Opinion On semiconductors, jugaad won’t do

My arguments are based on qualitative and anecdotal evidence assembled over the years through observation, case studies, and other insightful conversations with government and business that bookish economists would mock. Even at the cost of their ire, I proceed, but with caution. It is important to recognise upfront that as a country we have built islands of excellence in certain fields surrounded by a sea of ordinariness. This is true in certain manufacturing segments, and some services, in areas such as health and education.

Let me begin with a tale told to me by my late father around the purchase of his first car — a Fiat 1100D in the early 1970s in Shillong — where he was posted, the memory of which still reverberates in my consciousness. As an army officer, he was entitled to an “out-of-turn” allotment of a car but had to pay the full purchase price six months in advance of receiving it. Readers from generations X, Y, and Z must note that India was then a nation defined by severe scarcities of all kinds, and automobiles were one among many other sectors. Unfortunately for my father, when the day of reckoning, finally arrived, transportation had already wrecked the odd-looking bulging fenders of the Fiat 1100 D. My father requested repair, but the dealer politely declined. But because my father was an officer of the revered army, he was offered a refund, without interest of course. Many other claimants would gladly buy the injured car at a premium, the dealer said.

This incident occurred just a few years before the Foreign Exchange Regulation Act (FERA) and other insidious regulations combined to spawn a culture of scarcity, mediocrity, and manoeuvring in an economy that barely managed to stay afloat. While there may have been one or two positive aspects to that system, such as low emissions and moderate inequality, it stifled innovation and discouraged excellence. In a protected, tariff-walled economy, a monopolist could and did sell sloppy products at high prices in a supply-constrained environment.

Fast forward to 2023 and India is a vastly different story. In purchasing power parity terms, we are the third-largest economy in the world. Consumption has also increased manifold. A fifth of all global semiconductor design is done in India. And Indians and people of Indian origin are leading some of the top global tech companies. The ability to manufacture excellence is there, but sadly it is not pervasive enough.

India has always been a country with islands of excellence engulfed by unevenness. Both economic theory and empirical evidence suggest significant externalities will be created by the excellence of fab investment. It promises to boost component and ancillary manufacturing, along with providing more employment opportunities for skilled workers. This will not happen overnight, naturally, but will develop in tandem with the growth of the semiconductor sector.

But there is one important, intangible attribute that India will need to build to leverage all the benefits of having a fabrication unit. That is to create a culture of excellence. Too often we have seen that our products suffer from a last-mile malady — whether it is packaging, after-sales service, or simply giving the finishing touches. The “jugaad” syndrome, as opposed to the compelling frugal innovation, has existed in part because the Indian market has not been tested by exacting international standards. This has meant that even substandard products have enjoyed demand, while the repair market has concomitantly flourished. Erratic and outright shortages have resulted in expensive captive power plants being built.

However, none of this jugaad will be possible for semiconductors. Power fluctuations are an anathema for chips. With the minutest interruptions leading to a total batch loss worth millions of dollars. Hence, the process has to be immaculate, the packaging will need to be of Japanese quality, and the transportation impeccable. China took several decades to move up the value chain, and we are just about beginning our journey. The bridge between islands of excellence and the rest of the economy will need to be built leading to a convergence towards the best, and not to the mean. Until that happens, the new fabs will need to be protected from the vagaries of market and government failures, just like we have shielded ISRO to produce excellence that has remarkably landed us on the moon.

The writer is Dean, School of Humanities and Social Sciences at Shiv Nadar Institute of Eminence and Professor of Economics. Views are personal