Date: 13/03/2023

Relevance: GS-3: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development, and Employment;

Key Phrases: India-US Bilateral Commercial Dialogue 2023, India-US Pact On Semiconductor Supply Chain and Innovation Partnership, US’s CHIPS and Science Act, India’s Semiconductor Mission

Why in News?

• The India-US pact on semiconductor supply chain and innovation partnership was signed during the India-US bilateral Commercial Dialogue 2023.
• The pact will increase India’s role in the electronics supply chain and the two sides have started acting on it.

Key Highlights About The Pact:

• The MoU on semiconductors, signed under the framework of India-US Commercial Dialogue, has come at a time when the US is seeking to move away from China, in the areas of critical technologies, and also reduce its dependence on Taiwan for advanced semiconductors.
• The India-US MoU seeks to establish a collaborative mechanism between the two governments on semiconductor supply chain resiliency and diversification because of the US’s CHIPS and Science Act, and India’s Semiconductor Mission. Both programs provide incentives for the production of semiconductors.
• The MoU aims to leverage complementary strengths and facilitate commercial opportunities and the development of semiconductor innovation ecosystems through discussions on various aspects of the semiconductor value chain.

Global Semiconductor Foundry Market:

• The global semiconductor foundry market size was valued at $101.6 billion in 2022 and is projected to reach $182.9 billion by 2030.
• Taiwanese companies, led by TSMC, account for over 60 percent of the market share of the global foundry market (factories contracted to make chips designed in other countries). China accounts for 8.5 percent of the global foundry market.

Major Initiatives During The India-Us Bilateral Commercial Dialogue 2023:

• Both sides announced the launch of a new Working Group on Talent, Innovation and Inclusive Growth under the Commercial Dialogue to further the cooperation on start-ups, SMEs, skill development, and entrepreneurship including in digital and emergent technologies.
• The countries also re-launched the ‘Travel and Tourism’ Working Group to continue the progress from before the pandemic and to also address new challenges.
• A Standards and Conformance Co-operation Program (Phase III) was also launched which would be carried out in partnership between the American National Standard Institute and the BIS to further cooperation in standards.

Need For A Resilient Semiconductor Chain:

• A sudden surge in demand for microcontrollers, AI processors, and new generation baseband chips, sensors, and memory chips has forced policymakers to revisit policies for developing an ecosystem for in-house manufacturing and supply chains of semiconductor chips.
• Semiconductors are critical technological components for emerging technologies viz. artificial intelligence (AI) and internet of things (IoT) applications, 5G communications, cloud computing, automation, and electric vehicles, with a wide coverage of applications from basic consumable electronic gadgets and automobiles to areas of strategic operations.
• Of late, disruptions in its supply chains have reportedly affected over 169 industries and businesses the world over.
• The possibilities of using it as a geopolitical tool can’t be ruled out in times to come.
• This, being a huge capital-intensive business concentrated in a handful of producing nations, mostly located in East Asia, competitive politics could lead to nations denying access to the semiconductor supply chain.
• As the ICs business accounts for more than 80 percent of the total economic value of the semiconductor market, it is high time India takes steps to create an ecosystem for attaining self-reliance.

Issues With The Semiconductor Value Chain:

• A typical semiconductor value chain includes strong research and development followed by design, production, assembly, testing and distribution, and logistics network.
• Despite several claims of India being a strong candidate for the fabless design market, several supply-side constraints such as inadequate availability of ultra-pure and clean water and clean sand used for growing wafers, uninterrupted quality electricity supplies, controlled pollution-free environment, etc., inhibit its local manufacturing.
• It needs access to lots of water. Not just any water, but millions of liters of ultra-pure water.
• In fact, even a basic fabrication unit is known to consume more than 20 million liters of water per day and sourcing this water has turned out to be China’s Achilles heel in scaling production. Even Taiwan has had trouble with this thing for a while now.
• Inadequate logistics and the absence of proper waste disposal have further exacerbated the poor state of its production.
• Besides, heavy investments into establishing and equipping production lines both in terms of capital and gestation period do not encourage private players to venture into it.

Status In India:

• The current policy in India focuses on providing incentives for the manufacturing of semiconductor components, display panels, and specialized components, rather than utilizing the country's talented software and hardware designers.
• Subsidies of 30-50% of the total project cost are offered to companies proposing projects within the first three schemes, while subsidies for fabless companies are capped at ₹15-30 crore per company.
• These large investments may not be enough for advanced semiconductor fabs, and the fabless design industry, which has greater potential, is being overlooked.
• Additionally, some components of the proposed incentive package may not be as important and there may not be enough value in incentivizing packaging and testing companies.

Conclusion:

• The bilateral goods and services trade has almost doubled since 2014, exceeding $191 billion in 2022, signaling accelerated growth benefitting both countries.
• With the US becoming India’s largest trading partner in 2022, both sides will take further steps to enhance their commercial collaboration and tap into market potential across multiple sectors.

Source: The Hindu

Mains Question:

Q. Discuss the various challenges faced by the semiconductor industry in India. Suggest measures for ensuring semiconductor supply chain resiliency and diversification. (250 words).