64 10. MACROECONOMICS OF SEMICONDUCTOR MANUFACTURING
massive due to a growing middle class and would cause a disastrous failure of Make in India for
high-tech semiconductor manufacturing. e present plan will not be able to achieve its goal of
eliminating India’s projected current account deficits of $400 billion (from imported electronics)
by 2020. Only a balanced economy can help India make its huge investments sustainable so that
the semiconductor manufacturing facilities will be able to cater to a robust domestic consumer
demand.
Recently, the U.S. announced huge tariffs on solar goods from China and Taiwan as a first
step to boosts its domestic manufacturing. Eventually, the U.S. will have to impose tariffs on
all foreign manufactured goods entering the U.S. in order to boost domestic manufacturing and
eliminate its trade deficits. In that regard, Indian manufactured goods will be not able to compete
in the U.S. just because of their low cost of manufacturing when an import duty is imposed
from fair-trade policies. Hence, India needs to ensure that it has a robust domestic demand for
electronic goods so that the semiconductor wafer fabs remain in operation 24 7 to minimize
any idle time.
e solution to this macroeconomic crisis is to reform the Reserve Bank of India (RBI)’s
monetary policies to usher in a competitive free-market economy so that wages keep track with
employee productivity and eliminate budget deficits. Additionally, by ensuring that wages keep
track with productivity, a robust consumer demand can be ensured through the growth in real
wages as compared to unsustainable demand through the growth in consumer debt.
e trade deficits have to be eliminated by reforming free-trade policies by fair-trade poli-
cies or by managing its foreign exchange rates with China in order to boost U.S. exports to China.
In this way, these macroeconomic reforms, and by means of establishing a fabless-foundry semi-
conductor eco-system based on a three-tier business model, would lead to balanced economic
growth and a sustainable semiconductor manufacturing ecosystem for India.
10.3 CAN “MAKE IN INDIA” BECOME SUSTAINABLE FOR
THE INDIAN SEMICONDUCTOR MANUFACTURING
SECTOR WITH COMING MACROECONOMIC
CHANGES IN THE U.S. ECONOMY?
e semiconductor manufacturing is the most capital-intensive business and it is very important
to make these investments sustainable in the short term in order to ensure profitability in the
long term. Sustainability of the semiconductor wafer fabs involves being able to keep the fabs in
operation 24 7 to reduce the tool idle time and to manufacture semiconductor wafers that meet
the growing demand for consumer electronics and military needs.
My recent book Mass Capitalism: A Blueprint for Economic Revival, takes you on a journey
of semiconductor manufacturing in the U.S. semiconductor industry. e high cost of manufac-
turing and keeping track with the ITRS roadmap to keep up with progress of Moore’s Law has
forced the offshoring of the IC packing industry, design engineering services, and, eventually,
10.3. CAN “MAKEIN INDIA” BECOMESUSTAINABLEFORTHEINDIAN SEMICONDUCTOR 65
even the manufacture of semiconductor wafers from the United States to Asia. ese policies
of globalization have resulted in rising trade deficits for the U.S. e replacement of manufac-
turing sector with relatively low-paying service sector jobs has resulted in falling incomes and a
depreciating middle class in the U.S.
In this way, globalization of semiconductor manufacturing resulted in a loss of dominance of
the U.S. semiconductor industry and started to make this capital-intensive as well as knowledge-
intensive business unsustainable, leading to an early demise of Moore’s Law (due to economic
limits because of huge capital investments) because of poor RoIs due to poor domestic consumer
demand. Since the 2008 global financial crisis, the U.S. has been trying to revive its economy
with its benchmark interest rates close to 0% and following QE policies to stimulate its economy.
Instead of reviving the economy by boosting domestic consumer demand, the QE policies have
resulted in growing income disparity, as the wages of the middle class haven’t been growing to
boost consumer demand.
e growth in domestic demand from increased consumer borrowing due to low interest
rates is unsustainable as interest rates cannot remain low forever. Additionally, the low interest
rates have not increased domestic investments in the U.S. and, instead, investors have preferred to
get better returns on their investments by investing in developing countries with higher interest
rates, like India. Hence, low benchmark interest rates in developed economies like the U.S. and
Europe have primarily benefited the wealthy individuals in helping them get cheaper loans on
mortgage properties and helping them earn higher incomes through renting these properties.
ese monetary policies haven’t encouraged the easy money from QE to get invested in the U.S.
economy, as investors have preferred to invest for higher yields in countries like India. Hence, QE
policies have not been able to solve the problem of unemployment in the U.S. and have mostly
created low-paying and part-time jobs in the U.S.
