Raghuram Rajan in a note late Saturday said India’s policy to spend more on subsidies for chip manufacturing than the annual budget for the country’s higher education has not been through through. “This is certainly not the way to become a developed nation, no matter what my troll friends say,” the professor of finance at the University of Chicago Booth School of Business wrote.
The former central bank governor clarified that it is not that India should never make chips, “but with every nation trying to pursue the same, it would be a ruinous race to get into now”.
Rajan’s ‘rejoinder’ was all about a recent interview to Bloomberg that kicked up a row where he criticised the government for focussing on high-profile projects such chip manufacturing instead of fixing the education system. India had just last month okayed three semiconductor plants under its Rs 76,000 crore ($10 billion) chip subsidy scheme. Of the Rs 1.26 lakh crore ($15 billion) total investments in these three facilities, an estimated Rs 48,000 crore ($5.8 billion) will reportedly be financed by Centre’s subsidies.
“The reality is that the chip subsidies are capital subsidies, which are meant to be paid up front, not based on production (unlike production-linked incentives). If the government’s claims that India will be making chips soon is credible, the capital subsidy will have to be paid very soon. Moreover, only the naïve will think the subsidies will stop here. What we will get, if all goes well, is 28 nm chips. The state of the art in modern cell phones is 3 nm chips (more sophisticated chips have lower nm). If we are to become a global chip manufacturer at the frontier, we have to subsidize a few generations of chip factories before we reach the frontier. And the size of the subsidies will keep rising, since the more modern manufacturing technologies involved in making more sophisticated chips will be much more expensive,” he wrote.
Rajan said India had more pressing needs such as such as putting spectrometers in colleges so the country can produce first-rate science students.
“It is far from clear how the government decides which industry, sector, or firm gets subsidies. Chip manufacturing is certainly not a labor intensive industry, when jobs are our most important challenge,” he added.
He said it will be factually incorrect to say India needs to have the whole chip supply chain to participate in segments of it (chips). “As the IT minister acknowledges, we already have 300,000 chip designers without doing any chip manufacturing. Nvidia and Qualcomm don’t make chips, neither does Apple. They design them and get them made in Taiwan. Dutch firm ASML makes machines to make chips, without having major chip manufacturers in the Netherlands. This is why I worry that chip subsidies indicate government policies that have not been carefully thought through”.
