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Why India’s push for semiconductor self-reliance is about more than China

October 26, 2021 GMT

Indian Prime Minister Narendra Modi had a busy schedule at the Quad summit in Washington last month, meeting heads of state, corporations and investors. Interestingly, his meeting with leaders of the semiconductor industry stands out for multiple reasons.

For starters, the meeting came amid a looming chip crisis in India. Since the beginning of 2021, the nation has faced an acute semiconductor shortage, affecting automobile plants across the country. By July, the Ministry of External Affairs was calling its diplomats in Japan, Taiwan, the United States and Germany to secure semiconductor chips for the ailing industry.

However, given the worldwide chip shortages, supply is not going to meet demand any time soon. This could affect the upcoming holiday season sales of laptops, smart televisions and other electronic appliances.

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The Quad summit has been described as an anti-China coalition that convenes to coordinate efforts against Beijing’s actions across different spheres, including trade, technology and maritime security. Securing semiconductor supply chains and examining their vulnerabilities is one such endeavour of the Quad, while simultaneously analysing the role an autocratic state could play with such technology.

However, for Modi and India, the discussion on semiconductor chips is much larger than the perceived China threat. It is about realising Aatmanirbhar Bharat ” making India a self-reliant nation.

As the bricks-and-mortar Indian economy transforms into a digital one, with every facet of the economy becoming reliant on advanced technologies to run day-to-day operations, semiconductors are becoming ubiquitous. As a consequence, they are vital for the success and, over time, even survival of the Indian economy.

Furthermore, with the world moving away from the internal combustion engine and towards battery-powered electric vehicles, semiconductor chips will become the new oil.

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The world might not be divided between democracy and autocracy, as some people envision but, rather, between states controlling the semiconductor value chains and the rest at their disposal.

While globalisation experts have steadfastly held to their mantra that globalisation and economic interconnectedness prevent conflict, the past few years suggest otherwise and that it might not be a conflict-preventing silver bullet after all.

China’s acts of economic coercion and bullying targeting Australia are a case in point. The world’s dependence and overreliance on China has left nations holding the short end of the stick and given China immense leverage to weaponise its economic interconnectedness.

In today’s multipolar world, India’s traditional foreign policy of strategic autonomy finds new significance. America’s botched withdrawal from Afghanistan, the Aukus affair and its historical treatment of allies and partners do not instil confidence to wholeheartedly jump on the US bandwagon.

While India and the US might find policy convergence on issues related to China, in this dog-eat-dog world, partners and allies shift so often that it is in India’s strategic long term interest to go its own way rather than with the Quad for semiconductor chips.

Both the US and Japan have established semiconductor fabrication units and continue to attract investment. In India’s case, the sector is nonexistent and its participation in a Quad-led initiative could place it at a disadvantage.

Furthermore, while the crisis in the automobile industry might serve as a wake-up call to promote domestic manufacturing of semiconductor chips, it is vital that policy planners be aware of the need for clusters for Aatmanirbhar Bharat to have a wide-ranging impact.

The success of production-linked incentive schemes can be seen in the mobile phone handset industry. However, if the success is limited to the manufacturing of handsets and the rest of the value chain is abroad, the goal of self-reliance will only have been partially achieved.

Similarly, India’s service-sector-led economy will indirectly increase its reliance on imports if laptops, closed-circuit television cameras, routers and the chips that go into them are not manufactured domestically.

Earlier this year, Tata Sons chairman Natarajan Chandrasekaran expressed an interest in establishing semiconductor chip manufacturing domestically to ward off supply constraints for Tata Motors.

Given the chip industry’s capital intensive nature and its requirement of a steady power supply, major international companies may not be the best bet. Those firms may be unwilling to take billion-dollar risks based on politicians’ promises. With the recent exit of Ford and several other multinational corporations over the past decade, international chip manufacturers might not be very excited by India’s incentives.

India’s Tata or Mahindra Group will have to become trendsetters. Such behemoths are leaders in both the information technology sphere and in automobile manufacturing. Without them, seeking self-reliance for semiconductors will be a fool’s errand.

Leaders in the Indian information technology sector and the broader service sector should wake up and smell the coffee as some automobile leaders have set up shop in the country and others are considering doing so. This will subsequently lead to complementarity in India’s service sector clusters and manufacturing sector clusters.

The Quad’s semiconductor supply chain review is welcome. However, this should not lead to complacency in the Indian administration’s Aatmanirbhar Bharat initiative.

Akhil Ramesh is a Non-Resident Vasey Fellow at the Pacific Forum

This article originally appeared on the South China Morning Post (SCMP), the leading news media reporting on China and Asia. For more SCMP stories, please download our mobile app, follow us on Twitter, and like us on Facebook.

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