In the recently published book, ‘When The Chips Are Down’, authors Pranay Kotasthane and Abhiram Manchi identify three major challenges that India has to overcome in its $10 billion semiconductor programme
It’s almost exactly two years since India announced its ambitious $10 billion incentive programme to develop a semiconductor manufacturing ecosystem. So far, US-based chipmaker Micron’s $2.75 billion assembly and testing facility in Gujarat—expected to create 5,000 jobs—is the biggest achievement of the programme. After having missed out on the semiconductor ecosystem for over five decades, the Centre is hopeful that the Micron deal will finally get the country’s chip industry going.
But even there, critics point out that government subsidies foot 70 per cent of the overall bill, meaning the Centre and state government will together pay Rs 3.2 crore per every job created. So, what can the government do beyond subsidies to make up for the historic error of not having facilitated a domestic chip industry?
In a recently published book When The Chips Are Down: A Deep Dive Into A Global Crisis, authors Pranay Kotasthane and Abhiram Manchi identify three major hindrances that prevented chipmaking from taking root in India—uncertain tax and policy environment, poor infrastructure and high trade barriers. In an exclusive interaction with Outlook Business, the authors detail how India can go beyond subsidies and solve structural issues that will help the country claim a substantial stake in the global chip value chain. Edited excerpts:
Do you see India’s present semiconductor policy addressing the three crucial hindrances that are highlighted in your book?
The semiconductor policy doesn't address these issues directly as they are outside the domain of the electronics and IT ministry. The government hopes to take the tax, trade, and policy problems out of the equation by offering upfront incentives for capital investment. However, structural issues matter greatly since investments in this industry have long gestation periods.
Considering policies beyond the semiconductor policy, the government has done relatively better on tax and infrastructure policies. The GST is an important reform. The reduction in corporate tax rates in 2019 was also a positive move. The investment in building new infrastructure also deserves praise.
But one aspect where the government has fallen short is its trade policies. Increasing import tariffs, non-participation in the Information Technology Agreement Extension (ITA-2), and not joining any recent multilateral trade pacts negatively impact investor sentiment in this sector. For example, high import tariffs are a major reason Taiwanese companies haven't shown interest in the assembly and fab stages yet (fab = chip fabrication plants). The recent restrictions on laptop imports are another example of poor trade policy thinking.
Many recent fab proposals in India fell through due to failure to get licensing deals from global chip majors. Is the present protectionist stance adopted by US and European nations making it difficult for India’s fab proposals to achieve technology transfer?
India is a sweet spot from a geopolitical perspective. We will likely see selective international cooperation on semiconductors subject to geopolitical considerations. The semiconductor ecosystem is transnational; it relies on comparative advantages to accelerate innovation. To get ahead of each other, high-technology powers such as the US will likely transfer technologies to their respective partners, provided these strengths are complementary. Such cooperation was recently seen in the AUKUS deal and the iCET announcement on GE jet engines.
Similarly, the first major firm to announce the setting up of an assembly and testing facility in India is Micron, an American firm. Provided that India is seen as a trusted partner, the technology transfer will become much easier than it was in the past. Overall, plurilateral cooperation on semiconductors is a necessity, not a choice.
India has already faced trouble at the WTO for its high import tariffs on IT products. How important is the lowering of import tariffs for India to woo foreign chip companies to set shop in the country?
It is supremely important to harmonise our trade policies. People don't realise that chips are Taiwan's biggest import category by value, even though its biggest export is chips.
The think tank ICRIER released a report with MeitY last year, arguing that India must first globalise and only then localise if it aspires to be a global production and export hub for electronics. And yet, the revealed preference of the government is in favour of protectionism.
We know through news reports that Taiwanese officials have repeatedly asked their Indian counterparts for tariff reductions on products used to make semiconductors. It makes sense because chip assembly and manufacturing would require a lot of imports. Taiwan had also filed a case against India for violating the agreement on tariff reductions in WTO.
High import tariffs also discourage Indian chip design firms. Many domestic design firms are not allowed to import second-hand tools due to anti-dumping policies. Some companies find that imports are stuck at customs for long periods. Such policies place an extra burden on startups.
When it comes to design-linked incentives, the government has mooted the idea of including larger foreign companies in addition to domestic start-ups. How exactly can this help create intellectual property rights (IPR) in India?
At this stage, the DLI scheme has met with a muted response. As of July 2023, only seven firms have been selected, while the stated policy goal is to foster a hundred of them. Given this reality, it is a good policy to decouple ownership norms and domestic IP creation at this stage. India's venture capital ecosystem for semiconductors is underdeveloped, and naturally, most companies will raise capital from outside the country. Instead of turning such companies away, the government could support Indian entities of all design firms doing substantial design work in India.
This move will help create local IP indirectly. Once there are many engineers and researchers with rich experience in building products in these design houses, some will create new companies with fully Indian-owned intellectual property. Something similar happened in the case of software.
The run-up to Micron’s investment in India saw PM Modi and Union Minister Vaishnaw visit the US and meet leading figures in the Silicon Valley. How critical is it for India to maintain amiable relations with the US to get ahead in the global semiconductor value chain?
It is in India's national interest to be on good terms with the US from a technological perspective. The US is a key player in the supply chain. Every country that has built a local semiconductor industry began with some technology transfer from the US. The country dominates specific nodes such as chip design and Engineering Design Automation (EDA) software, without which it becomes difficult to produce a chip.
There are also examples of the US applying export controls on Chinese and Russian semiconductor industries. India's semiconductor design talent development also hinges largely on the design houses set up by US companies.
On the other hand, India is also important to the US since it offers a low-cost alternative to China and Taiwan for design and assembly. Moreover, as the fastest-growing largest economy in the world, US companies now have an added incentive to invest in India.
History shows that the repatriation of top executives from US-based chip companies yielded great returns for some Asian countries. Do you think inclusion of such figures in India’s chip policymaking body will bring about similar effects?
The advisory committee for Semicon India already includes many renowned people of Indian origin. But the key success factor is when returnee engineers come back to set up companies. Such examples can be seen in East Asian countries as well. TSMC’s founder, Morris Chang, also worked in the US and returned to help set up the company. The same is the case with Zhang Rujing, who went on to set up China's national semiconductor manufacturing champion, SMIC.
India has already witnessed this phenomenon in software. However, the decision for anyone to move countries is multi-causal. Factors such as air quality, future economic growth perceptions, and living standards matter. There is no quick-fix solution.