The story so far: The Centre last week sanctioned ₹76,000 crore under the production-linked incentive (PLI) scheme to encourage the manufacturing of various semiconductor goods within India. The scheme comes amid an inadequate supply of semiconductor chips in the global market which has severely affected the supply of a number of goods such as cars, laptops and phones.

Also read: Comment | The dream of being a chip hub

What is its aim?

Under the scheme, the Centre will offer financial support to companies that want to manufacture a range of semiconductor goods in India. The subsidy will bring down the production costs of companies manufacturing such goods, and thus encourage them to set up new factories and other facilities. It is seen as an attempt to build a strong semiconductor industry that would put an end to the country’s reliance on imports to meet its semiconductor needs and is also expected to help in the creation of jobs.

Will it help the economy?

The Centre believes that the scheme will give a boost to the domestic semiconductor industry. And according to estimates, it can help create over 1 lakh new jobs either directly or indirectly. Some also feel that financial support can encourage businesses to invest during uncertain times such as the ongoing COVID-19 pandemic by reducing the amount of capital that they need to put at risk. Further, increased spending by the Government in such schemes is also seen as a step to boost demand in the economy. Many economists also believe that the Centre, by offering subsidies to businesses, can play a crucial role in developing India as a global hub for electronic goods.

Critics, however, have questioned the use of subsidies to encourage any industry. They argue that the burden of subsidies falls on taxpayers, who will have lesser incentive to work as taxes on them rise. Further, subsidies can lead to misallocation of resources. Note that investment decisions in a market economy are generally dictated by the preferences of consumers. If consumers want certain goods, businesses lured by profits would invest money to produce it. If consumers do not want certain goods, however, businesses trying to avoid losses would avoid investing in producing it. Projects that would otherwise not be undertaken by businesses due to lack of demand from consumers, however, may suddenly become viable when the Government subsidises part of the production costs. These projects may, in fact, be viable only as long as taxpayers are forced to fund the required subsidies. Finally, there is also the risk of cronyism that is high when politicians and bureaucrats get to decide which company or sector receives subsidies. Critics also say that money that the Government spends on the PLI scheme comes from the pockets of taxpayers who would have simply spent it on things of their own desire. So it would not be right, they argue, to say that spending on subsidies will boost aggregate demand.

What lies ahead?

The success of the PLI scheme in building a vibrant semiconductor industry will depend on factors other than just the amount of subsidies offered to investors. While subsidies can certainly lure businesses into investing in an industry, they are not sufficient or even necessary to attract investments. Investors care more about ease of doing business, which is influenced by the quality of institutions in a country. Some economists even argue that Governments just need to provide an environment that is conducive for doing business in order to attract investments. They point out that when a country has the right institutions, businesses will invest in any industry as long as it makes financial sense to do so.