Editorials/Opinions Analysis For UPSC 29 July 2023

Editorials/Opinions Analysis For UPSC 29 July 2023

Contents

1. India’s Semiconductor Industry: New Horizons
2. Fiscal Challenges and 16^th Finance Commission Recommendations

India’s Semiconductor Industry: New Horizons

Context

• The second Semicon India conference, held annually by the India Semiconductor Mission (ISM), marks an important turning point for the country’s semiconductor industry. The conference showcases India’s advancements in semiconductor design and manufacture at a time when the global semiconductor environment is undergoing rapid transformation.
• Through its unparalleled budgetary assistance and proactive engagement with industry titans, the government has demonstrated its commitment to developing a home ecosystem that is self-sufficient and placing India as a significant player in the global value chain.

Relevance

GS Paper 3 – Economy- Industries

Mains Question

Considering the fiscal incentives and regulatory support provided by the government in luring foreign investors, evaluate the relevance of India’s growth as a global semiconductor hub. How can India make sure that semiconductor production is environmentally friendly and in line with international concerns? (250 Words)

India’s Missed Opportunities: Building from Scratch

• India has had to deal with lost opportunities to build a successful semiconductor industry over the years. From missing out on the Fairchild Semiconductor fab in the 1960s to bureaucratic and regulatory roadblocks impeding a global semiconductor company’s interest in the middle of the 2000s to missing out on Intel’s global expansion in the late 2000s to Vietnam-India repeatedly missed the bus as a result of the then government’s murky operations and exorbitant delays in articulating a vision and drafting a formal policy.
• Despite a promising start by public sector organisations, India was unable to fully realise the potential that had been shown in the early going. In order to remain competitive, Bharat Electronics Ltd (BEL) and some other labs and organisations were unable to produce the volume they needed, nor did they possess the cutting-edge technology necessary to become market leaders.
• Long before Taiwan entered the semiconductor manufacturing industry, India’s VLSI fabrication facility at the Semiconductor Complex Limited in Chandigarh began operations. But it was closed for many years following a significant fire in 1989. The failure of successive administrations to quickly restart business at SCL serves as a harsh reminder of how India’s inability to catch up with advanced nations was due to a lack of strategic vision and bad policy.
• Despite a promising start by public sector initiatives, competitiveness was hampered by a lack of a strategic vision and cutting-edge technology.
• As a result, India’s reliance on imported semiconductors increased, which had an adverse effect on national security as well as economic growth. However, Prime Minister Narendra Modi’s India Semiconductor Mission (ISM) aspires to buck this trend and attain semiconductor self-reliance.

The Mission and Practical Action of ISM

• The goal of the ISM is to build a strong domestic semiconductor ecosystem that supports economic growth, protects industry from external shocks, and ensures digital sovereignty. The semiconductor industry is being established nearly totally from scratch, unlike other industries where domestic sectors that are already strong are supported by initiatives like Production Linked Incentives.
• The financial incentives and regulatory support provided by the government are crucial in luring foreign companies to locate their manufacturing facilities in India. The comprehensive approach used by policymakers, which encompasses the entire value chain from semiconductor design to final assembly and testing, demonstrates their understanding of the long-term support needed for the semiconductor sector’s success.
• Policymakers are aware that the sector is fundamental and integral to the growth of many other sectors, both directly and indirectly, and that it makes a significant contribution to employment creation. The government grasped the need of developing semiconductor self-reliance and saw opportunities from the global shortage of semiconductors, which disrupted supply chains across industries. Finally, to secure “digital sovereignty,” a crucial component of national security, domestic manufacturing is required.
• The Design Linked Incentive (DLI) scheme supports a select group of entrepreneurs, and work is being done to update Chandigarh’s Semiconductor Complex Limited. Agreements with the US and Japan further demonstrate India’s appeal on a global scale and dedication to semiconductor research and talent development.

