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India’s Semiconductor Dream

As China poses a major threat to the US military, security, and economic interests in the Indo-Pacific region, Washington seems to be getting closer to New Delhi to reduce reliance on China for semiconductors, argues Dr Rakesh

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The US Secretary of Commerce, Gina Raimondo, visited India in March as part of strengthening the India-US Comprehensive Global Strategic Partnership and developing inclusive and fair trade and investment policies. During the visit, the two countries held the 5th ministerial-level meeting of the India-US Commercial Dialogue in New Delhi on 10 March 2023. Amidst the trade war and technological competition between the US and China, the visit might also have implications for India-China relations. As part of decoupling and delinking China from the supply chains, the US has succeeded in bringing India on board as a key partner in the Indo-Pacific region. The visit was also significant as the US has become India’s largest trading partner in 2022, surpassing China. It provides India with a new hope for cutting the huge trade imbalance it has with China.  

In addition to semiconductors, the exchanges between the two sides include: infrastructure development, economic integration of countries sharing democratic values in the Indo-Pacific region, India’s participation in the Indo-Pacific Economic Framework for Prosperity (IPEF), supply chain issues, cyber threats and data security, the pharmaceutical industry, technology transfer, critical and strategic minerals (including rare earths), clean energy technology, and post-pandemic economic recovery. 

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The visit also reflects the increasing cooperation and collaboration between the two Indo-Pacific countries with shared democratic values. A similar remark on “shared values of democracy and freedom” was made during Nancy Pelosi’s visit to Taiwan in August 2022. Covertly, the visit of Gina Raimondo is part of the United States’ effort to strengthen its grip in the Indo-Pacific region, with China as its other ideological rival. 

The strategic competition between the US and China is quite visible as the two major powers engage in trade and technological competition. As China poses a major threat to the US military, security, and economic interests in the Indo-Pacific region, Washington seems to be getting closer to New Delhi to reduce reliance on China for semiconductors and other critical technologies. The Biden administration signed the CHIPS and Science Act on August 9, 2022, to promote self-reliance and closer cooperation with allies and partners to fix vulnerabilities in semiconductor supply chains. 

While India is building a partnership with the US in the key technology sector, Beijing is facing more heat in its effort to become a key player in the semiconductor industry sector. In October 2022, the US imposed export restrictions on shipping American semiconductor manufacturing equipment. However, the move could not be effective without the participation of other key exporters of the same core technologies and equipment in the international market. 

After placing restrictions on the export of extreme ultraviolet (EUV) lithography machines to China in 2019, the Netherlands government has agreed with its US and Japanese counterparts to restrict the export of advanced deep ultra-violet (DUV) lithography machines as well. A secret meeting was convened in Washington, D.C., on January 27, 2023. Washington has reportedly courted the Dutch authorities by inviting the Hague to host this year’s ‘Summit for Democracy’ as part of building a coalition of democratic countries. Similarly, the Japanese semiconductor industries, such as Tokyo Electron and Nikon Corp., will restrict exports of semiconductor equipment to China as part of this understanding. Against this backdrop, closer cooperation between India and the US in the key technology sector could have wider geopolitical and geoeconomic ramifications. 

India as a Semiconductor Powerhouse 

The most important outcome of the visit is the signing of an MoU on establishing semiconductor supply chain and innovation partnership under the framework of India-US Commercial Dialogue held in New Delhi on March 10, 2023. The deal was aimed at a collaborative mechanism on semiconductor supply chain resiliency and diversification in view of the CHIPS and Science Act of the US and India’s Semiconductor Mission. 

The current geopolitical environment provides India with an opportunity to accelerate the development of the domestic semiconductor industry. This offer from the Biden administration is potent enough to change the technological landscape of India. Most importantly, the domestic policy of India is also in favour of encouraging investment in the chip industry. 

The Modi government has launched a US$10 million incentive plan under the Indian Semiconductor Mission to boost the domestic semiconductor industry. India has strong capabilities for semiconductor design and engineering. However, the deal aims to turn India into a key player in the assembly, testing, and packaging of the chips, not just fabrication. It will help India become a major player contributing to the diversification of supply chains for chips in the global market. 

On the question of India’s semiconductor ecosystem, India is taking the first step with the signing of the MoU with the US. In the long run, the deal is an effort towards turning India into a major manufacturing hub as an alternative to China. India has to work on enhancing its semiconductor production capacity at home to meet the local demand. With high investment coming to the country, further expansion of production capacity will help India manufacture more chips for other international clients. Also, labour supply is an important factor that needs to be addressed. 

Speaking to Nikkei Asia, Chris Miller, an associate professor at Tufts University and author of the book titled “Chip War”, said that effective tax policy and incentives are the easier parts of the game to attract investments, while the harder part is the “overall ecosystem”. The success of the semiconductor industry depends largely on infrastructure, the availability of a workforce, and the ecosystem. Moreover, he added that customer demand is the key to the success of any new chip supply chain. This expert opinion points towards the gaps India needs to fill before writing a successful semiconductor story. 

