Semiconductor Incentive Scheme: Promoting Semiconductor Manufacturing

Why the Scheme is in News?

The Indian central government announced on May 31 that it will start accepting applications from June 1 onwards for the establishment of semiconductor and display fabrication units in India as part of the ‘Modified Semicon India Programme’. This program will be open for applications until December 2024.

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This decision was made following a Bloomberg report stating that the government has chosen not to extend incentives for the proposed 28-nanometer semiconductor manufacturing facility by Vedanta-Foxconn due to the joint venture’s failure in meeting the requirements of securing a technology partner. However, Vedanta chief Anil Agarwal has denied this claim.

In addition, Union Minister of State for Electronics and Information Technology Rajeev Chandrasekhar clarified that the government has not communicated any intention to discontinue the pursuit of Vedanta’s fab proposal.

Introduction

The government is highly committed to its crucial goal of fostering the overall semiconductor ecosystem, which will subsequently stimulate the rapid growth of India’s electronics manufacturing and innovation ecosystem. With this in mind, the government has sanctioned the Semicon India program, which has a total budget of INR 76,000 crore, aimed at developing the semiconductor and display manufacturing ecosystem in the country.

Due to the aggressive incentives provided by countries that already possess established semiconductor ecosystems and a limited number of companies with advanced node technologies, the program has been revised accordingly. The revised program aims to offer financial support to companies that invest in semiconductors, display manufacturing, and design ecosystem, thereby facilitating India’s increasing presence in the global electronics value chains.

Need for Domestic Semiconductor Manufacturing

India, with its large consumer base and growing economy, has witnessed a surge in demand for electronic devices. However, the country heavily relies on imports to meet this demand, especially for semiconductors.

The import bill for semiconductors has been steadily increasing, putting a strain on foreign exchange reserves and leaving the Indian electronics industry vulnerable to supply chain disruptions. To address these challenges and achieve self-reliance, the Indian government has prioritized the development of domestic semiconductor manufacturing capabilities.

Semiconductor Incentive Scheme: Key Objectives

The Semiconductor Incentive Scheme aims to boost semiconductor manufacturing in India through various incentives and support mechanisms. Here are some key features of the scheme:

1. Financial Incentives: The scheme offers attractive financial incentives to both new and existing semiconductor manufacturing units in India. These incentives include capital subsidies, interest subsidies, tax benefits, and reimbursement of expenses incurred for skill development, R&D, and patent filing.
2. Infrastructure Support: To facilitate semiconductor manufacturing, the scheme emphasizes the creation of infrastructure such as semiconductor wafer fabs, assembly and test units, and packaging facilities. The government provides support in the form of grants, land allocation, and expedited approval processes.
3. Research and Development (R&D): The scheme encourages investment in R&D activities related to semiconductor manufacturing. It provides funding for collaborative research projects, technology development, and innovation centers. This focus on R&D will help India develop cutting-edge semiconductor technologies and reduce dependence on foreign intellectual property.
4. Skill Development: Recognizing the need for a skilled workforce, the scheme supports training programs and skill development initiatives. It aims to nurture a pool of talented professionals with expertise in semiconductor design, fabrication, and testing.

Semiconductor Incentive Scheme: Benefits and Impact

The Semiconductor Incentive Scheme holds several benefits for India’s semiconductor industry and the economy as a whole:

1. Reduced Import Dependency: By promoting domestic semiconductor manufacturing, India can reduce its reliance on imports, which will enhance its self-sufficiency in the electronics sector. This will bolster national security, reduce supply chain vulnerabilities, and help maintain price stability.
2. Job Creation: The scheme’s focus on skill development and infrastructure creation will lead to job opportunities in the semiconductor sector. It will generate employment across various domains, including research, manufacturing, design, and testing.
3. Technological Advancement: The scheme’s emphasis on R&D and innovation will foster technological advancements in semiconductor manufacturing. India can emerge as a hub for advanced chip design and development, attracting investment and promoting collaboration with global semiconductor giants.
4. Attracting Investments: The financial incentives and support provided by the scheme make India an attractive destination for semiconductor manufacturers. This will encourage both domestic and foreign companies to establish or expand their semiconductor manufacturing operations in India, boosting investments in the sector.

Initiatives under Semiconductor Incentive Scheme

The aforementioned program has introduced several initiatives to offer financial assistance to new businesses or the expansion, modernization, and diversification of existing units in India.

1. Modified Scheme for setting up of Semiconductor Fabs in India

One such initiative is the “Modified Scheme for setting up of Semiconductor Fabs in India,” which aims to attract significant investments for establishing semiconductor wafer fabrication facilities in the country. This scheme provides fiscal support equivalent to 50% of the project cost on a pari-passu basis for the establishment of Silicon CMOS based Semiconductor Fabs in India.

2. Modified Scheme for setting up of Display Fabs in India

Another initiative is the “Modified Scheme for setting up of Display Fabs in India,” which aims to attract substantial investments for manufacturing TFT LCD or AMOLED based display panels in the country. This scheme offers fiscal support of 50% of the project cost on a pari-passu basis for setting up Display Fabs in India.

