Thwarted by oil and gold, India wants to tackle its import binge with electronics

If India could do something about oil and gold, its trade deficit would look respectable; indeed it might even tip towards a surplus. From 2012 to 2013, India spent $169 billion on oil imports and $54 billion on gold imports, creating a deficit of $190 billion. But there is a third category that worries India’s policymakers: electronics hardware.

With imports of $31.5 billion, the category is small fry compared to oil and gold. Yet electronics hardware makes up the country’s third largest expense, and it’s rising fast. Unlike oil or gold, which India cannot magically wish into existence, hardware is something it can produce locally. Yet India’s department of electronics and information technology estimates that by 2020 domestic production will account for only a quarter of the forecast demand of $400 billion worth of hardware. That is huge: The government thinks it is “likely that by 2020, electronics imports may far exceed oil imports.”

No wonder Indian policymakers are rejoicing this week. After years of trying to promote local semiconductor manufacturing with generous subsidies that could amount to 25% of the investment, the government has approved proposals from two consortia to build plants in India. Together, they will invest more than $8 billion in India. More importantly, they will help bring down India’s reliance on imports. Semiconductors account for $7 billion of India’s electronics imports and are expected to reach $50 billion by 2020.

It is not just the trade deficit that will benefit from India’s ambitions to manufacture chips domestically. India, like many countries, worries that using imported chips in its national infrastructure could in fact invite foreign powers to tap into its communications. Domestically-produced chips are less likely to contain hidden vulnerabilities. The plants are also good for the economy moreover, creating 22,000 jobs and help pushing up manufacturing’s share of GDP from 16% to a desired 20% by 2020. Chips are also the first step to creating a wider ecosystem of electronics manufacturing, the government hopes.

There are, however, significant obstacles to India’s fabrication dreams. Making semiconductors requires significant quantities of high-quality water and uninterrupted electricity supply, neither of which India does well. Others worry that the particular kind of semiconductors the two plants will manufacture will soon be outstripped by newer technologies, leaving India back where it started. Still, the government remains hopeful that it can help prospective manufacturers overcome these hurdles and attract many more. Among the optimists is Kapil Sibal, the minister for communications and information technology. “India needs not less than 15 fabs,” he told reporters, referring to chip-fabrication units.

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