On the sidelines of the ongoing World Economic Forum meeting in Davos, India Today’s Rahul Kanwal talked to former Reserve Bank governor Raghuram Rajan. A video clip of the interview has gone viral, where Raghuram Rajan gets a befitting reply from Kanwal for his criticism of the Modi government’s handling of the economy.
The controversial former RBI governor, who is close to the Congress party, tried to raise several points to attack the economic policies of the Modi government, but he was effectively countered by Rahul Kanwal. The India Today anchor cited several global examples to show that what the Indian govt is doing is not unique, and it is in line with what other global powers are also doing.
When asked about his views on the Modi government’s handling of the economy, Rajan said that while the government is doing in areas like infrastructure, like the building of roads, he said that the performance is not satisfactory in the ‘soft infrastructure point’. He cited raising tariffs as one example, saying that ‘if we are to become a global player, we have to recognize that a tariff is not just preventing imports but also preventing exports. But Rahul Kanwal countered that by saying that reason for it is that it has become a global trend, and it is happening not just in India.
However, Rajan said that as India is trying to make its way into the global supply chain, India should lower tariffs even though other countries are not doing so.
#Exclusive
— IndiaToday (@IndiaToday) January 18, 2023
What's your assessment of Modi government's handling of the Indian economy?Former RBI Governor Raghuram Rajan responds. #Newstrack with @Rahulkanwal | #IndiaTodayAtDavos #RaghuramRajan pic.twitter.com/zaQxUnODwL
Kanwal then moved on to the astronomical rise of electronic manufacturing in India under the Modi government, which was negligible during the UPA rule. He said that hardly anything was produced during the UPA govt, but now India is producing electronic devices not only for the domestic market but also has become an export centre. But Raghuram Rajan directly dismissed this achievement, saying that the rise in domestic production is only because of the incentives offered by the government.
He said that the mobile plants in India are importing large amounts of parts and are just assembling the final products in India. According to Rajan, it is not a big achievement, and he also claimed that assembly plants do not generate much employment. He added that there is no value addition in assembling the phones. He also claimed that around ₹5000 in subsidy is paid by the govt for every phone made in India.
Rajan also claimed that manufacturers are looking to come out of China, and asked whether they will come to India without subsidy. ‘Somehow it seems the only way we get mobile Manufacturing in India is to subsidize that final output, pay 5000 rupees per cell phone that is manufactured or whatever the final number is regardless of how much value is being added,’ he said, criticising the Production Linked Incentive (PLI) scheme of the union government.
Rahul Kanwal countered it by saying that the government is doing what it can do to bring manufacturing to India. He added that India is not the only country offering incentives to companies to bring in manufacturing, giving the example of how the US has announced a $280 billion initiative to move chip manufacturing from countries like Taiwan, China, Thailand etc to the USA.
However, when Kanwal showed how the USA is also giving incentives to manufacturing, Raghuram Rajan changed track, virtually saying USA’s incentive is good but India’s incentive is bad. He criticised the $10 billion incentive announced by the Modi government for semiconductor manufacturing in the country, saying it will generate only 1000-1500 jobs.
It is notable that just 5 minutes earlier, he was criticising incentives for phone assembly plants, saying it is worthless if there is no manufacturing of parts in India. But then he moved to criticise the manufacturing of semiconductors, saying it does not generate much employment.
Raghuram Rajan then turned from an economist to a pure leftist, saying that instead of giving $10 billion to the semiconductor industry, the money should be used to start new universities and give to existing universities. According to him, giving money to universities will result in the flourishing of technological abilities.
He also doubted the capabilities of the companies which have announced semiconductor plants in India under the PLI scheme. He was referring to Vedanta, which is setting up a ₹1.54 lakh crore semiconductor plant in Gujarat, as Vedanta has no experience in the sector. But he conveniently forgot that it is a 60:40 joint venture with Taiwanese giant Foxconn, the world’s leading electronics manufacturer.
Rahul Kanwal countered his ‘build universities instead of manufacturing plants’ by saying that it will take years, while the semiconductor plants will start manufacturing in a couple of years. And now, Rajan had a problem with the semiconductor plants in India, saying they will make ‘run of the mill semiconductors.’ According to him, the semiconductor plants coming up in India are worthless because they are not making chips that power modern computers, smartphones and other top-end devices.
Rahul Kanwal effectively countered it by saying that it is a chicken and egg situation, and the country has to start with low-end chip making and then move up the value chain. Raghuram Rajan wants India to directly start making top-end chips, which is not possible, and Kanwal effectively pointed out this, forcing Rajan to again move off track. He said that China already has such chip-making facilities, but it has not acquired the capabilities to move up.
Kanwal again effectively countered him, saying that in China everything is under government control, and without democracy and freedom, there is little incentive to move up the value chain. He said that the Indian start-up sector has already shown that the chances of innovation in India are higher than in China. He said that China is not catching up because it’s essentially a state-run society.
Raghuram Rajan disagreed with him, saying there are several successful private tech companies in China, and there have been innovations in China like TikTok. However, he agreed that India’s democracy gives it strength in terms of innovation if that is allowed. But he added that we also need to spend on human capital, and need to have world-class universities.
He said that India should open up manufacturing but there is no need to give to subsidies to the industry. He kept on stressing building more ‘human capital’, saying it should get priority over manufacturing and logistics etc.
