Why India’s Semiconductor Future Needs Empowerment, Not Red Tape

‘Make in India’ was launched with much fanfare a decade ago, with the mission of making India a global hub for manufacturing, design, and innovation.  However, over the years, the mission has floundered, thanks to many hit-wicket policies such as the recently withdrawn Chip Import Monitoring System (CHIMS).

To understand CHIMS, picture a census and import control rolled into one regulation. Launched in October 2021, it mandated prior registration of most integrated circuits (chips) through an Import Management System portal, adding another complicated regulatory layer to the existing Importer-Exporter Code (IEC) registration. Applying for approval entailed submitting extensive information, including technical documentation of the chips to be imported. The customs would clear the consignments only upon receiving this chip license.

For reasons that may never be known, CHIMS imposed an additional burden and cost to the routine business of importing chips, affecting the entire electronic design services ecosystem. In the early phase of its rollout, the scheme caused inconvenience and delays among large importers. For small and medium enterprises, startups and the general chip design industry, CHIMS was an unwelcome overhead, increasing the already high costs of doing business in India. The hardest hit, however, were innovators: CHIMS pretty much smothered their initiatives by making the import of chips in small quantities harder and far more unpredictable. While innovators in the US and Europe could buy components directly from China (despite an ongoing trade war), Indian innovators couldn’t.

Policies like CHIMS placing procedural hurdles have an invisible but direct impact on innovation. The predominantlyservice-orientedIndian electronics product development industry designs devices for the export market where adherence to timelines is non-negotiable as it is integrated to multiple downstream dependencies. Unfortunately, with CHIMS in place, hardware enthusiasts were forced to spend most of their time wrestling with unnecessary bureaucratic challenges rather than on cracking breakthrough innovations.

The worst part is that the Directorate General of Foreign Trade (DGFT) notification that introduced these restrictions cited no reason for its decision. The best guess is that the government decided to bring it on for two reasons. First, it aimed to mine the large amounts of data it needed to identify categories for incentivising local semiconductor manufacturing. However, given the fast-paced nature of the industry, a blanket chip census was never going to succeed, as it could not possibly capture the rapidly changing dynamics of the business. In any case, customs clearance already relies on the Harmonised System of Nomenclature (HSN) codes, which provide detailed global classification of goods, giving the government access to all the data it could conceivably need. Moreover, such objectives are best achieved through surveys with active industry participation, without imposing unnecessary burdens.

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The second and more plausible reason for CHIMS was geopolitical, a part of India’s response to the Galawan conflict, given that nearly 60 per cent of India’s chip imports were from Mainland China and Hong Kong. Realistically, however, in the absence of viable alternatives, CHIMS had little chance of achieving its strategic geopolitical goal, if that indeed was its purpose. What it did achieve was to add procedural delays and overheads, scuppering both the industry and innovation.  

As suddenly and bafflingly as it was introduced, CHIMS has been rolled back, breathing fresh hope into the sector. No explanation has been given for this volte face nor have any details been shared about the outcomes of CHIMS over the past three years. One can only assume that the DGFT finally recognised the harm it was causing to the Indian electronics industry. Better late than never.

India simply cannot repeat such policy faux pas if it wishes to achieve the objective of Make in India to promote innovation and manufacturing in the country. Unlike software, building hardware capabilities is capital intensive and time consuming. Poor access to capital is a known bugbear in our ecosystem—the reason why India lags in hardware even as it goes toe to toe with global leaders in software. Less than 5% of the one lakh-plus Indian startups are hardware-based. Any hurdle small-scale innovators face is a big dampener for the overall ecosystem.

Building a local semiconductor ecosystem is a long drawn-out game, involving gradual, incremental additions in capability that could eventually integrate us into global value chains over an extended period of time. Winners and losers should be chosen by the market, not by arbitrary government policies. Indian designers must have the freedom to choose the best components from wherever they are available. Market-distorting policies that restrict choices are bound to stifle innovation and erode the competiveness of India’s chip industry in global markets. Looking to scale only to the size of local markets can limit economic viability, as, by global standards, India’s market for electronics is miniscule.

The product design industry is many times the size of the semiconductor design industry. Both must be fostered for India to achieve a position of importance in the semiconductor value chain.  The key is to craft policies that empower and enable bottom-up innovation across the spectrum spanning students, individual innovators, startups and MSMEs.  Freedom to innovate unfettered by government regulations is the path to leadership in the industry.

Shree Kumar is an embedded systems specialist. Pranay Kotasthane chairs Takshashila Institution’s High Tech Geopolitics Programme.