Chip off the block

General Studies Paper 3

Context: As incentives for semiconductors sputter, course corrections are due

Introduction

• As funds for production-linked incentives (PLI) for manufacturing semiconductors lie under-utilised by upwards of 80%, the Union government must be far clearer on what it has achieved — and aims to accomplish — by continuing to spend crores of rupees on bringing more semiconductor fabrication capabilities to India.

Semiconductor chips

• These are the materials which have a conductivity between conductors and insulators. They can be pure elements, silicon or germanium or compounds, gallium, arsenide or cadmium selenide.
• They are essential to almost all sectors of the economy including aerospace, automobiles, communications, clean energy, information technology and medical devices etc.
• These chips are the basic building blocks that serve as the heart and brain of all modern electronics and information and communications technology products.
• India has become the hub for semiconductor design with nearly 2,000 chips being designed per year and more than 20, 000 engineers working in various aspects of chip design and verification.

India’s semiconductor mission

• India Semiconductor Mission (ISM) has been setup as an Independent Business Division within Digital India Corporation.
• ISM has all the administrative and financial powers and is tasked with the responsibility of catalysing the India Semiconductor ecosystem in manufacturing, packaging and design.
• ISM has an advisory board consisting of some of the leading global experts in the field of semiconductors.
• ISM is serving as the nodal agency for efficient, coherent and smooth implementation of the programme for development of semiconductor and manufacturing ecosystem in India.

Existing schemes and domestic implications

• While the PLI scheme for IT hardware has a ₹17,000 crore outlay, the one for semiconductors and displays has ₹38,601 crore earmarked. On the employment and substantive value addition fronts, existing schemes in and of themselves show little promise: while chips are important for most hardware and appliances, making them employs advanced and automated systems, and manufacturing facilities employ few people for the value generated in sales.
• Not all big-ticket spending in the national interest translates into domestic employment, as import-heavy defence spending shows. But the central wager with these schemes, at much cost to the exchequer, lies in attracting an “ecosystem” that will increase the value addition of India’s electronics manufacturing sector.
• This is far from a guaranteed outcome, even if PLI benefits are availed optimally. The wager also relies on global manufacturing giants giving other benefits of a globally distributed supply chain a go-by, including cheap and accessible international transport facilities for chips.

Need of other incentives

• The constellation of PLI schemes must be bolstered by other efforts to strengthen India’s hand — encouraging semiconductor design talent to develop domestically. Some efforts here, such as the design-linked incentive scheme, show promise.
• But the bulk of the capital remains focused on the assembly and subsidising of large manufacturing plants, with much of the raw and even intermediate material still being imported.
• And with the limited scope of what the PLI funds are incentivising, multinational chipmakers are staying away from making substantive commitments, despite incentives. Private capital is also in a state of flux, with advancements in chips and emerging technologies such as artificial intelligence leaving policymakers guessing on how best to allocate resources to boost their technological position for the coming decade.

Issues faced

• And with the limited scope of what the PLI funds are incentivising, multinational chipmakers are staying away from making substantive commitments, despite incentives. Private capital is also in a state of flux, with advancements in chips and emerging technologies such as artificial intelligence leaving policymakers guessing on how best to allocate resources to boost their technological position for the coming decade.
• India still lags in the establishment of semiconductor wafer fabrication (FAB) units due to a weak ecosystem and shortage of resources as compared to more competitive bases like China and Vietnam.

What needs to be done?

• These outlays must, therefore, be pegged to a tangible outcome: is this a matter of safeguarding cyber sovereignty to protect India from another pandemic-style supply chain shock, encouraging the domestic electronics industry to make electronics cheaper for Indian consumers, or asserting India as a global electronics manufacturing centre? Clarity on desired outcomes would make failures easier to spot. It would also make it possible to course correct before massive PLI spending has already taken place with little to show for the outflow.