20 March 2023

Save Businesses To Create ‘Trusted Sources'



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Semiconductors lie at the heart of electronic products and advanced technologies like 5G.
India Media, Telecoms, IT, Entertainment
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Semiconductors lie at the heart of electronic products and advanced technologies like 5G. In December 2021, the Union Cabinet approved INR 76,000 crores under the 'India Semiconductor Mission' which is fungible across different schemes. This was followed by a modified programme to provide financial support to companies investing in semiconductors, display manufacturing and design ecosystem to curb heavy dependence on import of semiconductors. In the 2023-2024 Union Budget, INR 3000 crores has been allocated for the India Semiconductor Mission out of which INR 1,799 crore has been allocated for the modified scheme for setting up compound semiconductors, silicon photonics, sensors fab, discrete semiconductors fab and semiconductor assembly, testing, marking and packaging, outsourced semiconductor assembly and test facilities in India. Also, INR 1,000 crore has been allocated for the modified scheme for setting up of semiconductor fabs in India, while INR 4 lakh has been allocated for the scheme to set up display fabrication units in India.

Towards the objective of making India self-sufficient in semiconductor manufacturing, the central government had regulated the import of telecom equipment, that are heavily dependent on semiconductors, by introducing the 'trusted sources' approval mechanism to regulate the use of equipment through sources that are designated as 'trusted', with onerous approval process. It is believed that this way, focus will move towards manufacturing locally and imports will reduce from China.

The policy and budgetary thrust to manufacture semiconductors in India is perceived as a visionary approach to achieve self-reliance. The question is, when?

With the amendment to the telecom licenses to procure equipment only from 'trusted sources', the government will exercise the right to impose conditions for procurement of telecommunication equipment and cheap components from China. The Russia-Ukraine war has worsened the pandemic induced shortage of semiconductors as it has further disrupted the supply chain. As per the India Semiconductor Market Report 2019-2026 by the India Electronics and Semiconductor Association, only 9% of India's demand for semiconductors was sourced locally in 2021. This increases the cost of electronic and telecom products.

While on the one hand the government has introduced the long-term financial incentives in the semiconductor space, it is interesting to note on the other hand, the enthusiasm with which the government is continuing with the restrictions introduced during the pandemic and amidst the Sino-Indian border tension. It overlooks the urgent need for exemptions and simplification of the approval process. The delays in approving telecom equipment import applications or raising unending queries on the buyer and the seller, puts the risk of pushing back India's growth story by several years. Needless to mention that the disrupted supply chain has led to shortages of imports from other countries such as Taiwan and South Korea.

The US recently signed into law, the Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022 ("CHIPS Act"), which provides federal financial assistance to semiconductor companies to construct, expand, and modernize semiconductor manufacturing facilities in the United States. Any semiconductor company that receives federal financial assistance has to notify the American government of any material expansion of semiconductor manufacturing capacity in China and the government can either approve, mitigate, or block the transaction. It can be reasonably foreseen that at some point, markets like India may also benefit from the legislation once the semiconductor firms expand their manufacturing base.

Another hope in sight to meet the local demand is from the very recent glut reported in chip inventories by some industries due to the post pandemic drop in demand. It is likely that the inventories are cleared with improvement in supply chain. Also, with companies such as Tata which is set to enter the semiconductor industry for packaging and testing of units, a crucial step for semiconductor manufacturing, it is likely that more such players will enter the market in the near future. However, it may not yield immediate results and the dependency on imports remains the key, at present.

For the policy incentives and private sector enthusiasm to yield swift results, the government's political agenda must be distinguished from business exigencies to avoid a downward spiral where businesses heavily reliant on semiconductors suffer the double jeopardy of dwindling supplies and restrictive trade policies with China while they are required to invest billions of dollars in making chips. A recent glut in the chip market could deter private investments on its own into the sector. A self-sustaining market is, therefore, a must for attracting enterprises. An immediate relief from the restrictions on the semiconductor trade is the need of the hour to save businesses dependent on 'trusted sources'.

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