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PM Modi’s $24 billion manufacturing push is stuck on the assembly line

PM Modi’s $24 billion manufacturing push is stuck on the assembly line

A $10 billion push to make semiconductors in India is on shaky ground. Its collapse will expose a major fault line in Prime Minister Narendra Modi’s campaign for greater economic self-reliance. Already, influential critics are asking if the much-touted success in becoming a hub for smartphone manufacturing is a hollow claim. Low-end assembly-line jobs, created with the help of expensive state subsidies and protectionist import duties, would only make sense if they were a quick pathway to more sophisticated production, such as of microprocessors.

To that end, a likely rejection by the government of incentives for the 28-nanometer chip unit proposed by Indian billionaire Anil Agarwal’s Vedanta Resources Ltd. and Taiwan’s Hon Hai Precision Industry Co., also known as Foxconn, is not a good look. Neither of the two collaborators has significant chipmaking experience, and the project is yet to find a technology partner or license manufacturing-grade technology, Bloomberg News reported this week, citing people familiar with the matter. New Delhi has pledged to pay half the cost of setting up semiconductor units, but only when at least one of those two conditions are met. 

It isn’t just the Vedanta-Foxconn project that has hit a rough patch. A $3 billion proposal that had Israeli foundry Tower Semiconductor Ltd. as a tech partner has also stalled, while a third plan is stuck because Singapore-based IGSS Ventures Pte wants to resubmit its application for incentives, Reuters reported this week. With that, state-assisted chipmaking may be back to the drawing board.

Maybe Vedanta will reapply when the junk-rated miner has figured out what to do about its record $2 billion bonds coming due next year. Tower might be waiting for Intel Corp. to finish acquiring it before reentering the race. Or perhaps newer claimants will emerge. The Mumbai-based conglomerate Tata Group, which may soon become the fourth contract manufacturer for iPhones, also harbors chipmaking ambitions, Chairman Natarajan Chandrasekaran told Nikkei Asia in December.

Although the Covid-19 disruptions finally convinced widget makers of the virtues of a “China+1” strategy, bureaucrats in New Delhi were viewing the deepening chasm between Beijing and Washington as a once-in-a-generation opportunity even before the pandemic. But instead of focusing attention on making a 400-million-plus workforce more productive, the Modi government decided to emulate the Trump administration’s jingoistic approach to trade. In 2018, it announced a “calibrated departure” from a two-decade-old policy of reducing protectionism and raised import duties on mobile phones to 20% from 15%. The 2019 electronics policy adopted net positive balance of payments as one of its goals. 

Then, just as the country was about to exit its pandemic lockdown, Modi came up with the slogan of self-reliance. A five-year, $24 billion subsidy, known as Production Linked Incentives, or PLIs, was conceived. The idea was to select a handful of investors and coax them to manufacture locally across industries such as electronics, electric-vehicle batteries, solar panels and textiles. Risk takers were to be compensated for the economy’s underlying lack of competitiveness with handouts as well as import protection. By 2020, a quarter of India’s tariff lines were higher than 15%. That’s double the figure from a decade earlier.

The “Make in India” campaign appears to have worked for mobile phones. From being a net importer to the tune of $3.3 billion five years ago, the most-populous nation is now a net exporter. The difference between what it now garners from selling phones to the rest of the world and what it spends on buying them from China is a cool $9.8 billion. 

Still, those numbers hide more than they reveal. As Raghuram Rajan, a former Reserve Bank of India governor, showed in a recent paper with two coauthors, instead of ready-made mobile phones, India now imports components. When you add major parts like semiconductors, printed circuit boards, displays, cameras and batteries, the country is a bigger net importer than before. It’s now spending a net $21 billion. (Or a portion thereof, assuming that some of the imported components may be used to make things other than mobile phones.) “In other words, it is entirely possible that we have become more dependent on imports during the PLI scheme,” the researchers say.

On each phone assembled locally, the government pays the likes of Foxconn and Wistron Corp., another Taiwanese contract manufacturer for Apple Inc., up to 6% of the invoice price. In the absence of data, Rajan and his colleagues wonder if the handout, coupled with other subsidies, actually outweighs the value added. It’s an important question. The emerging consensus in policy-advisory circles is that in a decade the nation will go on to capture about 20% of the final price of a device. That’s optimistic, considering that China garnered $6.5 on the first iPhone in 2009. It took the People’s Republic nearly a decade to raise its take to $104, or 10% of the final price of iPhone X, economist Yuqing Xing has estimated.  

But if five years of high tariff walls and nearly three years of subsidies haven’t encouraged indigenous production of simple parts, how will handouts help with more complex manufacturing? Maybe it’s just as well that Agarwal, who boasted of creating “a self-reliant Silicon Valley” in Modi’s home state of Gujarat, couldn’t find a technology partner in nine months, or that Hyundai Global Motors, selected for a battery subsidy, turned out to be a case of mistaken identity — it had nothing to do with the South Korean carmaker. It’s time to pause and weigh if the PLI program is as successful as it’s cracked up to be. With even private-equity swashbucklers turning cautious about startups spending $1 on customer discounts to buy $1 in revenue and $2 in losses, it makes no sense to be hasty about wasting taxpayers’ billions.

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