Keeping focus on Make in India and sunrise manufacturing sectors like semiconductors crucial for new coalition government

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Prime Minister Narendra Modi may be set for a historic third term, only this time around, he has to reckon with a new reality—of a coalition government, with partners known to extract their pounds of flesh. That may not impact the direction of economic reform, and policy making and execution, but the billion-dollar question is whether the tempo of a few big-bang government initiatives will be impacted.

How, for instance, will Make in India and the financial incentives that come with initiatives in terms of production-linked incentives to manufacture, expand and export play out in the new dispensation?

Hours after the dust had virtually settled on the final electoral picture on June 4, the prime minister appeared undeterred by the narrower-than-expected victory, and reiterated that the focus will continue to be on sunrise manufacturing sectors and making India self-reliant. “We have made India the second-largest mobile manufacturing country. Now we will accelerate the progress in electronics, semiconductors, and the new and upcoming sectors,” he said in a speech at the BJP headquarters in New Delhi after the results on Tuesday.

Analysts at Bernstein predict the NDA will form the government, but add that in an extreme scenario, such as if the opposition wrests the alliance's key allies, their investment approach to India would change materially. “The government’s policy of pushing manufacturing and construction is the right approach, but it will take several years to succeed.”

With the government aiming to rise two ranks up and become the third-largest economy, it will be crucial to increase the current 13 percent share of manufacturing, which has remained consistent in the past years. It will also be important to keep global investments flowing in to boost growth in the burgeoning semiconductor sector.

Things look well on track. In March, the government approved an allocation of $15.2 billion to build three new semiconductor plants, including the first fab facility being set up by the Tata group and Taiwan’s Power Chip. The fab under construction in Gujarat’s Dholera will reportedly have a capacity to produce 50,000 wafers per month, and it aims to manufacture 3 billion chips annually for market segments like electric vehicles, high-power computers, telecom, and more.

The other two facilities for semiconductor assembly, testing, marking and packaging (ATMP) are under construction in Assam’s Morigaon by Tatas and the second by CG Power in Gujarat’s Sanand.

In 2021, the government launched the India Semiconductor Mission (ISM) with an outlay of $10 billion for chip manufacturing, packaging, and design units. The scheme offers fiscal support of up to 50 percent of the project cost on an equal footing with the approved applicants. US chipmaker Micron was the first to receive approval in 2023 to build a chip assembly and test facility in Gujarat. The company announced a total investment of $2.75 billion and commenced the construction of the factory in September.

Semiconductors are key to societal growth and economic prosperity for every citizen in the world. They should become a non-political agenda. The opposition parties should also view this as a national campaign to make India a semiconductor nation, explains Ajit Manocha, president and CEO of the global microelectronics association SEMI. “Semiconductors are foundational for every industry in the world. So, driving the chip industry will actually help all industries grow.”

The industry looks forward to the same support from the government coupled with more enabling policies, as they have been astutely curated and implemented in the present context, says Anurag Awasthi, vice president of the India Electronics and Semiconductor Association (IESA). “We further expect value creation in component manufacturing with a primary ‘product-centric’ focus on electronics. Fresh approvals with a renewed budgetary envelope for semiconductor fabrication and ATMPs with diverse technologies.”

Chips have become as essential as oil reserves, which have defined geopolitics for the past many decades. Covid-19 and the global semiconductor shortage have prompted companies and the Indian government to ramp up domestic manufacturing and preserve the supply of chips. India is currently dependent on other countries for its semiconductor requirements. The chip imports surged from Rs67,497 crore in 2020-21 to Rs129,703 crore in 2022-23.

As per the latest Nasscom-Zinnov report, around 30 percent of the new global capability centres (GCCs) set up in India during the December quarter last year were in the semiconductor space, flashing a growing interest in leveraging the local talent pool in areas across front-end design, performance testing, and post-silicon validation.

Diversifying the chip supply chain has become more important than ever. Currently, most of the world’s chips are designed in the US and manufactured in Asia. The advanced chips, which are currently in high demand, are only produced in Taiwan and South Korea, of which 90 percent come from Taiwan Semiconductor Manufacturing Company (TSMC). National security concerns and the fear of missing out on having the world's best chips have prompted countries, including the US and China, to bolster domestic chip production.

For instance, in the last week of May, China raised about $48 billion in its third installment of a national semiconductor fund, aiming to increase its chip-making capabilities to tackle the escalating technology competition with the US. The Chinese government is spending roughly as much money as the rest of the world combined each year on subsidising its chip industry. Since 2014, the country has spent tens of billions of dollars a year trying to build its own domestic supply chain, and it's still a long way away from being able to do that. China produces around 25 percent of the chips it uses domestically and imports the rest.

The first two funds focussed on investing in equipment and materials-related chip industry companies. The latest fund is established in the middle of the generative AI (artificial intelligence) boom, which will focus on advanced computing chips and memory chips for the future AI economy, explains Winston Ma, adjunct professor at NYU School of Law. “China is also looking for more global cooperation wherever they can because you need a global ecosystem to develop the chip industry.”

China differentiates itself towards the end of the semiconductor supply chain. It has one of the strongest assembly and test industries as well as one of the most dynamic end markets, for example, the EV segment, explains Eric Bouche, semiconductor consultant and founder of Silicon Valley Research Initiative. “With semiconductor investments in China from western companies having stopped, India is definitely one of the new destinations for the capital. India has a number of differentiators, like a large engineering population and know-how in fabless microchip design.”

The idea is not to be an alternative to China, reiterates Awasthi of IESA. The strategic thought is to combine the aspects of the availability of a large skilled pool of professionals, the existing demographic dividend, and the capability of taking risks. “Now that large entities in semiconductors are factoring in India as a preferred destination, using a combination of guardrails and rewards for high-value tech production could be the key.”