In an attempt to criticise the Modi government, Raghuram Rajan ended up saying only the higher-end semiconductor industry matters, which is not correct. While only computers and phones come to mind when talking about chips, actually today chips are everywhere, and there is a huge demand for lower-end chips in the world.
The automobile industry was facing a crisis recently due to a shortage of supply of chips, as each vehicle contains several chips to control various aspects of the vehicle. Today most appliances and electronic products contain semiconductors, which are not made by the likes of Intel.
With the expansion of smart and Internet of Things (IoT) devices, the global chip demand is set to explode, and by venturing into the sector, India will be able to capture a part of the market. By the end of the decade, the semiconductor market for the automobile sector will be $150 billion, while the semiconductor market for consumer and industrial electronics is set to be $220 billion. Therefore, the $10 billion bet by the government of India is worth it to enter this highly coveted sector with only a few players.
Even in computers, phones, gaming consoles etc that need top-end chips, there are several lower-end chips and other semiconductor products apart from the main CPUs and GPUs, and the upcoming plants in India can supply those parts.
Moreover, entering the low-end chip market will be crucial to moving to high-end chips to compete with the likes of TSMC, Samsung and Intel. No new player in a sector can’t enter the top end directly, it has to start at the bottom and gradually move up the value chain.
It is also important to note there is no such thing as ‘run of the mill semiconductors,’ as claimed by Rajan. While the chips used in devices are lower-end compared to CPUs and GPUs of computers and phones, the ‘low end’ semiconductors are still highly complex products which are made by only a small number of companies in the world. It is a niche but high-value industry with a few players that manufacture at a large scale, and the industry produces mone of the most complex products ever designed by mankind.
Rajan is also wrong in saying that the Vedanta-Foxconn plant may not be a success as it has no experience in chip making. But the fact is, Foxconn is actually a major electronics component maker While Foxconn is mostly known for manufacturing iPhones and other consumer electronics devices of several companies, the company also makes a huge number of components that go into phones and other devices. Moreover, the company has forayed into chip manufacturing in recent years, has acquired chip fabrication plants, and therefore has the knowhow to operate a semiconductor plant.
Also, given the scale of operation of Foxconn and the financial muscle of the joint venture, it will not be difficult for them to acquire the required expertise.
While saying that China has not been able to move up the value chain in semiconductors from being an assembler, Raghuram Rajan ignored several factors. The first is that China focused on becoming the manufacturing hub of the world, while India is focusing on both assembling devices and making chips from the begining.
Also, China has a big hurdle in making it big in semiconductors because of US sanctions. The Semiconductor industry involves a global supply chain of several countries in various countries including the USA, and several American companies hold crucial IP rights needed for the sector, and due to the sanctions, the Chinese semiconductor industry can’t access them.
Raghuram Rajan also conveniently ignored the US subsidy program to bring the chipmaking industry to the country when Rahul Kanwal mentioned it. In the recently introduced CHIPS and Science Act, the United States government has announced more than $50 billion in tax breaks and other subsidies for manufacturers, while the total value of benefits in the scheme is set to be $280 billion.
Therefore, India is not the only country to offer incentives to bring manufacturing to the country, even an economic superpower like USA is also doing the same.
Raghuram Rajan also claimed neither assembling nor manufacturing in the electronics sector generates employment in large numbers. First, he contradicted himself, as he attacked the phone assembly plants, saying they all use imported parts, then he criticised the semiconductor industry saying it will only produce low-end chips. He also said assembly plants do not generate much employment, and the chip plant will hardly generate 1000-1500 jobs.
He is wrong on multiple fronts on this aspect too. While he is correct that semiconductor manufacturing is not employment intensive, it’s a big industry that will support lots of ancillary industries, which will generate much more jobs. Semiconductors are made in highly specialised fabrication units, and a small number of highly skilled workers are needed to operate them. But like all such industries, they also require a large number of products and services to operate, therefore they can generate much more indirect employment.
Raghuram Rajan’s claim that phone assembly plants do not generate much employment is plainly wrong because it is actually one of the most manpower-intensive industries. Single campuses of Foxconn in China employ lakhs of employees, because, the process of assembling various parts to build a phone or a similar device requires a lot of manpower. The phone assembly units operating in India also employ large numbers of people.
For example, in 2020 around 30,000 people worked in several Xiaomi plants in India that manufacture phones and other devices of the Chinese giant. The company has been adding capacities since then, and therefore the number must have gone up. Foxconn is reportedly increasing its manpower in India to 70,000 in the next two years. These plants also generate lots of indirect employment, and therefore they are large employment generators, unlike the claims of Rajan.
Raghuram Rajan’s suggestion that $10 billion should be used to build universities instead of promoting industry is similar to the a familiar leftist rant every time the government announces big industry of infrastructure projects. They always claim govt should build schools and hospitals instead of building roads, railways, ports etc. While the requirement for top-end universities can’t be denied, there is no reason why it should be at the cost of the semiconductor industry. The government has budgets for different sectors, and the money is spent accordingly.
The complete interview of Raghuram Rajan with Rahul Kanwal can be viewed below, where they talked about several other subjects, like Rajan saying that Rahul Gandi is not a Pappu.