Indian Opportunity in Sustainable Semiconductor Manufacturing

• The semiconductor sector is concerned about its excessive water and energy usage. India has the chance to concentrate on making sustainable semiconductors by stimulating innovation and investing in green technology in response to this problem.
• As environmental concerns become more important on a worldwide scale, India can position itself as a pioneer in environmentally friendly semiconductor manufacturing methods.

The Development of India as a Global Semiconductor Hub

• India’s desire to establish itself as a leading global semiconductor hub was highlighted by Prime Minister Narendra Modi’s persuasive plea to foreign investors at the Semicon India 2023 summit. This ambition is greatly aided by the government’s policy changes, tax breaks, and initiatives to entice foreign companies to locate manufacturing facilities in India.
• The PM emphasised the country’s Internet adoption and fibre infrastructure, the availability of talent, the size of the market, as well as a favourable and alluring corporate tax structure. He also emphasised the nation’s political stability.
• The Prime Minister discussed the quick development fueled by India’s goals for the future, pointing to the decline in severe poverty and the broad spread use of accessible, reasonably priced data connectivity that has reached even the most rural areas of the nation.
• He claimed that the nation had made great strides in the electronic manufacturing sector, which had increased from $30 billion to over $100 billion. He also mentioned the country’s expanding exports of electronic manufacturing as well as the presence of more than 200 mobile manufacturing facilities in India.
• The announcement of AMD’s $400 million commitment to construct its largest design centre in Bengaluru is evidence of the faith that international firms have in India’s potential for semiconductors. India’s position as a desirable location for semiconductor manufacture is further strengthened by the chairman of Foxconn’s optimism over the nation’s resolve and growth potential.

Conclusion:

From a nearly nonexistent local ecosystem, India’s semiconductor industry has grown into a robust industry that draws foreign investors. Industry titans now have faith in the ISM’s vision and practical initiatives. In order to establish itself as a prominent player in the global semiconductor market, India must concentrate on sustainable practises and strategic alliances as it embraces this new universe of potential. India is on the verge of becoming a worldwide semiconductor powerhouse because to the government’s continuous support and the rebalancing of the industry’s global value chain.

Fiscal Challenges and 16^th Finance Commission Recommendations

Context

The Sixteenth Finance Commission will soon be established. The fifteenth Finance Commission, established in November 2017, experienced significant changes that significantly altered India’s fiscal environment. The COVID-19 pandemic outbreak and related geopolitical issues severely impacted the economy. By the end of the fiscal year 2020–21, the combined government debt–GDP ratio had risen to about 90%. The difficulties encountered by the federal government have further been exacerbated by the fact that numerous States have been dealing with significant fiscal imbalances.

Relevance

GS Paper 3 – Indian Economy – Fiscal Policies

Mains Question

Describe the fiscal issues India is facing, in especially the growing debt-to-GDP ratio brought on the COVID-19. Compare and contrast how the Sixteenth Finance Commission handled this ratio and the fiscal imbalances between the federal and state governments. (150 Words)

Dimensions both vertically and horizontally

• The Fourteenth Finance Commission increased the contribution of States in the divisible pool of central taxes from 32% to 42% in an effort to rectify the fiscal imbalances between the central government and States. When India’s states were reduced to 28, this percentage was eventually changed to 41%. The Centre efficiently handled the problem by withholding Planning Commission grants, which were eliminated during that time, notwithstanding the higher share for States.
• Any further increase in the States’ share of federal taxes may not be justified in light of the Centre’s significant fiscal problems. The Sixteenth Finance Commission should also look at the Center’s reliance on non-shareable cesses and surcharges, which made for 18.5% of its gross tax receipts from 2020–21 to 2023–24 (BE). One solution to this problem is to think about freezing the share of cesses and surcharges at a base amount. This share was set by the Thirteenth Finance Commission at a meagre 9.6%, therefore it could be wise for the Sixteenth Finance Commission to suggest a 10% cap. To preserve fiscal balance, the share of the States should be increased if the proportion is greater than 10%.

