Modi’s semiconductor manufacturing plan is a ‘semi-con’

Feudal to Federal

“India’s democracy, demography and demand will help us make electronic chips not just for us but for the world” – July 2023, Prime Minister Narendra Modi at ‘Semicon India’.

“India’s unique combination of democracy, demography and demand will help us make products for India and the world” – Sept 2014, PM Modi at ‘Make in India’.

Same lines spoken by the same person, almost a decade apart, to launch similar programmes.

‘Make in India’ was supposed to spur India’s manufacturing sector, increase India’s share of goods exports, and create many jobs. Instead, manufacturing as a share of GDP has only declined from 17% to 15% in this period, and India’s share of world trade in goods has remained flat at 1.8%. Why would the same hollow punchline help India become a semiconductor powerhouse now? If only choreographed glitzy events, filmy style speeches and pliant media headlines delivered economic growth, India would have become the richest country in the last nine years. India’s much-touted foray into semiconductor manufacturing is off to a loud but false start.

Micron Technology is a $75 billion American semiconductor company that makes memory chips. Recently, Modi made a bombastic announcement that Micron is setting up a plant and will herald a semiconductor manufacturing revolution in India. What he did not say are these:

1. More than 70% of the roughly $3 billion investment for the Micron plant will be paid by the people of India, through Union and state government subsidies.

2. As per the company’s own estimates, the plant will provide direct jobs only to 5,000 people over a decade. This means, the government will spend roughly Rs 3 crore to create one factory worker job at Micron India, which will likely be more than the entire lifetime wages of that worker.

3. The financial assistance of the Union government for this project was on the condition (unwritten) that the plant be set up only in Gujarat, and not in Karnataka or Tamil Nadu, which may have been their more preferred locations.

To be absolutely clear, I am not against attracting foreign and domestic investment into new areas using government subsidies and resources such as land, financial and tax benefits. But a developing country like India is always constrained by financial resources and it is therefore important to ensure that the government spends our money where the benefits are maximised for Indians.

Semiconductors or electronic chips are not just any product. They are very strategic for a nation. If data is the new oil, as some technology experts claim, then semiconductors are the new internal combustion engines. It is important for a country like India to develop capability to manufacture its own future engines than be held hostage by countries such as China. Therefore, it is in India’s strategic interest to become a self-reliant producer of electronic chips first, and then produce for other nations, too. Which makes it even more critical for India to use its limited resources wisely to achieve this larger objective.

Financial assistance for foreign semiconductor companies can help but are not a deal-breaker or even the main decision driver to invest in India. For a company like Micron that has announced $250 billion of investments in America recently, $2 billion financial subsidy for a plant in India surely is inconsequential. Infrastructure requirements such as water and power are the most critical requirements for a semiconductor plant. A robust ecosystem of vendors and suppliers are very important. Spending money on providing good infrastructure and developing a semiconductor ecosystem of smaller suppliers and parts manufacturers is far more important than giving a few billion dollars to an already rich foreign company.

Beyond all these, the most important requirement for India to be self-reliant in semiconductors is to keep politics out of it. Businesses should be free to choose where they want to locate their investment, who they want to hire and how they want to set up their factories. Controlling and directing these decisions for political purposes and imposing them on businesses will render these projects inefficient and deter from our larger national purpose. Had Micron chosen to locate their factory in Sriperumbudur in Tamil Nadu or in Devanahalli in Karnataka, which already has a well-developed ecosystem of electronics manufacturers, would the Modi government have still rolled out the ‘red carpet’ for them? In the current times of deeply polarised politics, I doubt it would have.

This is also why companies need to be wary of taking small financial subsidies from the Union government, since it almost always comes with binding constraints that may not be beneficial in the long run. Financial assistance of $2 billion is peanuts for Micron, but by being forced to go to Gujarat, which does not have an established ecosystem like Tamil Nadu or Karnataka, Micron may be ‘$2 billion wise, $200 billion foolish’. This is not the first instance that the Modi government has played politics with electronics manufacturing initiatives. In the run up to the Gujarat election, it forced the then announced Vedanta-Foxconn semiconductor investment to shift from Maharashtra to Gujarat. The project was subsequently called off and it will not be far-fetched to impute that the coercion of the Modi government may have played a role in the cancellation.

India needs an efficient, world-class and strong semiconductor industry at the earliest. We must do all it takes to give birth to this industry and nurture it to its fullest growth potential. As the information technology industry has shown, the government needs a ‘light touch’ governance paradigm to achieve the larger strategic goals for the nation in developing a semiconductor industry. For this, Narendra Modi needs to act as the Chairman of India, not as CEO of Micron Technologies.