India gains semiconductor momentum but the policy mix can be even better

To sustain the momentum, India’s domestic policies must complement its foreign policy efforts to fully leverage the benefits of the current geopolitical shift.

On February 29, the Indian government approved three semiconductor units worth Rs 1.26 lakh crore including a fabrication plant by Tata Electronics Private Limited (TEPL) in partnership with Taiwan’s Powerchip Semiconductor Manufacturing Corporation (PSMC) in Dholera. The other two units include Assembly Testing Marking & Packaging (ATMP) plants to be set up by Tata Semiconductor Assembly and Test Private Limited (TSAT) in Morigaon and CG Powers in Sanand.

The Cabinet’s clearance of the three projects demonstrates its commitment to integration into the semiconductor Global Value Chain (GVC). The hitherto hesitant private sector has also exhibited the resolve to venture into an unfamiliar manufacturing segment that hasn't historically been India’s forte. Together with the US-headquartered Micron’s ATMP unit in Gujarat, these announcements herald a new era in India's semiconductor strategy.

India As A Preferable Alternative

This development is a culmination of geopolitical and geoeconomic consequences. China’s significant presence in the fabrication of mature nodes and the ATMP segment of the semiconductor supply chain amidst the ongoing US-China tech war and the pandemic-induced supply chain disruptions in 2020-21 has propelled the world to seek diversification.

With ‘China+1’ at the core of this de-risking strategy, India has emerged as one of the preferable alternatives. Initial success in attracting dominant players in the electronics and semiconductors GVC will likely trigger a "herd mentality" process, where others also favourably evaluate the country to expand their operation.

But geopolitics can take us only so far. To sustain this momentum further, India’s domestic policies must complement its foreign policy efforts to fully leverage the benefits of the current geopolitical shift.

To begin with, India has to compete with well-established semiconductor hubs such as Malaysia, Vietnam and Thailand. In ‘Ease of Doing Business’ rankings, last released in 2020, India fared marginally better than Vietnam at 72 but did significantly worse than Malaysia (12) and Thailand (21).

Revising Trade Policies

Industrial policy alone is insufficient to foster a thriving semiconductor industry. Effective trade policies are equally crucial. The current protectionist stance, characterised by increasing tariffs, contradicts the aims of the semiconductor industry's integration into GVCs. Ad hoc tariff structures and a non-committal stance on plurilateral trade agreements, such as the International Technology Agreement (ITA-1), will impede the seamless flow of materials and technologies essential for semiconductor manufacturing. Competitive imports will support this nascent industry as they build downstream linkages and develop an ecosystem for components, materials, and services over time.

Policy and regulatory certainty are the linchpin for attracting investment. Predictable and transparent policy is supremely important for an immensely capital-intensive industry where upfront investments will only begin to see returns after three or four years when the first chips begin to roll out. Measures such as last year’s abrupt notification and subsequent withdrawal of import restrictions on laptops or India’s refusal to honour its zero-tariff commitments under the ITA-1 severely undermine this crucial factor.

Labour regulations present another area for refinement, particularly considering the unique operational requirements of semiconductor manufacturing, such as long shifts in clean rooms. Targeted adjustments to labour regulations could facilitate the operational needs of fabrication foundries, potentially avoiding future stalemates and delays on this ground with international partners like TSMC currently faces in the US.

Finally, India must also double down on its comparative advantage in chip design. India already plays host to top fabless semiconductor design firms such as Intel and Qualcomm, of which Indian engineers are an indispensable part. Enhancing capabilities in chip design will help establish strong forward linkages to the up-and-coming fabrication and assembly stage.

Better Incentive Schemes 

The semiconductor design-linked incentive (DLI) scheme is a far cry from achieving the same level of success as other prongs of the Indian Semiconductor Mission due to stringent ownership conditions and insufficient support compared to the needs of semiconductor design startups.

Two years since its introduction, the DLI scheme has only approved a handful of design startups, woefully short of the pace required to achieve its stated target of supporting 100 startups over five years. To effectively leverage India's chip design talent, a significant overhaul of the DLI scheme is required, focusing on more startup-friendly intellectual property rights and investment guidelines.

Of course, the government’s keen interest in these big projects will help large fab and ATMP projects overcome initial regulatory and bureaucratic challenges. Still, the same benefit might not be available to auxiliary industries involved in the upstream value chain. This could drag the progress.

Thus, a comprehensive view of the factors needed to generate the linkages between these stages must be a priority for the government rather than seeking to make it easier on a case-to-case basis.

Amit Kumar is a Research Analyst with the Takshashila Institution's Indo-Pacific Studies Programme. Satya Sahu is a Research Analyst with the Takshashila Institution's High Tech Geopolitics Programme.  Views are personal, and do not represent the stand of this publication.