GST (Goods and Services Tax)

The poor performance of the Goods and Services Tax (GST) and its effects on the divisible pool of taxes have been one of the main issues in recent years. There is some solace, though, as GST receipts have shown strong growth over the past two years. Despite this, it is crucial to keep reformatting the GST in order to make it a less complicated and more effective tax system.

Calculating States’ Participation in a Dividend Pool:

• Population, per capita income, area, and incentive-related variables like forest cover and demographic change are only a few of the indicators that affect which States make up the Center’s divisible pool. Richer States have argued about the per capita income criterion, which is now weighted at 45%. They believe that this criterion, which had previously been given much more weight, should now be given less.
• However, it is imperative to recognise the concerns of States with lower incomes. In the future, these States are anticipated to make a large demographic dividend contribution to India, assuming their healthcare and educational demands are adequately met. To achieve balance, the weight of the distance criterion can be maintained at its current level or slightly decreased to 40%, while nevertheless guaranteeing that resources are transmitted to the poorer States through grants that are adjusted upward.

Equalisation Theory:

By using the equalisation principle, resource transfers to particular States could be streamlined. In order to do this, a small set of criteria—including population, area, and distance—must be used, complemented by appropriate grants. The equalisation principle has been successfully applied in federations like Canada and Australia because it is consistent with both equity and efficiency.

Recommendations:

In 2020–21, the overall debt–GDP ratio of the federal and state governments was 89.8%, which is much higher than the FRBM guidelines of 40% and 20%, respectively. The fiscal deficit for the Centre during that time period increased to 9.2% of GDP, while the States likewise experienced a sizable deficit of 4.1% of GDP. It is crucial to reevaluate the change to the Centre’s FRBM that was suggested by the Fifteenth Finance Commission given these departures from the FRBM rules and the States’ debt-to-GDP target decrease to 20% in the 2018 amendment.

FRBM Act: What is it?

• The Fiscal Responsibility and Budget Management Act, or FRBMA, was passed in 2003 with the intention of fostering fiscal restraint, responsibility, and openness in the administration of India’s finances.
• The Department of Economic Affairs, Ministry of Finance, is responsible for enforcing the Fiscal Responsibility and Budget Management Act of 2003.
• By decreasing the fiscal deficit, the Fiscal Responsibility and Budget Management Act of 2003 ensures long-term macroeconomic stability and intergenerational justice in fiscal management. Additionally, it makes sure that prudent debt management and the successful implementation of monetary policy are consistent with fiscal sustainability.
• Consideration of a target of 28% consistent with an underlying nominal GDP growth of 12% could be investigated in order to allay the worries of the Twelfth Finance Commission. It is clear that the national government will need to make more adjustments than state governments, though. Fiscal restraint is also hampered by the proliferation of subsidies and the reintroduction of the outdated pension system in some States without a clear explanation of funding sources.
• The creation of a lending council, as suggested by the Twelfth Finance Commission, would be a practical solution to these worries. In order to ensure budgetary restraint and prudence, an impartial agency might monitor the sums and types of loans taken by the federal and state governments.
• The Sixteenth Finance Commission should closely investigate non-merit subsidies to assess their justification when dealing with subsidies. However, the commission may find itself in political hot water if specific subsidies were excluded when deciding disbursements. However, the commission must continue to take a tough stance against States that exceed their fiscal deficit caps while providing rewards to those who practise fiscal restraint.

Conclusion:

The effects of COVID-19 and geopolitical dynamics provide substantial financial difficulties for the Sixteenth Finance Commission. Considerations such as cesses, surcharges, and subsidies must be carefully taken into account in order to address the budgetary imbalances between the Centre and States. Both equity and efficiency can be achieved by using the equalisation principle and simplifying resource flows. The panel can provide recommendations that support fiscal responsibility and sustained economic growth for India by reexamining the FRBM standards and taking into account novel ideas like a lending council.