India Enters into Semiconductor Manufacturing

It is not to be debated that India's economic growth figures have been impressive in recent years. Most therefore assume that absent a major hiccup, this nation is destined to maintain its growth and become an even greater economy. Growth and success are indeed important but they often brew hubris and bad thinking by governments. An example of this is found in this news piece reporting that India's government is about to publish a semi-conductor policy as part of industrial policy.

It is a shame that government's just do not learn about the limits of directed or central planning and the success in one industry such as software and Business Process Outsourcing (BPO) is generating hubris among bureaucrats in India. They appear to be ignoring enormous amounts of literature on the one side and empirical evidence that weighs against designing industrial policy around subsidies under the guise of tax incentives to attract semiconductor manufacturing into India.

Based on my reading of this book by William Lewis, I would bet against the success of most of these firms that intend to start investments in the industry merely to ride on those subsidies. Careful reading of this book would show that the semiconductor industry is not only very highly competitive but that it exhibits the characteristics of common commodities. Further investments in producing semiconductors through subsidies or protection would only transfer public resources to those investors without generating much new value. If the guidelines remain as suggested in the piece, then this would simply be about putting corporations on welfare. the unintended consequence would probably be a glut in chips in the world market. India's Industrial policy planners would be well advised to review the chapter on South Korea.