CURRENT AFFAIRS – 21/06/2023

To set up a semiconductor fabrication plant in India is not mere hubris. There is a growing market. There are also strategic reasons: India’s susceptibility to coercion increases due to its dependence on the import of semiconductors. Therefore, the government’s 2022 Semiconductor Mission is laudable. But today, there is still uncertainty about whether India will have a fab. In this context, it is important to understand why earlier attempts failed and examine alternate approaches.

The first serious attempt was made in 2007 in the form of a Special Incentive Package (SIP), but it yielded no response. The second attempt in the form of Modified SIP in 2012 fared better. After over two years of extensive outreach with practically all the major fab companies in the world, India came close to having a fab. Two consortia were approved by the Cabinet with an attractive set of incentives. Jaiprakash Associates in partnership with IBM and Israeli company TowerJazz constituted one, while the other was led by Hindustan Semiconductor Manufacturing Corporation along with ST Microelectronics. The two fabs together involved investment of $10 billion, and the government offered incentives amounting to nearly $5 billion in the form of cash and tax cuts. Locations for the fabs were finalised and land was allotted. But finally, both failed to mobilise resources.

Semiconductor fabrication represents the ultimate frontier of human tech advancement. The frontier has been advancing adhering to Moore’s law that the number of transistors in a unit area doubles every 18 months. But the progress of miniaturisation is accompanied by higher complexity and costs. As a result, the industry has seen a decline in the number of participants.

China started late in the semiconductor fab industry. But backed by massive government financial support over the last two decades, it acquired hundreds of loss-making fabs from around the world and built its fab industry. Aided by lower manufacturing costs and a massive electronics manufacturing industry, China’s chip production has grown rapidly. By the time the U.S., the traditional leader in this game, realised, China had become one of the major producers of chips. Aided by its market supremacy in rare earths, which are essential for chip production, it has a strategic stranglehold on chip-making. Over the last year, the U.S. and its Western allies have blocked the transfer of the latest fab-related technology to China. But this could be a case of closing the stable door after the horses have bolted. The U.S. enacted the CHIPS and Science Act in 2022, with nearly $40 billion in subsidies, in an effort to bring back semiconductor manufacturing to the the country. The European Union sanctioned €7.4 billion for a new fab in France. India will have to contend with these countries in what has become an intense chip warfare.

Investment in a semiconductor fab is one of the riskiest. Billions of dollars need to be recovered before the technology becomes obsolete. This necessitates substantial production volumes for economic viability, often reaching levels that are adequate to meet global demand. It is therefore difficult to conceive of a fab which is based on the domestic market only. The advantage of semiconductors having a small freight-to-price ratio and a zero-custom duty regime under the Information Technology Agreement, 1996, facilitates production in a single location and global sales. This is why no company is interested in setting a greenfield fab.

Developing an ecosystem for chip manufacturing in a greenfield location is a major challenge. Hundreds of chemicals and gases are required for chip fabrication, people need to be trained, and abundant clean water be made available. But above all is the art of chip-making. Despite the best of equipment, poor quality and low yields can make fabs fail.

There are other issues, such as whether to set up a logic/processor, memory or analog fab. An electronic equipment and its functionalities are characterised by their logic chips, which are therefore strategically important and generate the highest profit. The most advanced set of technologies is needed to manufacture them. Analog chips are essential, but have the least strategic value. Memory fabs use the most advanced feature nodes, while analog fabs can be even as large as 130 nm. Logic fabs are the most expensive and analog fabs the least. A relatively easier option is Assembly, Testing, Packaging and Marking (ATMP), to get the fab ecosystem developed before the full-fledged fab is set up. But ATMPs have little value in terms of actual chip-making.

India’s strategy has been to set up a new logic fab. China, which acquired loss-making fabs and then set up its own logic fab, provides lessons. Acquiring existing fabs has many advantages: they are reasonably priced, have stabilised technology, a supply chain ecosystem, an established product line, and market. They will enable India to build the fab ecosystem and train human resources. Much lower subsidies would be required, and the funds saved could be used for advanced R&D in fab technologies which will help build state-of-the-art fab in next few years. Another strategy could be setting up ATMPs. Tessolve, now acquired by Tatas, had set up an ATMP in 2013-14. This ATMP is successfully packaging chips upto 7 nm feature size. China has over 100 ATMPs.

China started on the fab journey about 20 years ago. As the Chinese saying goes, the best time to plant a tree was 20 years ago, but the second best time is now.

The dizzying array of daily limits on United Payments Interface (UPI) transactions set by apps and banks — both in terms of value and volume — has put the spotlight on the rapid rise in such transactions in India in recent years.

