Linked Incentive (PLI) scheme for semiconductors.

Rajan’s argument was that the $10 billion allottment under the PLI scheme should have been instead used to build ten world-class universities, as they would add to the strengthening of the human capital. The 'how' part was conveniently skipped.

Ironically, his criticism for the PLI scheme for semiconductors, succeeded his concerns around manufacturers merely coming to India while importing parts from elsewhere.

Speaking about mobile phone companies, Rajan stated that looking at the subsidies, many would want to come and build in India while importing all the parts from outside, and hence there is little value that is added.

However, in the larger context, Rajan was way off the mark about the PLI scheme for semiconductors. 

One, the cost. Semiconductors, by virtue of their utility and criticality, are an expensive ambition to pursue.

By the end of this decade, the semiconductor industry will be worth a trillion dollars.

Even if India is unable to get the high-end chip manufacturers, like Taiwan Semiconductor Manufacturing Company Limited (TSMC) which is contracted with Apple, there is still a huge automobile industry to cater to.

The semiconductor market for the automotive industry will itself be a $150 billion game by the end of the decade. Consumer and industrial electronics will make up another $220-odd billion. 

If the market size is assumed as the frame of reference, the government’s PLI scheme worth $10 billion is merely a good start in the right direction.

To say that the money is best diverted in setting up universities is to be ignorant about the semiconductor supply chain crisis that hit the industrial capacity in the last two years.

For all major economies going forward, chip atma nirbharta would be indispensable, given it directly complements their manufacturing prowess. Rajan, however, stands against that idea. 

Two, in another snarky comment, Rajan remarked that the companies availing the subsidies under the PLI semiconductor scheme have no prior record.

Discarding the money muscle the conglomerates bring to the table, Rajan said it is a hope that they are able to pull it off.

For some reason, Rajan was unwilling to acknowledge the $20 billion joint venture between Vedanta and Foxconn, the latter being one of the world’s biggest contractors for electronics manufacturing across the globe. 

Also, while it is imperative that India does get the likes of TSMC, Intel, and Samsung to come build in India, it would be wrong to discard the critical role played by the smaller players in the semiconductor supply chain.

For instance, Apple apart from TSMC, procures its chips (memory, audio, radio frequency and so on) from different players across the globe.

Why would Rajan choose not to envision any Indian company playing that role for any global manufacturer (cars, mobiles, laptops, electronics etc) in the future?

Three, the China comparison. Rajan stated that China had been pursuing the semiconductor ambition for ten years and had got nowhere.

That is as wrong as it gets.

Firstly, the one mistake China made was focus merely on assembling of electronics parts, and not manufacturing; a mistake India is ensuring it does not make.

Two, China’s semiconductor pursuits were well on their way, before their trade war with America began. Had it not been for the sanctions under President Joe Biden, China would have edged closer to production of advanced chips. 

Rajan is also wrong to assume that companies, semiconductors or anything else, will be attracted to India by virtue of its size.

Choosing to be oblivious about the CHIPS and Science Act, where the United States government has announced more than $50 billion in tax breaks and other subsidies for manufacturers, Rajan must realise that even with the majority share in chip design, software tools, and core intellectual property, the US had to go for subsidies to attract the likes of TSMC and Samsung. 

Four, the idea of putting the PLI money elsewhere.

Rajan, at his political best, chooses to be philosophical where the government is calculative, and chooses to be calculative where the government is philosophical.

While the need for creating more and better universities is not wrong, why must the cost of setting them up be India’s semiconductor ambition?

Why not ask for an academic, research, and development ecosystem that complements the $10 billion push for semiconductor industry in existing universities and colleges? 

Five, the employment factor. Speaking about the importance of human capital, ambiguously, Rajan remarked that the semiconductor industry may only get a few thousand jobs.

For someone obsessed with incremental calculations, Rajan’s dismissive attitude of the semiconductor manufacturing ambitions is appalling, to say the least.

In the larger context, establishing a vibrant chip ecosystem in India is about playing a key role in the global supply chains and attracting investors and companies engaged in the production of advanced chips.

This is not about absolute employment numbers, but the potential it generates in the long run.

Recently, there were reports of TSMC looking to establish a plant in Germany, given the demand of the automotive industry in the region.

While revenue shortfalls may postpone TSMC’s plans, it is quite clear to an average observer of supply chains, be it in China in the past or globally today, that a thriving manufacturing ecosystem only enables more companies to come and build there.

The market size is merely a bonus, as was the case in China and will be in India.

For Raghuram Rajan, however, it is all about philosophical ambiguity and not real world transitions.

A Congress man in the making, perhaps?