Economists caution against chip subsidies as Gujarat and Tamil Nadu pitch for investments

The Tamil Nadu Government has used its investor summit to unveil a new semiconductor policy, which will see the state offer up to 50% subsidies over and above the Centre's $10 billion subsidy plan for chipmakers. But experts have cautioned against merely focusing on chip assembly, saying that governments would be better off by building a composite semiconductor ecosystem, instead.

"Just building one or two factories is not enough. But if you begin to build an entire ecosystem from the top of the supply chain to the bottom, then you get enough scale to start having new firms emerge that are creating even more value," said Chris Miller, author of the critically acclaimed 'Chip War', in a chat with CNBC-TV18.

"Design is just as value additive — often more value additive — than manufacturing itself," he added, "India has design centres in Bangalore and Tamil Nadu, and building design expertise is just as important as building a manufacturing base."

Incidentally, Tamil Nadu's semiconductor policy also incentivises semiconductor design on the funding and industry-academia partnership front. The policy document has targeted creating a talent pool of 2 lakh skilled engineers and workers in the sector.

The Centre is also working along these lines. “We will put in whatever resources are required, so that we can create an ecosystem for R&D, validating new ideas and taking the entire journey to the next level,” said Vaishnaw.

In India, names like Polymatech, ISMC Consortium and Singapore-based IGSS Ventures are looking to establish fabrication units in Tamil Nadu and Karnataka. Three semiconductor MoUs were signed at Vibrant Gujarat, including one by South Korean PCB manufacturer Simmtech. Economists, however, are not thrilled about the subsidies being offered to woo such investments.

"What we are worried about more is the excessive subsidisation," said economist and former RBI governor, Raghuram Rajan, "If you put together everything that the state governments and the central government are offering, then you have to ask, 'what am I getting in return?"

Rajan added: "That's why the Micron example is important. Because here is a factory that's going to produce not logic chips, but memory chips. The entire investment is $2.7 billion. The Central Government and Gujarat are picking up $2 billion. For what? For 5,000 jobs?"

Experts say India may well have all the ingredients to build a great ecosystem and move beyond mere chipmaking, to focus on engineering, design and R&D. But the real achievement will be making this happen.

The government claims it has watertight plans to get it done. "We have already tied up with 104 universities and institutions to develop BTech, MTech and PhD-level talent," said Vaishnaw. The question is: how soon?