In 2021, the National Payments Corporation of India (NCPI) limited the number of daily transactions users can make to 20, and the amount to ₹1 lakh per day. However, banks and apps have come up with their own limits at various points in time in recent months. This has created a complex web of limitations both in value and volume. For instance, according to ICICI bank’s UPI FAQ page, the number of transactions is limited to 10 in a 24-hour period, whereas Bank of Baroda and HDFC Bank allow 20 transactions in the same period.

Such limits were introduced given the surge in the volume of UPI transactions in India in recent years after it was popularised as an alternative to cash in the period after demonetisation. UPI payments were introduced in India as a pilot programme on April 11, 2016.

Chart 1 shows the month-wise volume of UPI transactions in million between April 2016 and May 2023. In May 2018, around 190 million UPI payments were made in India. This rose to 9,415 million in May 2023 — an astonishing increase of nearly 4,855%.

Chart 2 shows the share of various instruments in the volume of retail payments in India over time. In 2017-18, the share of UPI in all retail payments was just 5.9%, while pre-paid payment instruments (wallets offered by Paytm and Amazon, gift vouchers, etc.) and debit cards dominated with shares of over 20% each. In 2022-23, UPI edged out all instruments with its share increasing to over 73%, while pre-paid payment instruments came a distant second with a 6.5% share. Also, the share of credit cards in retail payments decreased from over 11% to just 2.5% in the same period.

However, it should be noted that the surge in transactions was mostly in terms of volume and not value. The value of UPI transactions carried out in May 2018 was ₹33,288 crore, which amounts to ₹1,756 per transaction. The corresponding figure for May 2023 was ₹14,89,145 crore, which amounts to ₹1,581 per transaction — a fall of ₹175 per transaction in five years. Chart 3 shows the share of various instruments in the value of retail payments in India over time. In 2017-18, the share of UPI in the total value of retail payments was just 0.4%. It increased to 21.1% in 2022-23.

When the surge in volume and the decline in value are read together, two trends emerge. First, consumers are increasingly using UPI as an alternative to petty cash, with the value associated with each transaction becoming smaller and smaller over time. Second, according to PwC’s Indian payments handbook, released in December 2020, banks are struggling to keep up with the surge in UPI payments by upgrading their banking infrastructure and technical systems. This struggle is leading to transaction failures. This is also why smaller banks are setting UPI transaction limits which are much lower than even the ₹1 lakh allowed by the NCPI.

Charts 4 and 5 show the volume of UPI transactions through UPI apps and remitter banks, respectively. PhonePe dominates the apps, closely followed by GPay, while Paytm was a distant third. Among banks, State Bank of India was the remitter bank for a majority of UPI transactions, while HDFC was a distant second.

China on Tuesday blocked a proposal by India and the U.S. at the United Nations to designate Pakistan-based Lashkar-e-Taiba terrorist Sajid Mir as a global terrorist. Mir is wanted for his involvement in the 26/11 Mumbai terror attacks.

Beijing blocked the proposal that had been moved by the U.S. and co-designated by India to blacklist Mir under the 1267 Al Qaeda Sanctions Committee of the UN Security Council as a global terrorist and subject him to assets freeze, travel ban and arms embargo.

In September last year, it was learnt that China had put a hold on the proposal to designate Mir at the UN.

Mir, believed to be in his mid-40s, is one of India’s most wanted terrorists and has a bounty of $5 million placed on his head by the U.S. for his role in the November 2008 terror attacks in Mumbai.

In June last year, Mir was jailed for over 15 years in a terror-financing case by an anti-terrorism court in Pakistan.

Pakistani authorities had in the past claimed that Mir had died, but Western countries remained unconvinced and demanded proof of his death.

This issue became a major sticking point in the assessment by the Financial Action Task Force (FATF) of Pakistan’s progress on the action plan late last year. “Mir was LeT’s operations manager for the attacks, playing a leading role in their planning, preparation, and execution,” the U.S. State Department has said.

Beijing, an all-weather friend of Islamabad, has repeatedly put hold on listings to blacklist Pakistan-based terrorists under the sanctions committee of the UN Security Council.

For his role in the Mumbai attacks, Mir was indicted in the U.S. in April 2011.

GEMCOVAC-OM, India’s first indigenous mRNA vaccine for the Omicron variant of the novel coronavirus, was approved under emergency use guidelines by the Drug Controller General of India (DCGI) late on Monday. This comes a year after the Pune-based Gennova Biopharmaceuticals Ltd. got approval for GEMCOVAC-19 against COVID-19.

Both the vaccines are yet to be commercially available, though Gennova officials said at a press conference on Tuesday that the vaccines were likely to be formally “launched and rolled out” within the next “two to three weeks”.