Moreover, the US Commerce Secretary’s visit was well-timed and critical in view of the Russia-Ukraine conflict and the emerging geopolitical environment in the Indo-Pacific region, where China is making efforts to advance its technological prowess in the semiconductor sector. It is a well-known fact that the close friendship between India and Russia remains a matter of concern in the India-US strategic partnership. The same has been strongly defended by the Indian authorities time and again. India’s close defence cooperation with Russia is irreplaceable in the foreseeable future. Nevertheless, semiconductor technology is something that New Delhi cannot ignore in order to tap into the huge market and various emerging technologies for both civilian and military purposes. This is something that Russia cannot provide. And China is struggling in the wake of export control measures introduced by the US and its allies.  

The Global Times of China was quick to term the development as the US’s move to “enlist India to join its small, exclusionary circle against China”. Moreover, the report also refers to India’s weak industrial base, lack of qualified personnel, and poor business environment as impediments to its emergence as a major player in the semiconductor sector. 

Green and Clean Energy Technology

The India-US Commercial Dialogue also focused on energy security and the reduction of greenhouse gas emissions. Reducing supply chain dependence for solar equipment, hydrogen technologies, biofuels, wind turbines, the smart grid, energy storage, and liquefied natural gas were deliberated and discussed as part of a partnership in green and clean energy technology. 

India plans to install a total of 280 gigawatts of solar energy by 2030, but it imports nearly 80 percent of the solar components from China. Besides, India faced supply chain disruptions during the COVID-19 pandemic, and heavy reliance on China has become a major problem. Under ‘Make in India’ campaign, the government is planning to cut imports from China by investing huge amounts in the local manufacturing of solar modules. After putting curbs on imports from China in 2020, the government is considering a relaxation of the ban as domestic production has failed to meet the increasing demand. Such imports from China constitute a big chunk of the trade imbalance between India and China. However, without the expansion of local production, the country has to rely on imports to meet its target of generating more renewable and clean energy sources. 

Challenges Ahead

There are some challenges to India-US trade and technological cooperation as a natural outcome of bilateral engagement between the two countries with differing levels of development and technological advancement. One key example is the issue of technology transfer relating to clean energy. Moreover, geopolitical competition and rivalry also create another set of challenges to bilateral relationships. 

The sour relationship between New Delhi and Beijing is reflected in the emerging partnership between India and the US. The issue of semiconductor industry and supply chains is one very sensitive area that can further affect India-China relations. In this context, one might recall the fact that India and China had conducted several rounds of meetings over the LAC following the Galwan clash. Moreover, India’s approach towards Huawei and ZTE and ban on several Chinese apps over security concerns are bilateral issues that are being swept under the rug. 

Under the Biden administration, the US has become India’s largest trading partner in 2022, marking a new era in close cooperation between the two democratic nations. Earlier, the Trump administration had imposed import duties on steel products and withdrawn Generalised System of Preferences (GSP) benefits on some of India’s major export items. Moreover, there are differences between India and the US over data transfer, liberalisation of e-commerce rules, work visa restrictions, technology transfer, non-tariff barriers relating to sanitary and phytosanitary standards, and technical barriers. 

Recently, the Adani Group, led by Gautam Adani, has been in the news over alleged fraud and stock manipulation. Hidenburg Research, a New York-based firm, published a report on January 24, 2023, accusing the Adani Group of committing “brazen accounting fraud, stock manipulation, and money laundering”. The Adani Group has rejected the allegation. 

Meanwhile, TotalEnergies, a French power company, has suspended a green hydrogen project with the Adani Group. Adani Green Energy is a subsidiary of the Adani Group with an interest in clean energy technology. It is yet to be seen whether the sensational report will affect confidence in cooperation and technology sharing with US firms on clean energy when the two sides are gearing up to strengthen their partnership in critical and emerging technology sectors.

After joining IPEF and the Quadrilateral Security Dialogue (commonly known as QUAD), the move by the Biden administration and the Narendra Modi-led government towards strengthening the India-US partnership through a semiconductor alliance could have far-reaching consequences for the emerging world order. Similarly, Chinese President Xi Jinping’s visit to Moscow in March this year also deliberated on enhancing the resilience of industrial and supply chains and expressed serious concern over military security ties with the US and other Indo-Pacific countries. Such developments call for serious efforts to work on the areas of convergence between India and China  and address the major differences, including boundary issues.   

The writer is a former Research Associate/Associate Fellow at the Centre for Air Power Studies (CAPS), New Delhi and Research Fellow at Indian Council of World Affairs (ICWA), New Delhi. He is also an Imphal-based independent researcher and founder of Wakonpung, a community library and sustainable livelihood initiative.

Disclaimer: The credit for the image goes to the original owner and The North East Affairs does not claim the ownership and/or the infringement.

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