Now that the QE has come to an end and the Fed is on track to raise its rates by end of
2015, the following macroeconomic changes are certain. First, the rising benchmark interest rates
would not be able to lure U.S. residents into increased borrowing for mortgaging cars and houses.
Additionally, when interest rates rise, the investors who have invested for short-term gains in
countries like India will move their investments for higher yields to the U.S. is would put a
sudden strain on the Indian rupee (INR). Hence, the net result of rising rates in the U.S. with
the present monetary policy would be a poor domestic consumer demand in U.S. from decreased
borrowing, and a strain on economies of developing countries like India through rising inflation.
ese changes would cause a rise in value of the USD and depreciate the INR. Since one year
of coming to power, although Prime Minister Narendra Modi has announced business-friendly
policies, the INR has depreciated from Rs. 58 per USD to Rs. 67 per USD.
e net result of rising interest rates in the U.S. would be rising inflation in India as in-
vestors looking for better gains would rush to the U.S. for higher returns. e largest withholder
of U.S. forex, viz. China, has signed currency swap deals with its major trading partners and
performs transactions in Yuan instead of USD. Hence, although the USD will rise from for-
66 10. MACROECONOMICS OF SEMICONDUCTOR MANUFACTURING
eign investments, the U.S. will not be able to reduce its trade deficits through exports as U.S.
manufactured goods would become expensive in international markets. As there will be no major
buyers for U.S. debt, due to bypassing of USD by major withholders of U.S. forex like China
and Russia, the only way forward for the Fed is to reform its current monetary policy so that
wages keep track with employee productivity, thereby reducing U.S. budget deficits. e U.S. has
also recently imposed huge tariffs on solar goods from China and Taiwan to boost its domestic
manufacturing. Eventually, the U.S. will also have to impose tariffs on all foreign goods entering
the U.S., to eliminate its trade deficits and revive its domestic manufacturing industry. Without
reforming its trade and monetary policies to reduce its trade and budget deficits, any rise in value
of the USD with a rise in the Fed’s benchmark interest rates would result in an increase in the
U.S. twin deficits, which would also cause an increase in supply of goods to the economy, which is
suffering from poor economic demand. is would cause a crash in profits of those corporations
when their manufactured goods remain unsold, thereby also crashing the U.S. stock market.
Taking these macroeconomic changes into consideration, India has the following things to
worry about for its Make in India plan. e plan to lure foreign investors to India to make India a
global semiconductor manufacturing hub like China could fail, if any of these investors are looking
for short-term gains, as semiconductor investments are long-term strategic investments. ese
investments pay off for any country over a long-term, they are not short-term investments that
yield a quick return like the financial sector of today’s economy. Hence, just like TSMC Inc. gets
its financial backing from the government of Taiwan, Samsung Inc. gets its financial backing from
the government of South Korea, and Globalfoundries Inc. gets backing from the government of
Abu Dhabi, the upcoming Indian semiconductor fabs should also be sponsored with the backing
of the government of India to make these capital-intensive investments sustainable. is approach
would minimize any chance of these capital-intensive investments becoming unsustainable when
investors move their investments out of India for their short-term gains due to the rise in U.S.
interest rates. Fabs in India, backed by state or central government, could license manufacturing
technology from developed economies and begin high-tech manufacturing in India.
ese huge capital investments in semiconductor wafer fabs can become sustainable only if
there is a solid economic demand for these semiconductor wafers in Indian electronics industry,
because the economic demand is presently slowing in developing economies, too. However, if
Indian government policies do not encourage consumption of domestic manufactured products
and hence if the import of foreign manufactured goods continues due to India’s free-trade poli-
cies, the trade deficits of India will continue to soar. e government recently passed some strict
guidelines to all ministries, asking them to give preference to domestically manufactured elec-
tronic products. is is a positive step forward aimed at boosting electronics production as part of
Prime Minister Narendra Modi’s Make in India drive. If trade deficits are allowed to soar, they
will put a further strain on the already troubled INR. Additionally, the products manufactured
by Indian fabs will get consumed domestically only if the wages of Indian citizens keep track
with their productivity. is free-market monetary policy based on the theory of mass capitalism
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