The great electronics gamble: A catalyst for private enterprise

Take a stroll down Lodhi Road in New Delhi and try to spot the building that houses the ministry responsible for the country’s electronic policy. In all probability, you will point to a shimmering, ultra-modern looking structure made of glass and steel. This building, you will soon realise, has nothing to do with electronics, but in a case of Orwellian irony, belongs to the Central Bureau of Investigation (CBI). The place you’re after, “Electronics Niketan”, is a shabby affair directly across the street, announced by crooked lettering and splashes of paan stains.

Yet, a student of semiotics will tell you that radical change is in the air. After all, the Department of Information Technology has now conferred official recognition on its erstwhile step-child and even given it first billing in the ministry’s latest avatar - Department of Electronics and Information Technology. But it’s not just a labelling exercise. The government has recently rolled out what many are calling a bold, wide-ranging policy that, it hopes, will be a defibrillator to a dying electronics and hardware sector. “This is visionary thinking,” says Satya Gupta, chairman of the Indian Semiconductor Association (SIA). “There are no short-term profits here,” he adds.

One of the cornerstones of this policy is the facilitation of the building of a semiconductor fabricator, known as a “fab”, which can then churn out a large number of “wafers” that house electronic chips. Another is to provide fiscal incentives across the electronics value chain via a Modified Special Incentive Package Scheme (M-SIPS), which aims to offset India’s infrastructure gaps.

At first glance, the policy looks like a no-brainer. Today, almost everything we use-from phones to medical devices to kitchen mixers-contains electronics of some sort. Globally, this is a $1.75-trillion industry with India consuming around $100 billion of it. This burgeoning demand will shoot up to $400 billion by 2020, according to government figures. While the domestic industry will cater to a fourth of this demand, India will still need to import $300 billion of it, roughly equivalent to our oil import bill.

What has really driven technocrats into a tizzy is the fact that China manufactures a good chunk of the semiconductor processors that are also used in industries of national importance, such as aerospace, defence and telecom. “Today, the semiconductor industry has become a strategic weapon, much like our space or nuclear programme, and not just a commercial opportunity,” says SIA’s Gupta.

Therefore, the rationale for an electronics policy looks like a fundamentally good idea. However, building this industry from scratch is a gargantuan, incredibly complex, and exorbitant proposition. Not only does this require billions of dollars to build, it also needs additional billions to refurbish and upgrade since chip-making technology tends to evolve at a lightning speed.

Which is why it is a good thing that this new policy has a noticeable absence of the government hand. Instead, it aims to provide a catalyst to private enterprise at almost every level of the value chain so that an ecosystem can take shape organically.

“If we pre-decide where to go, we will likely go wrong,” says Ajay Kumar, joint secretary, Ministry of Communications and Information Technology.

Kumar’s ministry’s solution is a dizzying array of incentives worth over Rs 15,000 crore to begin with, for manufacturers-domestic or foreign-to set up shop here. This ranges from subsidies on capital expenditure (for 20 per cent of firms ensconced in SEZs, or 25 per cent for those outside); preferential market access in areas of government procurement; subsidies for the development of electronic “clusters”, much like those in Japan and Taiwan; Rs 10,000 crore in risk capital towards a proposed Rs 40,000 crore Electronic Development Fund; a plethora of grants for faculty, young researchers and aspiring Ph.D candidates in the chip-making arena; A pioneering push in training and curriculum development catered towards the shop floor. “If you don’t do all of it together, likelihood of success diminishes. Each sector impacts another one,” says Kumar.

Dipping one’s toes into the world of semiconductors is not for everyone. Yesterday’s chips that allowed phones to map out directions speedily on Google will not be capable of streaming Indian Premier League matches on it tomorrow, but you can be sure that the competition is trying to make that happen through fab upgrades. These can ravage balance sheets and can lead to frustrating cyclicalities and cash flow crunches.

So, it’s a good think that India has some critical advantages. Many of the world’s leading chip design companies are here and thriving, which means an already flourishing talent pool. And despite India’s bleak history in hardware, its work in the “embedded” space-an amalgam of software and hardware that produces “smart” devices such as controllers-will ensure migration of skilled professionals up the design value chain.

Perhaps the most valuable trend facilitating India’s potential electronics ascent has nothing to do with India. “Costs in China are increasing, the Yuan is strengthening, Japan is no longer interested in China and is very keen to diversify. Plus, India is the gateway to Africa and the Middle East,” says Ajai Chowdhry, former chairman of HCL Infosystems. “This is the perfect time.”