What India can learn from Trump’s Intel playbook

According to Intel, the US government’s equity purchase will be funded by converting $5.7 billion of $7.9 billion of grants awarded to the company under the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act into equity.

Another $3.2 billion pledged to Intel as part of the US’s ‘Secure Enclave’ programme, which is aimed at ensuring a protected source of supply of microelectronics for US defence and strategic requirements, will also be converted into common Intel stock. The agreement includes a five-year option for the government to buy another 5% if Intel loses control of its foundry unit.

This marks a profound shift from the US’s previous largely laissez-faire economic model and towards more direct intervention in industry, driven by strategic as much as economic considerations.

If the covid pandemic exposed supply chain fragilities, China’s rising challenge to US hegemony as well as its rapid strides in advanced dual-use technologies like advanced semiconductors and artificial intelligence have presumably driven this shift.

Historically, state intervention in business, in the US as elsewhere, has usually taken the form of financial incentives such as tax breaks, grants, and subsidies. India has been using these as its principal weapons in driving its ‘Make in India’ programme.

Government taking direct equity in private enterprise to bail out a struggling business is also not unknown. India recently converted outstanding dues into equity in Vodafone Idea Ltd, for instance. But the US government’s Intel stake acquisition marks a new model—of becoming an equity partner in businesses that hold critical strategic importance.

As a shareholder (in the Intel case, without voting rights, though), the government hopes to more directly nudge corporate strategy into alignment with national strategic imperatives. Which means, while the earlier Intel would have eyed China as its largest market, the new Intel, with the US government perched on its shoulder, will not.

A share of the action

US President Donald Trump has already signalled that Intel is the start of a new engagement with private sector enterprise. “We should get an equity stake for our money," US commerce secretary Howard Lutnick told CNBC. “We’ll deliver the money, which was already committed under the Biden administration. We’ll get equity in return for it."

Politically, Trump has positioned the Intel stake acquisition as a shift away from former US President Joe Biden’s era of “giveaways". In fact, the US government made a paper profit on the deal since the equity conversion was done at below market price.

Trump has sold this as taxpayers getting a “share of the action" and a more direct return for their money than simply bailing out a struggling business for largely unquantifiable benefits like preservation of jobs or keeping manufacturing within US shores, a key pillar of the MAGA or ‘Make America Great Again’ doctrine.

India’s industrial policy has shifted from state-directed development through licences and controls to subsidies and incentives. The production-linked incentive scheme is a prime example of this.

But while the PLI scheme has been successful in many areas, notably in mobile phone manufacturing, the return to taxpayers is not as easily measurable. Low value addition and the glacial development of a components ecosystem remain challenges.

Also, the PLI approach, requiring high investment thresholds and stiff output milestones, doesn’t help sectors like textiles or specialty steel, where the market is fragmented. India’s large base of micro, small, and medium enterprises (MSMEs), which accounts for a significant share of the manufacturing output and a majority of the jobs, has missed out.

Trump’s playbook

While PLI might help equipment manufacturers shift more manufacturing into India, it does not in itself serve as an adequate incentive for private enterprise to invest sufficiently in cutting edge but high-risk, long-term research and development.

For that, the industry requires long-term patient capital—investors willing to wait for the eventual payday. Governments can, particularly in areas of long-term strategic and economic importance.

Renewable energy, semiconductors, and pharmaceuticals are sectors where long-term leadership is only achievable through developing intellectual property. China has achieved this through massive state funding and subsidies. India does not quite have the economic headroom to do this.

Instead, India can, and should, take a leaf out of Trump’s playbook. By investing in strategically important sectors and key players as an equity partner, while leaving the day-to-day business strategy in the hands of company managements, the government can achieve both strategic and, potentially, financial goals.

Of course, there are many challenges, particularly in separating government as regulator from government as investor There is also a potential for market distortion—by picking one over the many, the government can end up creating an uneven playing field.

But these can be overcome by creating a transparent set of rules, clearly defining objectives and roles, and ensuring against regulatory capture by the favoured few.