0x0D India's FY2024-25 Budget on Semiconductors: Promise vs Reality
Going beyond the budget speech, what do the budgetary allocations for the semiconductor programme indicate?
(This article is cross-posted from the Anticipating the Unintended newsletter, edition #266)
My colleagues have provided an excellent overview of all things tech in the Union Budget for FY2024-25 here. In this edition, I will analyse the allocations made towards the semiconductor programme that was announced in December 2021.
A defining characteristic of low state capacity is the difference between funding promises and funding deployment. In other words, ex-ante Industrial Policy promises can be orders of magnitude higher than the actual disbursement.
This is a typical problem with the umpteen (fourteen, to be precise) Production-linked Incentive schemes. Out of the promised outlay of ₹1.97 lakh crore, the actual cumulative disbursement has only been around ₹9500 crore, i.e. 5 per cent of the total outlay. If the government were to continue at this run rate, it would take another twenty years for the promised outlay to be deployed.
The reasons for this vast gap are twofold. In the first stage, ministries promise hefty PLI outlays to signal their relative importance—the more the outlay, the more prestige they get. These outlays span across multiple years. Given that budgetary allocations are done on an annual basis using cash accounting principles, the PLI outlay figure is a pie in the sky. Sometimes, these outlays don’t figure even in budget estimates because the line ministries can’t even get them off the ground. Secondly, even when budget estimates take PLI expenses into account, the actual disbursements often fall far short of them. This can be due to investment delays by firms, bureaucratic delays in approving PLI claims, or both.
Nowhere is this difference between ex-ante Industrial Policy promise vs on-ground reality starker than in semiconductors. The government promised a $ 10 billion (₹76000 crores) incentive package in December 2021 with much fanfare. Crucially, the government frontloaded the disbursement on an equal footing basis during capital acquisition and construction stages instead of making its financial support incumbent on production. Given that two financial years have passed by since then, the FY25 budget provides the first snapshot of how the projects are proceeding in reality. And it doesn’t look pretty.
The above chart contains all budgeted and disbursed amounts thus far. The government expects to disburse a total of ₹11419 crores, or 15 per cent of the promised outlay, by the end of this financial year.
Breaking down this overall number indicates the health of each of the sub-schemes.
The display fab scheme hasn’t attracted any interest, and the government didn’t budget a significant amount for it this year, either. I have long argued that display fabs are not strategic, and spending taxpayer money on them merely to reduce imports from China is a wasteful exercise. Good riddance if the government stops wasting time, money, and effort here.
The sad news concerns a sector where India’s comparative advantage actually lies, i.e., fabless firms. The Design-linked incentive promised to support 100 start-ups in their go-to-market strategy, but the budgetary allocations show how far off the target the scheme is. There was no disbursement in FY23; The FY24 revised estimate is 25 per cent of the budgeted allocation of ₹200 crores; and the FY25 estimate is also pegged at a measly ₹200 crores. The reasons for tardiness include strict provisions that put firms raising substantial foreign money out of contention, confusion on the government’s right to the company’s intellectual property, and entrusting a government company, which is also a player in this domain, as the nodal regulator of this scheme. I have outlined many of these problems here.
The one area which seems to be proceeding well is the scheme for chip assembly and testing. With the Micron plant in Sanand ready to receive disbursement and potentially start operations by the end of AY25, this segment appears to be largely on track.
The budgeted outlay for a fab shows a muted picture. In edition #247, I questioned the ₹91000 crore investment figure for a legacy fabrication unit of small capacity when the industry benchmark was almost a tenth of that figure. Now compare that to the government’s budgeted allocation of ₹1500 crores this year for the fab. At this rate, the government will disburse its half of the total project cost (₹45500 crore) over thirty years!
Finally, the government expects to modernise the sarkaari R&D fabrication unit in Mohali this year with an allocation of ₹900 crore to begin with. As long as this becomes an open R&D and prototyping fab, which is open to Indian companies, it is defensible.
So, the lesson here is to take all claims—celebratory or critical—about industrial policy subsidies in India with a bucket of salt. The promises don’t translate to reality. These incentives aren’t going to be disastrous, as much of the recent commentary judging these fantastical outlays only on the basis of the jobs they create indicates. Neither are they putting India on the path to becoming a manufacturing superpower. These subsidies can, at best, be described as cute solutions pretending to address a much deeper problem.