The semiconductor industry has seen a gold rush of sorts recently. The COVID-19 pandemic showed how a shortage of a tiny device could send global markets into a tizzy. Investments in the semiconductor industry have been much more intensive since then.

So much so that these semiconductors are now finding themselves at the centre of global trade wars, with governments all over pouring money into the segment to ensure their silicon supremacy in the coming years. And India is one of those countries.

With the announcement of a US-India partnership and SEMICON India 2024—the country’s most popular semiconductor exhibition—in full swing, the narrative surrounding India and its investments in the space is drawing enough attention.

There may be a story to sell—and a promising one—but at this juncture, multiple issues with how the ecosystem is set up in the country need to be addressed.

To understand that, let’s look at why semiconductors have become key to India’s development plans in the first place. But first, a bit about the global semiconductor industry in general.

The geopolitical gambit: Without semiconductors, most modern electronic devices would cease to function. Everything from a calculator to a credit card relies on these devices. Semiconductors also happen to be a crucial part of military technologies around the globe. The US understands this, and this was a major catalyst for the trade war between that country and China.

The American government did not want China to rely on US-origin chip companies, but China’s proximity to Taiwan was a point of contention. The island houses TSMC, or the Taiwan Semiconductor Manufacturing Company—a foundry that makes chips for American tech giants like Apple, Nvidia and Intel.

In fact, there has been a concentrated effort by the US to bring chip manufacturing home, so to speak. The primary way this was facilitated was through the 2022 CHIPS Act. It promoted the US manufacture of semiconductors and other devices to safeguard its interests in the industry.

This aspect of self-reliance is a huge factor in India too. By investing in chip manufacturing in the country, India hopes to address multiple problems.

Where does India stand? Irrespective of how its global rivals are faring, India is definitely doing its part for its semiconductor industry. With a Rs 76,000 crore (almost $10 billion) investment through the Programme for Semiconductors and Display Fab Ecosystem, India has shown global chip giants looking to invest that the country is taking this development proposition seriously.

For example, consider you’re looking to build a semiconductor foundry. The central government will support 50% of the project cost. And the state government would put in another 20-25% in the form of land and capital subsidies.

But is this enough? India’s semiconductor programme is definitely generous, but you have to understand that the process of manufacturing chips has all the hallmarks of a money pit—it is capital-intensive, technically complex, time-consuming and cannot be easily scaled. A modern chip fab today costs at least $10-20 billion—which is why reports estimate that only eight semiconductor companies can currently afford to get one up and running.

With billions of dollars at stake for each plant, chip makers have to carefully evaluate multiple factors before deciding where to invest. These companies look at everything from a country’s talent pool, technology policies, tax breaks and labour costs to trade regulations and customs laws to ensure their investment is secure and profitable.

According to Electronics and IT secretary S. Krishnan, the government has committed about Rs 62,000 crore (about $7 billion) out of the proposed Rs 76,000 crore (around $10 billion) and sees no funding issue so far, with enough funding for a few smaller projects. Investments on the manufacturing front, therefore, have been intensive.

We also know that chip giants from India, the US and Taiwan like Micron, Tata, Powerchip Semiconductor Manufacturing Corp. and smaller entrants like Mysore-based Kaynes Semicon have benefitted from this scheme. Most of their objectives are export-led, but even then, India would have much to gain from more advanced insight into semiconductor manufacturing.

The scheme covers projects in the periphery of semiconductor manufacturing too, like display fabs (plants where LCD and AMOLED screens are built) and other sensor manufacturing plants, which is why the government has been able to cite good investment numbers in a short time frame.

Not an easy road: There is a bigger issue: the country’s scarce talent pool of industry-ready semiconductor engineers. While India has good representation on the design and software front with close to 20% of human resources in the global chip ecosystem based in the country, it has a scant presence of engineers on the manufacturing side of things.

A report by TeamLease Degree Apprenticeship states that By 2027, the semiconductor industry will face a shortage of 250,000 to 300,000 professionals in research and development, design, manufacturing and advanced packaging.

To change this, institutes like the Indian Institute of Science set up new courses in the field to build up an indigenous pool of talented engineers. It remains to be seen, though, whether the country can fulfill its promise of 85,000 semiconductor engineers in India in the next 10 years.

There are other factors too. The business environment is quite volatile, for instance. While the country has made a few notable strides in the overall ease of doing business in the past few years, the global sentiment is that the country’s regulatory frameworks still need a lot of work. With billions on the line, minimizing risk is crucial for companies invested in the chip sector.

Also, semiconductor fabs need solid infrastructure and a reliable supply of electricity and water, which is a problem India continues to face in some regions. Instances of data centres—which use methods like water-based cooling intensively— facing shortages in water-scarce areas do little to instill confidence in prospective investors.

Bustling with activity: All of this is not to say that India hasn’t made any progress. The Micron investment in the country, for instance, was the scheme’s biggest victory at a time when few saw the need for this programme. The prospect of the US-based digital storage giant and its investments entering the country saw a regulatory overhaul of the scheme itself—a 50% backing from the government instead of the previous 35%, a longer window for proposals (till December 2024 instead of the original 45 days) and an exemption for IGST duties. The government has also been fairly flexible when it comes to foreign investments in India’s semiconductor ecosystem

“The Tatas and the Adanis are aggressively pushing forward in the semiconductor space, fully committed to expanding the industry in India,” says an industry expert, requesting anonymity. “They will make every effort to ensure that government regulations remain favourable, thus safeguarding their profitability and long-term ambitions. This approach alone should instill adequate confidence in foreign companies looking to establish a presence in India.”

Tata Electronics is seeing headway with its collaboration with ASMPT—a Singapore-based equipment maker for semiconductor foundries—in Karnataka. The Adani Group is looking at building foundries in Maharashtra and is collaborating with Israel-based Tower Semiconductor. So, while the government has played its part to some extent, it's the private players with cash to spare that will eventually have to pick up the baton.

The semiconductor industry is one that demands absolute innovational excellence, on a par with the global economy. It remains to be seen whether India is cut out for the job.

Cover illustration by Devyani M/ The Morning Context