The government of India has approved setting up two semiconductor wafer fabrication (FAB) manufacturing facilities in India. These FAB units are to be set up by two business consortia, one led by Jaiprakash Associates Limited with IBM USA as technology partner [Technology: 90/65/45/28 nm, Capacity: 40,000 WSPM] and other led by HSMC Technologies India Pvt. Ltd with ST Microelectronics as technology partner [Technology: 90/65/45/28/22 nm, Capacity: 40,000 WSPM].
The government of India will extend several incentives to the two consortia:
- 25% subsidy on capital expenditure and tax reimbursement as admissible under Modified Special Incentive Package Scheme (M-SIPS) Policy.
- Exemption of Basic Customs Duty (BCD) for non-covered capital items.
- 200% deduction on expenditure on R&D as admissible under Section 35 (2AB) of the Income Tax (IT) Act.
- Investment linked deductions under Section 35AD of the IT Act.
- Interest free loan of approx. Rs. 5124 crore each. (Exact amount to be calculated on appraisal of Detailed Project Report)
In my recently published article, I made a case that one way for India to reduce its current account deficits from its imported electronics is by attracting inflow of foreign capital into India. This would compensate for any flight of foreign capital since the end of Quantitative Easing (QE) policies of Fed.
Since the financial crisis of 2008, countries like India have been prime beneficiaries of Quantitative Easing (QE) policies of the US Federal reserve. The investors borrowed cheap short-term money in the US and invested in higher yielding assets in India. The massive capital inflows also let India comfortably finance its trade and current account deficits. However, now that QE has come to an end in the US, the capital inflows into India will start moving out putting pressure on Indian rupee in coming years. In India, the Reserve Bank has been intervening in support of the struggling rupee in recent sessions, triggered by a worsening trade deficit.
As part of its Make in India initiative, India wants to become a global semiconductor manufacturing hub like China. In an attempt to build India's industrial base nationwide, prime minister Narendra Modi is pushing the Make in India campaign, designed to attract foreign investment by highlighting the ongoing changes. "We have to increase manufacturing and ensure that the benefits reach the youth of our nation," Modi tweeted after the initiative's Sept. 25 introduction. With this vision in mind, the prime minister of India, Narendra Modi has also invited US president Barack Obama as a chief guest on the occasion of India's 66th republic day celebrations on January 26, 2015.
Make in India in high-tech semiconductor manufacturing is certainly important step taken by India to minimize India's current account deficits because of large quantity of imported electronics due to its burgeoning middle class. However, without significant macroeconomic reforms, Make in India will not be able to solve its intended goal of reducing India's current account deficits. Let us analyze the problem before we look into proposed solutions for success of Make in India.