Ex- Bureaucrat EAS Sarma Seeks CAG Audit Into Subsidy Pledge to Micron During PM’s US Visit

New Delhi: Former top bureaucrat, EAS Sarma, has expressed grave concern over the government’s “prudence and propriety” of giving subsidies to “profit-earning private companies in the name of attracting investment for boosting production in certain specific manufacturing sectors.” He has sought a special audit of the scheme under which the subsidy to the US firm has been committed.

With reference to Prime Minister Narendra Modi’s recent visit to the US, Sarma has written a letter to Comptroller and Auditor General (CAG), drawing attention to the

Ministry of Electronics & Information Technology (MEITY), during PM Modi’s trip to the US, committing a a “vast subsidy incentive to a US semiconductor company, called Micron under a scheme similar to the production-linked incentive (PLI) scheme, known as, the “Modified scheme for setting up of Compound Semiconductors / Silicon Photonics / Sensors Fab/Discrete Semiconductors Fab and Semiconductor Assembly, Testing, Marking and Packaging (ATMP)/ Outsourced Semiconductor Assembly and Test (OSAT) facilities in India.

“I request the CAG to conduct a special audit of the two schemes and place its findings before Parliament, wrote Sarma.

According to the letter, “The scheme envisages subsidy to the extent of 50% of the project cost, to be released in proportion to the step up in the level of production, with no other goal specified”.

However, only up to 2.5% of the outlay of the scheme shall be earmarked for The Research and Development (R&D) component of the venture. A very small proportion of the subsidy is to be earmarked.

“The subsidy can be released to Micron, for example, even if it fails to generate employment as per phased targets”. Sarma writes. “There is no precondition with reference to domestic value addition”, he points out.

Raising concerns, the former secretary to the Union government, writes, “Why should scarce budgetary resources be diverted from critical sectors such as food security, rural employment, poverty alleviation schemes, health, education, and social empowerment to subsidise a profit-earning US company for no tangible societal benefits?”

“I request the CAG to conduct a special audit of the two schemes and place its findings before the Parliament”.

Read the full letter here:

To

Shri G C Murmu
Comptroller & Auditor General of India (CAG)

Dear Shri Murmu,

I had earlier addressed you vide my letter dated 2-6-2023  questioning the prudence and propriety of the government giving subsidies to profit-earning private companies in the name of attracting investment for boosting production in certain specific manufacturing sectors. I pointed out in my letter that the government has not evaluated the efficacy of subsidies as a policy instrument, compared to alternative policy options such as streamlined, transparent procedures for approval of projects, tax incentives etc.

More recently, during the Prime Minister’s visit to the US, the Ministry of Electronics & Information Technology (MEITY) seems to have committed a huge subsidy incentive to a US semiconductor company, Micron under a scheme similar to the Production-Linked Incentive (PLI) scheme, known as, the “Modified scheme for setting up of Compound Semiconductors / Silicon Photonics / Sensors Fab/Discrete Semiconductors Fab and Semiconductor Assembly, Testing, Marking and Packaging (ATMP)/ Outsourced Semiconductor Assembly and Test (OSAT) facilities in India“.

The above-cited scheme, notified by MEITY vide communication No.F. W-38/21/2022-IPHW dated 1. 4-10-2022, states its objective as follows:

“To attract investments for setting up Compound Semiconductors / Silicon Photonics (SiPh) /Sensors (including MEMS) Fabs/ Discrete Semiconductors Fabs and Semiconductor ATMP /OSAT facilities in the country to strengthen the electronics manufacturing ecosystem and help establish a trusted electronics value chain in the areas of application of these fabrication and packaging technologies“

The scheme envisages subsidy to the extent of 50% of the project cost, to be released in proportion to the step up in the level of production, with no other goal specified.

On R&D, the scheme envisages a very small proportion of the subsidy to be earmarked as follows:

“Up to 2.5% of the outlay of the scheme shall be earmarked for meeting the R&D, skill development and training requirements for the development of Compound Semiconductors / Silicon Photonics / Sensors Fab / Discrete Semiconductors Fab and ATMP ecosystem in India“

No other pre-condition has been set by the government for releasing subsidy to the beneficiary company, Micron.

The subsidy can be released to Micron, for example, even if it fails to generate employment as per phased targets. There is no precondition w.r.t domestic value addition. While a small proportion of the subsidy will be allocated for R&D development, there is no condition that a certain proportion of the profits of Micron be allocated for indigenous R&D and technology development, as is the case with the norm set by the Department of Public Enterprises in the case of the CPSEs vide 3(9)/2010-DPE(MOU) DATED 23-9-2012

The 50% subsidy provided to Micron under the above scheme works out to Rs 11,000 Crores for a total project cost of $2.7 billion. It is additional to the subsidies to be provided by the Gujarat government to the extent of 20% of the project cost! In other words, with no specific return benefits from the company to the economy, except setting up a chip testing facility in Gujarat, 70% of its project cost is to be borne by the Indian taxpayer, which represents nothing but crony capitalism.

At a time when the government is selling away its CPSEs to private companies, it is ironic that it should resort to subsidising private companies!

Why should scarce budgetary resources be diverted from critical sectors such as food security, rural employment, poverty alleviation schemes, health, education, and social empowerment to subsidise a profit-earning US company for no tangible societal benefits?

The project is not for fabricating state-of-art chips but for testing chips. Even if there may be some R&D involved in the project, Micron will have intellectual property rights over it, not accessible for indigenous technology development.

The CAG may also take note of the fact that the government, on the eve of the Gujarat Assembly elections last year, similarly took an emergent decision to modify the then existing scheme to provide subsidy for Semiconductors and Display Fab Ecosystem to enhance subsidy to 50% of the project cost, as soon as the Vedanta-Foxconn consortium announced that it would set up a semiconductor fabrication unit in Gujarat. The subsidy in the case of that project would be as high as Rs 75,000 Crores. In other words, in the name of the Vedanta-Foxconn and Micron projects, Central subsidies to the extent of Rs 86,000 Crores will flow into Gujarat under Article 282 of the Constitution, outside the ambit of fund devolution as per the Finance Commission’s rule-based allocation to the States. This, in my view, runs counter to the spirit of federalism, benefitting one State at the expense of the others.

Both the Micron and the Vedanta-Foxconn projects, involving huge subsidies to foreign-listed private companies to be located in one State, raise serious concerns about the prudence and propriety underlying the relevant schemes, a matter that should be placed before the Parliament for discussion. From that point of view, I request the CAG to conduct a special audit of the two schemes and place its findings before the Parliament.

Regards,

Yours sincerely,

E A S Sarma
Former Secretary to the Govt of India
Visakhapatnam