Chips for growth

Creating a base for semiconductors will be challenging

India’s attempt to enter the global semiconductor market with a government commitment of $10 billion is well-timed. But the policy decision must be followed up with a lot of work on the ground. The last three years have seen the value chain for chips drastically disrupted, first by the pandemic, and then by the Ukraine War, which affected the supply of neon, a gas that’s key for the semiconductor manufacturing process. India is not the only country attempting to plug this gap in the supply chain; the US has just implemented the Chips and Science Act, committing $52 billion in federal support to American chip-makers; and the EU is in the final stages of working out similar legislation.

India has some major advantages in entering this space. It also has several challenges to meet if it is to make this foray successful. First, India has a strong background and plenty of skills and experience in chip design. Second, it has a large domestic market, which is slated to grow faster after the launch of 5G telecom services, since that will enable high-speed internet and support a big expansion in enterprise and consumer–related applications such as IoT, thus creating new demand for chips. Plus, India has a large automobile industry, which has suffered from chip shortages. Domestic semiconductor production could also provide a boost to the burgeoning aerospace and defence sectors and enable local mobile handset manufacturing to move up the value chain. The large market and the design strengths have already been enough to generate early interest with some semiconductor majors reportedly looking to tie up with domestic business groups.

Some of the issues and challenges are generic, while others are specific to the semiconductor industry. Groups looking to locate major operations of any description in India have frequently expressed frustration about ambiguous and unclear policy drafts. The policy fine print must have great clarity to give comfort to potential investors. Further, there have been endemic delays in land acquisition for all sorts of projects, and also in environmental and other statutory clearances. Again, it’s up to policymakers to accelerate these processes and make them as transparent as possible. This is especially true since India will be competing against the US and the EU, which are wooing the same set of global majors. The semiconductor manufacturing industry requires massive scale to make it economically sustainable—it is a highly concentrated industry with only about 15 companies possessing the skills and scale to be significant global players. The policy commitment of $10 billion and assurances of support may not be enough as setting up these plants is fairly expensive.

The other challenges arise from infrastructure lacunae that could retard production. Chip manufacturers require massive amounts of absolutely pure water, and rock-steady, totally reliable power supply. India is water-deficient, and the water quality is poor in most places. Any semiconductor foundry will need captive power generation capacity, which is not a problem, and large-scale in-house water purification systems, which may be a criterion that narrows down choice of possible locations. Policymakers will have to take note of these issues and challenges and tackle them head-on to create a sound base for domestic semiconductor manufacturing.