GS-3: Effects of Liberalization on the Economy, Changes in Industrial Policy and their Effects on Industrial Growth

Key phrases- Semiconductor, Chip manufacturing

Why in news-

India is aiming to manufacture silicon semiconductor chips

Analysis:

What is chip manufacturing?

• Semiconductor sits between a conductor and an insulator and is commonly used in the development of electronic chips, computing components, and devices.
• Semiconductor manufacturing is now dominated by Taiwan Semiconductor Manufacturing Company (TSMC) in Taiwan and Samsung Electronics in South Korea.

Why is this important?

• During the pandemic, manufacturing came to a standstill impacting the supply chains of products that need one or more of these.
• Global semiconductor shortage has affected many industries for more than a year and because of that, they are either forced to pay more for products or being asked to wait a little more.
• Consumption of integrated circuits in products is ever increasing and a large manufacturing sector for these kinds of integrated circuits are a part of the supply chain.
• India doesn’t yet manufacture semiconductor chips yet and is entirely dependent on imports. There are about 170 commercial foundries globally but India does not have a single one.

Why India doesn’t have semiconductor manufacturing facility?

• It requires massive capital expenditure to the tune of USD 2 billion and more.
• Foundries are also required to adopt newer technologies and processes almost every 18 months to ensure competitiveness which means high capital depreciation and often accounts for 50-60% of the production cost.
• Domestic players have also shown low interest due to their inability to compete with tech giants in research and development (R&D) and investment.
• Many industry experts also cite the lack of a foundry as contributing to low R&D in this sector in India, which results in poor talent retention and eventually brain drain.
• Chip manufacturers like Intel, TSMC and Samsung choose other countries instead of India citing uncertain domestic demand and poor cost efficiencies here.

What’s the present clamour about domestic chip manufacturing?

• India is aiming to manufacture silicon semiconductor chips. It has intensified efforts to set up a semiconductor fabrication plant with the help of Taiwan, the market leader, for which the government is investing over $7.5 billion.
• The Tata Group is in talks with three States — Tamil Nadu, Telangana and Karnataka — to invest over $300 million to set up a semiconductor manufacturing facility.
• Several techies working in silicon fab and chip-making companies across the globe, notably IIT alumni from Andhra Pradesh, who want to revive the five-year old initiative of bringing the industry to A.P.

Status of electronics industry in India

• Indian electronics sector is tremendously growing with the demand expected to cross USD 400 billion by 2023-24.
• Electronic mobile phones have contributed more to this growth. The consumer electronics and appliance industry in India is expected to become the fifth largest market in the world by 2025.
• A growing middle class, rising disposable incomes, declining prices of electronics and a number of government initiatives have led to a fast-growing market for electronics and hardware products.
• India has share of 1.5 percent in world in total electronics hardware production.

Importance of electronics Industry in India

• Most of this production takes place in the final assembly units (last-mile industries) located in India and focusing on them would help develop deep backward linkages, thus inducing industrialization.
• Economic Survey 2019-20 also promoted this idea and suggested “assembly in India for the world”, especially in “networked products”, in a bid to create four crore well-paid jobs by 2025 and eight crore jobs by 2030.
• Of the country’s total demand for electronics, between 50-60% of the products and 70-80% of the components are imported
• A report by Deloitte Touche Tohmatsu states that expenses on electronics imports could surpass those on oil imports by 2020.
• India’s share in the global electronics market was a minuscule 1.6% of the market in 2015 that is currently valued over $1.75 trillion.
• China with its increasing labour costs will soon not be global hub and it presents a lucrative opportunity for India.

Current challenges

• Despite the impressive growth of electronic production in India, the net value added by production units is very low. The net value addition ranges between 5% and 15%, as most components are imported rather than locally sourced.
• In the era of global supply chains, the value addition at the final stages of production is very low, especially in electronics because the more complicated processes, involving greater value addition, occur prior to assembly, in ‘upstream’ industries. These imports nearly constitute 80% of these components, with approximately 67% of the imports coming from China alone.
• In the absence of foundries (semiconductor fabrication plants where microchips are produced), India has to rely on foreign contractors to produce microchips.
• It is expected that electronics imports will soon overtake crude oil as India’s largest import commodity which will result in assembly units ending up as little more than mere packaging units.
• Low FDI in electronics because of onerous labour laws, delays in land acquisition, uncertain tax regime.
• Positive custom duties on the components (or parts) used in electronic products make it expensive for domestic manufacturers to compete with foreign competitors who can access the components at lower prices.
• Lack of rare earth minerals. China dominates the reserves.

Government Initiatives

• To support the ESDM sector and its development trajectory, the Government of India has made electronics production an important pillar of important initiatives like Make in India, Digital India, and Start-up India.
• Government had first unveiled an Electronics Manufacturing Policy in 2012, which included schemes such as Modified Special Incentive Package Scheme and electronic development fund.
• National Policy on Electronics will strive to increase the competitiveness of the electronics manufacturing industry; innovation, R&D and start-ups.
• 100% Foreign Direct Investment (FDI) under the automatic route in the ESDM sector.
• Production-linked incentive schemes, plans to promote manufacturing of electronic components, and semiconductor and modified electronics manufacturing cluster schemes.
• Tamil Nadu government unveiled the Electronics and Hardware Manufacturing Policy, which targets the US $ 100 billion in production by 2025 and 25% of India's total electronic exports by 2025.

Way ahead

• Total outlay of Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS) must be increased from the current Rs. 3300 crores, to attract the microchip giants.
• Profiting from Anti-Chinese Sentiments: Due to the USA’s allegations on China for worsening Covid-19 and India-China conflict and recent developments as a result of it, numerous multinational companies (MNCs) are shifting their production out of China.
• There is a need to promote semiconductor manufacturing alongside assembly units in India. This will induce greater local production of components and also fuel the growth of the industry as a whole, making Make in India successful.
• Significant reforms inn labour and land laws are required
• Anomalies which discourage domestic manufacturing on account of inverted duty structure need to be rectified.
• If the Intellectual Property lies with the foreign entity, we end up manufacturing the basic material which does not serve the purpose. Rather, we need an ecosystem to promote SoCs (System on a Chip).

Source: The Hindu