India aims to revolutionize the semiconductor industry by becoming the global hub of the industry – another bold ambition of the emerging power.

Gaining a foothold in this sector is in India's strategic interest, taking advantage of geopolitical and global economic conditions to drive domestic growth and industrial development. As the so-called "chip war" heats up, India seems to be consciously joining the economic and technological competition in the semiconductor sector.

For a country with almost no semiconductor expertise or production capacity, the desire to leapfrog may sound overly optimistic. India's overall manufacturing and industrial ecosystem is also weak, which means the chip industry needs to be built from scratch.

Former Indian minister Rajeev Chandrasekhar said that India is 12 generations behind in chip technology. Since the 1960s, India has tried many times to enter the field, but all have failed. Just last year, Indian mining group Vedanta and Taiwanese electronics manufacturer Foxconn tried to form a joint venture but failed to become a first mover.

However, the situation seems to have reversed. India's chip market is expected to grow at an annual rate of 17% to about $80 billion by 2028, in part because of global growth – a remarkable feat given where India is starting, although it still lags behind Taiwan, China and South Korea.

Enthusiasm for this emerging market is evidenced by a sharp rise in foreign direct investment (FDI) in India – greenfield investment in the sector grew about 27-fold from 2017-19 to 2021-23, with the number of projects increasing from 20 to 47, according to data from the Japan External Trade Organization.

This has moved India's semiconductor industry from tenth to fourth place globally in terms of FDI, behind only the United States, Germany and Japan – particularly important since net FDI inflows into India have been falling since 2021, while divestments by foreign companies have been increasing since 2013-14. Growth is expected to continue: in a short period of time, mainly this year, several foreign investment plans and joint ventures have been announced, including those involving Japanese companies.

For example, India's Tata Electronics and Taiwan's Powerchip Semiconductor Manufacturing Co., Ltd. (PSMC) are building India's first semiconductor manufacturing plant in Gujarat, which is expected to be operational in 2026. In September, Japan's Tokyo Electron announced a strategic partnership with Tata Electronics to supply semiconductor equipment. Indian company CG Power and Industrial Solutions has formed a joint venture with Japan's Renesas Electronics and Thailand's Stars Microelectronics to build outsourced semiconductor assembly and test plants, or "OSATs."

Many foreign companies entering the Indian market also see India's talent pool. India's competitive advantage in semiconductors lies in the number of design engineers (or "fabless"), which accounts for more than 20% of the global total. In addition, India's large population, large number of engineering graduates, and relatively low labor costs are seen as untapped resources, although more training is needed for less skilled "fab" workers.

Semiconductors are of national strategic importance to India. The growing awareness (indeed, re-awareness) of the need to integrate economic considerations into national security strategies is prompting countries to enhance resilience by building strong domestic economies and diversifying supply chains. The rise in FDI in India suggests that Japan, the United States and other like-minded countries plan to diversify their supply chains away from dependence on China, while India seeks to ensure the transfer of key technologies.

Building a globally competitive Indian semiconductor industry is primarily a government-driven goal. To attract the private sector, the central and state governments bear about 70% of the capital expenditure for building semiconductor and display manufacturing plants. Under the flagship Indian Semiconductor Program, which will be launched in 2022, the government has allocated 760 billion rupees (1.4 trillion yen) as fiscal expenditure, and a second tranche of funding is reportedly underway to launch the program. Related industries such as mobile phone and IT hardware production can also receive additional subsidies through production-linked incentive programs.

Currently, eight Indian states have formulated their own semiconductor policies. The central government currently gives the greatest support to Gujarat and Assam to develop initial industrial clusters.

India Official's opinion

The Indian government has also expanded its partnerships with other countries, especially Japan, Singapore, and recently reached an agreement with the United States. The agreement India signed with the US in September this year is significant, not only in helping to push for more manufacturing plants to be built in India (particularly in Uttar Pradesh and West Bengal), but also in meeting the needs of the defense industry. Multilateral frameworks that India has joined, such as the Quad security dialogue and the Indo-Pacific Economic Prosperity Framework, have also agreed to strengthen the semiconductor supply chain as a key strategic area.

While the acceleration of domestic chip development is widely welcomed, it may ultimately be a double-edged sword for India. Other countries, including Japan, are also vying to win the race, which may trigger a bubble as the global surge leads to more competition and may eventually lead to overcapacity in semiconductors.

India's main goal is reportedly to meet the needs of the domestic electronics and automotive industries, both of which are expected to grow, but its goal is also to supply the global market. While economic security concerns drive the demand for Indian chips, the aforementioned Tata Electronics-PSMC joint venture aims to produce 28 nanometer (or larger) chips to compete directly with Chinese chips, while also trying to produce smaller chips.

If India's domestic industry fails to develop cost-competitive products at scale, its companies may have to resort to imported chips again, including from China—even though this would mean failing to achieve India's goals of self-reliance and large-scale employment in industrial production, with wider implications for economic security.

While reducing dependence on China is a priority for India, both the Economic Survey 2023-24 and industry players call for greater Chinese involvement in the country's commercial development. On the other hand, closer integration with the United States and like-minded countries in the semiconductor supply chain sends the opposite signal (as does Russia).

These practices perhaps indicate another "Indian way" of economic policymaking, a "realistic" stance on economic and industrial development.

Momentum is building. Semicon India, India's premier chip industry event, took place in September and attracted significant attention from domestic and foreign stakeholders, indicating (perhaps excessive) excitement and high expectations.

We still have to wait at least two or three years before products start to be delivered at scale. The world should watch closely to see whether India can realize its ambition to become a semiconductor giant with cautious rather than bold optimism.

Source: Content compiled from japantimes

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