$10 Billion Bet: Can India Move Beyond Subsidies In Global Chip Game?

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. 

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. 

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. 

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. 

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. 

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.