India’s chip mission: Higher stakes call for a closer look at trade-offs

The first is supply security for these little chips that power modern machines, from household gadgets to cars. The second is the costs that will be borne—not just by consumers, but also by taxpayers. Given the envisaged scale of fresh state support, in the order of ₹1.76 trillion, we should be reasonably confident of what we gain.

After covid disrupted chip factories and supply chains, resulting in a global supply crunch, locally made chips rose from a latent to an acutely felt need. Since then, demand has been shifting beyond just ‘legacy’ chips to high-end ones, fuelled by an AI boom, even as supply risks have gotten aggravated by geopolitical fissures.

The world’s facilities to make, pack and test chips are concentrated in South Korea, China and Taiwan.

However, unlike the oil business, say, where crude supplies are fungible, top refining technology is available off the shelf and ancillary industries are hardly needed, the chip sector is intricate. Critical tech is held closely by a few firms, largely American, Chinese and Korean, with one in the Netherlands. Hence, we have seen a global race to build chip factories, with governments pouring in billions of dollars to subsidize prohibitively expensive units.

It was in this context that the NSM’s first phase, launched in 2021, attracted investments across diverse parts of the value chain, from foundries to churn out chips and facilities to test them, to the materials needed to pack these delicate products. No doubt, this is a good start. Yet, from here on, we must move with care to foster an ecosystem that stands up to the scrutiny of a ‘make or buy’ test.

Three aspects must not be overlooked. First, chips made in India are likely to be more expensive than their Asian rivals and this must be viewed against the vast expansion plans set out by them.

Second, domestic output does not necessarily mitigate supply risks; sanctions on India would hurt, since critical tech is both proprietary and imported. Recall that when Enron filed for bankruptcy two-and-a-half decades ago, one promoter of its Indian power plant that held its crucial turbine tech dragged its feet on turning over the codes to operate it, using these as a bargaining chip. Therefore, tech transfers must play a role in our state-funded endeavours.

And finally, our export ambitions must stay in sync with global dynamics. Joining global value chains in the testing, packaging and contract manufacture of legacy chips is within our reach, but attaining true self-sufficiency or export dominance would require us to make critical equipment (and its inputs) at home. China, even as it eyes Taiwan, has taken this path in good measure.

In India, we need public policy to act in concert with a keen private appetite for risk. On R&D, especially, Indian investors would have to invest deeply. Going up the value curve in this fast-evolving sector calls for big capital and steely nerves. If the Centre is ready to place an outsized fiscal bet, private players must do their utmost to tilt the odds in favour of the NSM’s success.

This business is not for the faint of heart. For a cautionary tale, look no further than the foundry woes of Intel, a former innovator.