The Narendra Modi government is not only determined but very sincere in its desire to make India a global semiconductor manufacturing hub. Certainly, the incentive scheme for the chip ecosystem announced in December 2021 has met with a remarkable response. To start with, the oil-to- metal conglomerate, the Vedanta group headed by Anil Agarwal, has joined hands with Taiwan-based Foxconn – a leading supplier to Apple — to set up a huge semiconductor and display manufacturing ecosystem at a massive cost of $ 20 billion (Rs 1.54 lakh crore) in Gujarat, the home state of the Prime Minister. Other major proposals too are on their way.

The entire world is experiencing an acute shortage of chips, which have become essential for several sectors including electronics, automobiles, medical technology, renewable energy, food safety, healthcare and education. The demand for semiconductors is growing astronomically worldwide. According to market experts, while India is becoming one of the largest consumers of electronic and semiconductor components, most components are imported, offering limited economic opportunities for the country. At present, only 9 per cent of the country’s semiconductor requirements is met locally, the balance 91 per cent being met through imports.

The world has been facing a severe shortage of chips after the Covid-19 pandemic as most of the global chip output is limited to a few countries of East Asia like Taiwan and China. Now, countries like Vietnam have joined the race to manufacture semiconductors and display ecosystems. At the same time, Taiwan, South Korea and China are trying to expand their semiconductor manufacturing capabilities.

In this environment, India is aspiring to become a global semiconductor manufacturing hub as manufacturing advanced chips will not only make India self-reliant but will also keep it in the driving seat. Access to advanced technologies will always be the deciding factor in determining which country will lead in the future. Hence, the government has announced an imaginative, attractive and effective incentive scheme to attract leading global manufacturers. Having announced the incentive policy in December 2021, the government modified it recently in order to make it more competitive. But experts are questioning whether these schemes are enough to make India ‘Atmanirbhar’.

The scheme announced by the Ministry of Electronics and Information Technology (Meity) is designed to support all the major stages of semiconductor production: design specialized fabs for compound semiconductors, silicon photonics and sensors assembly, testing, marking and packaging (TMP) units, display fabs and semiconductor fabs. The first scheme – the design linked incentive (DLI) scheme — aims to help budding Indian semiconductor design firms. India is a major global centre for chip design, courtesy of foreign direct investment, a large and qualified engineering workforce and favourable government policies. However, experts point out that almost all the designed intellectual property (IP) belongs to foreign firms. At about Rs 150 crore, the cumulative revenue of purely domestic semiconductor design companies is relatively small.

While this scheme offers hope, there are three policy design concerns. One, the scheme does not talk about the design services firms in the country whereas most Indian engineers in the sector provide services to global semiconductor design firms. The government should have brought these design services companies under the design infrastructure support incentive. Two, the government will provide the product design-linked incentive to companies that have “demonstrated in an operational environment and are ready for volume production.” This clause might lead to investments in safer companies rather than betting on early-stage startups with new IP design ideas. Third, administering an industrial policy for 100 firms requires the nodal agency, C-DAC, to substantially improve its regulatory capacity. Otherwise, delays, rent seeking and corruption will mar the scheme, experts maintain.