The Centre’s approval for starting two semiconductor wafer fabrication units (fabs) — which have been granted a tax deduction on the entire capital expenditure incurred, a 10-year interest-free loan and other sops — deserves a cautious welcome. For a country that consumes almost $7 billion worth of semiconductor chips annually — either imported directly or embedded in phones, computers, cars, washing machines and other electronic goods — establishing local silicon foundry-cum-microcircuit capacities is a worthwhile project. The domestic market for microchips will only further expand on the back of growing incomes and aspirational values as well as the increasing automation of business operations. The absence of a semiconductor manufacturing base, apart from adding to foreign exchange outflows, exposes India to supply chain risks. We have seen such disruptions from earthquakes in Japan and Taiwan, quite similar to how the 2011 floods in Thailand led to an acute shortage of computer hard disk drives. Given our semiconductor design and software development strengths, domestic fabs could also help in the introduction of products relevant to the country’s requirements.
The cautionary note about building domestic fabs stems from past failures. The Andhra Pradesh Government in 2006 inked an agreement with SemIndia, a consortium of overseas Indians, for setting up a chip manufacturing plant in Hyderabad. It did not take off, despite land being made available at a nominal lease in addition to subsidised power and water supply. The ostensible reason for this aborted venture was the 2008 crisis and the difficulty it created in raising the money needed for the $3-billion project. One shouldn’t therefore take for granted that the first ‘Made-in-India’ chip will be rolled out in the next 2-3 years, as Information Technology Minister Kapil Sibal predicts. A large part of the responsibility to ensure that the proposed two fabs — one near Gandhinagar in Gujarat and the other in Greater Noida — really do materialise lies with the Centre.
With chip consumption expected to cross $50 billion by 2020, India needs to encourage domestic manufacturing. But the challenges are huge. The country should have created capacities in the 1990s, when Taiwan, Singapore, Korea and China were emerging as foundry hubs. Starting off now and competing against countries that have already-running fabs in a duty-free import regime isn’t going to be easy. On top of this are the massive requirements of clean water and uninterrupted power, not to forget money (Rs 25,000-26,000 crore for a standard 40,000 wafers-per-month facility). In today’s environment, the only compelling reasons for attracting chip manufacturing in India are the huge domestic market and a weak rupee making imports costlier than before. Tax breaks can be a sweetener; they are justified so long as the investments happen within a stipulated time and there isn’t any duty protection thereafter.