Semiconductor nationalism
There’s a passage in an interview of former RBI governor Raghuram Rajan, published by Frontline on September 1, that many people seem to have misunderstood, especially on Twitter, where — perhaps unsurprisingly — it has been reduced to “India shouldn’t make chips because it can smuggle them in instead”. Excerpt:
I want to emphasise that I’m not against self-sufficiency in defence. That’s very important. If you want foreign presence, get them to manufacture in India because at least we will have control over the factories. Let’s not be overly dependent on importing defence equipment. We had to do this when we were far behind the technical frontier but let’s try and get closer to the frontier sooner. People will say that for this we will have to have the private sector’s presence; and I’m not convinced that it has to be this way but if there are areas that we need to have the private sector’s presence in the defence sector, maybe that could be considered.
The problem, of course, is as soon as you say there are these strategic industries, everything becomes a strategic industry. And then it has no value. Rice is a strategic industry because we feed our people. No, be careful, pick the areas you absolutely need to have a presence in.
This is why when you hear me rail in public [against industrial policy], it’s when I see people say that India needs to make semiconductor chips [by pouring several billion dollars.] My question is: why? This is the most easily smuggled thing on earth. China is procuring Nvidia’s frontline chips through the backdoor. It sets up units in Thailand and Malaysia, and the services of those units are given to China. Russia has run a war since 2022, and it requires chips which are probably not frontline but second- or third-line chips, and it smuggles them in. Those big Nvidia chips, you can’t smuggle them in suitcases, but the rest you can. Who’s going to prevent you from buying it?
We have more than 35 million Indians in our global diaspora community, so even if everybody shuns us, the diaspora will at least buy these chips for us. What I’m saying is we can never be so independent in chip manufacturing that we will not need to source inputs globally.
If, tomorrow, the world breaks into isolated countries because of war, then forget about chip manufacturing because we will need the machines, we will need the silicon, we will need all that from elsewhere. When I say strategic, let’s be careful about what we want. But we have to absolutely make sure that our munitions are manufactured domestically. Because in the event of a war, if we run out of munitions, we are not going to get it from elsewhere. We need to be clever.
Rajan is clear that India should reduce its dependence on imported defence equipment and make sure it manufactures the munitions it needs within the country, where the government can control the factories. Herein lies the rub: having to do all this doesn’t automatically make the industry strategic — but which is the argument the Indian government has been applying to semiconductors. Rajan's rice example is illustratively absurd: if supporting the Indian population, such as by having to feed it, makes an enterprise strategic, then almost all enterprises with Indian consumers are going to become strategic, and the term loses all meaning.
Specifically, India spending several billion dollars trying to set up domestic semiconductor manufacturing is hard to justify when the goal is to achieve self-sufficiency alone because semiconductors are traded worldwide and depend on international supply chains, so even when trade becomes restricted, India can get many of the chips it needs through other international networks, often at a lower cost than it would incur. Likewise, even if India builds fabs, it will unavoidably have to get the inputs these facilities need from abroad. This is not the case for defence manufacturing, where complete self-sufficiency is as possible as it is desirable.
On semiconductors, India has to gain more than just self-sufficiency — and we need to see evidence for that before we deem the pursuit of self-sufficiency to be legitimate. Right now, the evidence points the other way: pretending India can have a completely domestic semiconductor stack has excused the diversion of considerable public funds as subsidies to private capital. And that value has also accrued to a few firms rather than to workers — as Rajan said, salaries in manufacturing have yet to rise above being an Uber driver — and society.
Instead, universities should develop courses in chip design, more people should enter the industrial ecosystem with the skills to develop chips for particular sectors, industry should invest more in R&D to take these designs to market, the state should invest more in infrastructure and quality and interoperability standards, more people — especially beyond tier-I centres — should have better jobs, and overall productivity should rise. In effect, becoming self-sufficient without inculcating the capacity to absorb all the value that status could generate is only import substitution, and will ultimately lead to what biotech startup PopVax's founder Soham Sankaran astutely diagnosed to be the status quo:
Too scared of R&D risk and actual competition to develop products that can go toe-to-toe with the best of the best from around the world in high-income markets, despite the huge financial rewards on offer, our cash-rich incurious billionaires and their captive policymakers have blown opportunity after opportunity to take Indian exports to the world, content to fatten themselves up on the domestic market by putting up both de jure trade barriers such as tariffs, as high as 100% on many cars, and even more damaging patronage-based unwritten barriers to entry that prevent all but the favoured few from doing anything at scale. This means that these companies have no impetus to innovate, or even to catch up fast enough to deliver something that is equivalent to what the global market leaders are selling and, lo and behold, they don’t!
So India should aim for strategic capacity, not the more limited self-sufficiency. That would also restore some meaning to the word.