3. Modified Scheme for setting up of Compound Semiconductors / Silicon Photonics / Sensors Fab / Discrete Semiconductors Fab and Semiconductor Assembly, Testing, Marking and Packaging (ATMP) / OSAT facilities in India

The “Modified Scheme for setting up of Compound Semiconductors / Silicon Photonics / Sensors Fab / Discrete Semiconductors Fab and Semiconductor Assembly, Testing, Marking and Packaging (ATMP) / OSAT facilities in India” provides fiscal support equivalent to 50% of the Capital Expenditure on a pari-passu basis for establishing Compound Semiconductors / Silicon Photonics (SiPh) / Sensors (including MEMS) Fab, Discrete Semiconductor Fab, and Semiconductor ATMP / OSAT facilities in India.

4. Semicon India Future Design: Design Linked Incentive (DLI) Scheme

The “Semicon India Future Design: Design Linked Incentive (DLI) Scheme” offers financial incentives and design infrastructure support throughout the various stages of semiconductor design development and deployment, including Integrated Circuits (ICs), Chipsets, System on Chips (SoCs), Systems & IP Cores, and semiconductor-linked design.

This scheme provides a “Product Design Linked Incentive” of up to 50% of eligible expenditure with a maximum limit of ₹15 Crore per application and a “Deployment Linked Incentive” of 6% to 4% of net sales turnover over 5 years with a maximum limit of ₹30 Crore per application.

In addition to these schemes, the government has approved the modernization of Semi-Conductor Laboratory, Mohali, as a brownfield Fab.

Semiconductor Incentive Scheme: Challenges

While India’s Semiconductor Incentive Scheme holds great promise for the growth of the semiconductor industry, several challenges need to be addressed to ensure its successful implementation. These challenges include:

1. Infrastructure: The establishment of semiconductor fabs requires robust infrastructure, including reliable power supply, water resources, transportation networks, and waste management systems. India needs to invest in developing and upgrading its infrastructure to meet the demanding requirements of semiconductor manufacturing.
2. Skilled Workforce: The semiconductor industry demands a highly skilled workforce with expertise in areas such as semiconductor design, fabrication, testing, and packaging. Ensuring an adequate supply of skilled professionals poses a significant challenge. It requires a coordinated effort between industry and educational institutions to develop specialized training programs and bridge the skill gap.
3. Technology and Intellectual Property: Semiconductor manufacturing involves cutting-edge technologies and intellectual property (IP) rights. To attract global investments, India needs to address concerns related to IP protection, patent laws, and technology transfer. Strengthening IP laws and providing a favorable environment for technology transfer will enhance investor confidence in the country’s semiconductor ecosystem.
4. Access to Capital: Setting up semiconductor fabs requires substantial capital investments. While the Semiconductor Incentive Scheme provides financial incentives and interest subvention on loans, access to capital remains a challenge, especially for startups and small and medium-sized enterprises. Simplified procedures for accessing capital and alternative financing mechanisms can help overcome this challenge.
5. Global Competition: The global semiconductor industry is highly competitive, with established players dominating the market. India needs to position itself strategically and differentiate its offerings to attract global semiconductor companies. It requires continuous innovation, fostering a supportive ecosystem, and creating a business-friendly environment that can compete with other semiconductor manufacturing hubs.
6. Regulatory Environment: Streamlining regulatory processes, ensuring ease of doing business, and providing a predictable policy framework are crucial for the success of the Semiconductor Incentive Scheme. India should focus on reducing bureaucratic red tape, expediting approvals, and providing a stable policy environment that encourages long-term investments.
7. Supply Chain Integration: The semiconductor industry relies heavily on a complex global supply chain. Developing a robust and integrated supply chain ecosystem within India is essential for cost-effective and efficient semiconductor manufacturing. Strengthening local component manufacturing, logistics infrastructure, and fostering partnerships with global suppliers are key to overcoming supply chain challenges.
8. Environmental Sustainability: Semiconductor manufacturing processes can have a significant environmental impact due to water and energy consumption, as well as the generation of waste. India needs to prioritize sustainable practices and invest in green technologies to minimize the environmental footprint of semiconductor fabs and ensure responsible growth.

Semiconductor Incentive Scheme: Vision

The government is fully aware of the importance of research and development (R&D) in the field of semiconductors. They have already set up R&D and Incubator Centers specifically for semiconductors.

Currently, there are several organizations that have facilities for conducting R&D in this field, namely the Semi-Conductor Laboratory (SCL) in Mohali, the Gallium Arsenide Enabling Technology Centre (GAETEC) in Hyderabad, and the Society for Integrated Circuit Technology and Applied Research (SITAR) in Bengaluru.

Furthermore, the government has provided funding for the establishment of the Gallium Nitride (GaN) Ecosystem Enabling Centre and an Incubator for High Power and High Frequency Electronics at the Indian Institute of Science (IISc) in Bengaluru.