The India Cellular and Electronics Industry (ICEA) recently released a report detailing the effects of import tariffs on the domestic electronics industry. Currently, India’s import tariff rate for electronic and technology goods is much more than those of competing countries like China and Vietnam. This has been on the back of the recently announced Rs 76,000 crore package to build the Indian semiconductor industry. But high import tariffs, trade restrictions, and taxation meant as protectionist measures decline the competitiveness of Indian goods in the global market. More importantly, it completely negates the effect of industrial policy measures, which are meant to be supportive and business-friendly like the production linked incentive (PLI) scheme.
This sparks a debate on whether a government’s industrial policy is actually the determining factor when trying to develop technology industries domestically. A national policy aimed at developing selected industries to achieve certain economic goals is the hallmark of an industrial policy. But arguments can be made that most successes of industrial growth cannot be attributed to the government’s industrial policies at all and is a result of a host of other factors. This reinforces the tendency to ignore wrong practices and embrace false successes.
Industrial policies, especially in the technology sector, mostly never have a definitive word on the scope, duration, and budget costs associated with the sector. There is also the fact that interaction with other government policies can distort the market. While governments are meant to tackle any existing market failure and correct it, industrial policies sometimes create their own distortions that exacerbate market failures rather than correct them. This can be in the form of conflicting subsidies and pre-existing regulations or schemes.
The ‘Knowledge Problem’
Though governments come out with industrial policies targeted and directed towards certain technology sectors, there is always the issue of misunderstanding the high-tech market and what support (financial or otherwise) it actually needs. This can lead to an inefficient allocation of public resources meant for planning specific industrial outputs and outcomes related to that technology sector.
Understanding the comparative advantages of one’s state in a specific technology will be imperative in growing the sector. However, the targeted efforts for commercial outcomes require a sharp focus on specific parts of the supply chain. This sort of sectoral approach is lacking in any industrial policy which focuses on the big package rather than the break-up of the public resources into definitive components in the value chain of specific technologies.
There is also the inability of the government to anticipate any unseen costs as a result of the proposed industrial policy. This can range from deadweight costs on the economy to opportunity costs that can derail technological progress with too much investment into just one sector. The ‘knowledge gap’ that exists results in slowing down the projects and making them costlier.
Lessons from the US and China
In the 1980s, the United States government decided to enforce its anti-dumping legislation to curb the semiconductor imports from Japan. This was specifically meant to target the Dynamic Random Access Memory (DRAM) chipset industry which Japan had taken a massive lead-in. This was also meant to help the producers in the US capture the memory chips market space.
The kind of protectionist measures that were taken by the government was meant to be an industrial policy that would protect domestic companies’ interests, enhance the level of innovation and eventually increase the quantum of exports from the country. There was also the intention of providing these products at a much cheaper rate if manufactured locally. However, it was seen that the US markets did not showcase any growth in the field as most companies had already moved ahead and focused on more revenue-generating products in the semiconductor supply chain. This resulted in the decline of availability of these memory chips and led to the rise in prices which was against the tenet of what the industrial policy wanted to achieve.
Similarly, China’s repeated semiconductor industrial policies have encountered major roadblocks. A large number of subsidies were offered to Chinese firms to start operations in semiconductor manufacturing but most projects ended up failing. Six multibillion-dollar Chinese chip projects failed in the last two years and high-profile manufacturers like Wuhan Hongxin, Tacoma, and Dehaui were dissolved or declared bankruptcy.
The current semiconductor capability of China still remains a couple of generations behind leaders like Taiwan and South Korea. Smaller and less technologically advanced chips are manufactured and the country is highly dependent on the United States for manufacturing equipment. The recent sanctions have also hurt the domestic industry. The Make in China 2025 plan envisioned a 70% self-sufficiency in semiconductor supply chains by 2025 while the actual projected rate is just 19.4% despite favourable industrial policies.
These instances from both countries showcase how despite the full weight of the government behind the sector, the consequences of their semiconductor industrial policies did not yield the results they anticipated. India must understand that government support remains a small entity in the entire process.
Combining government direction with private capital and market forces is what India should aim for in their industrial policies meant to spur growth in specific technology sectors. Investors remain key to building the ecosystem and reducing the reliance on state-owned enterprises for funding is critical. Protectionist measures in the name of self-sufficiency cannot foster growth especially in complex technology supply chains and can lead to discouraging innovation and extremely slow productivity growth.
Additionally, though government industrial policies have a manufacturing focus, they do not solve the issues of the manufacturing job crisis or raise the living standards of workers. India, which is deficient in manufacturing industries, needs a combination of government support and a business-friendly ecosystem to encourage any sort of innovation.
The author is a research analyst at Takshila Institution. The views expressed in this article are those of the author and do not represent the stand of this publication.
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