The company said GEMCOVAC-OM was stable in a 2-8 degrees Celsius range and hence could be stored in ordinary refrigerators. It could be administered into the skin via a “needle-free” PharmaJet system.

Data from clinical trials, which are not public yet but submitted to the DCGI for review, suggested that GENCOVAC-OM had a “greater” safety profile as Covishield and generated more neutralising antibodies, said Gennova CEO Sanjay Singh.

Besides spreading awareness of the benefits of yoga and meditation worldwide, India will be promoting the skill of its tribal artisans this Yoga Day.

The Tribal Cooperative Marketing Development Federation of India (TRIFED) is collaborating with the Ministry of Ayush to supply 34,000 yoga mats procured exclusively from tribal artisans across the country. These will bear the distinct designs and motifs representative of their respective communities.

Each mat is a vibrant testament to the diverse cultural heritage of India’s tribes reflecting their stories, folklore and artistic legacy, said a senior official at the Ministry of Tribal Affairs.

He added that the effort is aimed at bolstering economic prospects of tribal communities. This year’s theme of International Day of Yoga is ‘Yoga for Vasudhaiva Kutumbakam’, which indicates Indian socio-cultural heritage. Further, it will witness unique features such as the Ocean Ring of Yoga.

The story so far:

On June 15, the Supreme Court held that there was “no merit” in Coal India Ltd (CIL), a public sector undertaking, being excluded from the purview of the Competition Act. The Court was hearing the PSU’s appeal against the Competition Appellate Tribunal’s order which alleged the former of abusing its position.

The chain of events goes back to March 2017 when the Competition Commission of India (CCI) had imposed a penalty of ₹591.01 crore on CIL for “imposing unfair/discriminatory conditions in fuel supply agreements (FSAs) with the power producers for supply of non-coking coal.” In other words, CIL was found to be supplying lower quality of the essential resource at higher prices and placing opaque conditions in the contract about supply parameters and quality. The regulator contended that Coal India and its subsidiaries operated independently of market forces and enjoyed market dominance in the relevant market with respect to production and supply of non-coking coal in India.

Coal India argued that it operated with the principles of ‘common good’ and ensuring equitable distribution of the essential natural resource. With this objective, it was secured as a ‘monopoly’ under the Nationalisation Act, 1973 (more specifically, the Coal Mines (Nationalisation) Act, 1973).

The entity said that it may have to adhere to a differential pricing mechanism to encourage captive coal production (referring to mines that are handed over to companies for specific and exclusive use through lease or any other route). Differential pricing, which may be inconsistent with market principles, was to ensure the viability of the larger operating ecosystem as well as for pursuing welfare objectives. Furthermore, coal supply also has a bearing on larger national policies, for example, if the government were to encourage growth in backward areas through increased allocation.

The PSU stated that it did not operate in the commercial sphere. It specifically pointed to 345 out of its 462 mines having suffered cumulative losses totalling ₹9,878 crore in 2012-13.

The respondents broadened the scope of the arguments. The Raghavan Committee (2020) report, put up for perusal by the respondents, had observed that state monopolies were not conducive to the best interests of the nation. They could not be allowed to operate in a state of inefficiency and should instead, operate amid competition. Furthermore, coal ceased to be an ‘essential commodity’ in February 2007 and the Nationalisation Act too was removed from the Ninth Schedule (laws that cannot be challenged in court) in 2017. It was also pointed out that Coal India was a fully-government owned entity until the disinvestment in 2010. The government’s shareholding reduced to 67% with the rest held by private hands. Moreover, it was stated that the CIL directed 80% of its supplies to power companies. The latter would then pass power generated using coal to discoms (distribution companies), who, in turn, would supply power to the final consumer. The continual supply of coal, adherence to the contract, reasonableness in the rates and quality of coal also serve a common good, the respondents contended. Coal constitutes about 60 to 70% of the costs for power generation companies. Thus, irregular prices and supply will have a significant bearing indirectly on consumers.

The court said there was “no merit” in the argument that the Competition Act would not apply to CIL because they are governed by the Nationalisation Act, and it cannot be reconciled with the Competition Act. “The novel idea which permeates the Act, would stand frustrated, in fact, if the state monopolies, the government companies and public sector units are left free to contravene the (competition) act,” it stated. Separately, it said that entities cannot act with caprice, treat unfairly otherwise or similarly situated entities with discrimination.

According to Anshuman Sakle, partner at law-firm Khaitan & Co, the judgment reinforced the principle of “competitive neutrality” — entailing that the Competition Act equally applies to public and private sector enterprises.