Why India must manufacture microchips

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 Why India must manufacture microchips

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• Three new schemes: The GoI has launched 3 new schemes to push electronics manufacturing in India, with an outlay of  Rs.48000 cr. Demand for electronics may cross $400 billion by 2024, so potential is huge. Domestic production has already grown from $29 b in 2014-15 to $70 b in 2019-20.  (@25% CAGR)
• Final assembly stage: Most production in India is at final assembly stages. The logic is that this last-mile step will help build "backward linkages" and push industrialisation. The Economic Survey 2019-20 spoke of "assembly in India for the world" for networked products, so that 4 cr formal jobs by 2024-25 may be created. The PLI scheme is aimed at precisely this, and gives a 4-6% incentive for domestic production. [PLI - Production Linked Incentive]
• Net value addition too low: The production volume has gone up, but net value addition is very low. With most components imported, the net value addition is just 5 to 15%, or $7-10 b (of the $70 b production). Global market is $2100 b. What that means is India isn't getting large profits in this game.
• Rising imports: Trends show that electronics may cross crude oil as the largest import item, and these assembly units will become mere packaging units. Why so? Because in the modern global supply chain system, last mile value addition is too low. Upstream industries would already do most of complex value addition - processor production, memory chips, cameras, etc. India has little ability in these, with 80% items imported (67% Chinese).
• The first stage most valuable: Even before you make components, you have to make microchips - semiconductor integrated chips. This happens in Fabs - Fabrication Units, turning silicon into chips. Of the 170 commercial fabs, not one is in India. Leading makers (TSMC, Samsung, Intel) find poor cost efficiencies in India.
• Cost issues: Setting up a Fab needs upto $2 billion in upfront expenses, and almost every 18 months, things change. So high capital depreciation (50% of production cost). Local players opted out of some local proposals to set up Fabs, due to capital needed. ISRO and DRDO have their dedicated Fabs but only for space and defence systems.
• Chip design: India has many start-ups doing chip designing, but production has to be outsourced abroad. That itself carries an enormous national security risk. 
• Economic impact of Fab: The multiplier effect of Fabs is 6-23 times the investment. The SPECS scheme provides 25% incentive on capital expenditure for chip manufacturing. But its outlay is just Rs.3300 cr (too low).
• Moving out of China: Since many MNCs are moving a part of their business out of China, India must grab the semiconductor makers and assembly unit makers right now. That will spur component making too, and build a genuine electronics ecosystem, not just assembling work.

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