Semiconductor chips are a vital component in nearly every industry, from consumer electronics to healthcare. However, because of their limited supply, the world is currently facing a chip shortage. This has, in turn, created a shortage of electronic goods and products that are dependent on and supported by these chips.

In order to effectively mitigate the ch­al­lenges and decrease its dependence on im­ports, the Indian government recently laun­ched the semiconductor policy, which seeks to boost the semiconductor manufacturing capability of India. This move has been welcomed by the industry and is ex­pected to transform India from a chip im­porter to a chip exporter.

A look at how the global chip shortage impacted the country, key features of the semiconductor policy and the way forward…

Supply shock: Global chip shortage crisis

The world is currently reeling under a se­mi­conductor or chip supply crisis, which hit industries across sectors when the Covid pandemic started in 2020. This crisis has intensified over the past few months and major companies in mu­l­tiple industries are struggling to meet the rising demand for electronic goods and components. In to­day’s times, semiconductors or chips are the backbone of all digital products, and therefore their shortage is in turn causing a shortage of these products.

In India too, several companies, from car­makers to electronic goods manufactu­rers, have been forced to curtail production as a result. The shortage has not only hurt businesses, but also customers, who are bearing the burden of higher input costs.

Semiconductor manufacturing requir­es high investment, and there is no such facility in India as of now. As per government estimates, India imports 100 per cent of its semiconductors. This is because, at present, India does not have a robust semiconductor manufacturing ecosystem. Also, the entire semiconductor manufacturing pro­ce­ss is very capital intensive. Fabricat­ion plants (fabs) are expensive to set up, each costing at least $3 billion-$4 billion. Further, manufacturing equipment depreciates fairly quickly. As such, the whole manufacturing pro­cess takes a long time to become profitable. In addition, India is plagued by so­me other issues such as frequent power cuts and inefficient water supply treatment. Th­e­se factors also discourage foreign players from setting up shop in India.

Government’s thrust on boosting semiconductor manufacturing

To address the above-mentioned problems and make India a manufacturing hub for semiconductors, the go­vernment notified the semiconductor policy in December 2021. According to the gazette notificati­on, the government will provide up to 50 per cent of the project cost for two semiconductor and two display fabs in the country. Additional infrastructure support will be provided through the Electronics Manufacturing Clusters 2.0 scheme, de­ma­nd aggregation, support for research and development, and skill de­velopment and training, alongside support offered by state governments, if any. Further, the government noted that support under the scheme will be provided on pari-passu ba­sis for a period of six years.

This move is expected to attract large investments for setting up semiconductor wafer fabrication facilities in the country, which will help strengthen the electronics manufacturing ecosystem and establish a trusted value chain.

In addition, the union cabinet has app­roved the production-linked incentive scheme for semiconductor and display bo­a­rd production in the country. The scheme envisages an investment of Rs 760 billion in semiconductor production over the next five to six years. Through this sc­heme, the government aims to usher in a new era in electronics manufacturing by providing a globally competitive incentive package to companies in semiconductor and display manufacturing and design. The programme aims to provide attractive in­centive support to companies that are en­gaged in silicon semiconductor fabs, dis­­play fabs, compound semiconductor/ silicon photonics/sensor (including micro-electromechanical system [MEMS]) fabs, semiconductor packaging (assembly, testing, marking, and packaging [ATMP]/outsourced semiconductor assembly and test [OSAT]), and semiconductor design.

Under the scheme for setting up of semiconductor fabs and display fabs in India, the government will extend fiscal support of up to 50 per cent of the project cost on pari-passu basis to applicants who are found eligible and have the technology and capacity to execute such projects. The Government of India will work closely with state governments to establish high-tech clusters with the requisite infrastructure in terms of land, semiconductor grade water, high quality power, logistics and re­search ecosystem to approve applications for setting up at least two greenfield semiconductor fabs and two display fabs in the co­untry. The Union Cabinet has also ap­proved the proposal that the Ministry of Electronics and Information Technology will take the requisite steps for the modernisation and commercialisation of a semiconductor laboratory.

Under the scheme for setting up of co­m­pound semiconductor/silicon photonics/ sensor (including MEMS) fabs and semiconductor ATMP/OSAT facilities in India, the government will extend fiscal support of 30 per cent of capital expenditure to approved units. Fifteen such units for compound semiconductors and semiconductor packaging are expected to be established with government support under this scheme. In addition, the design-linked in­cen­tive scheme will extend a product de­sign-linked incentive of up to 50 per cent of eligible expenditure, and a product dep­loyment-linked incentive of 4-6 per cent on net sales for five years. This aims to fa­cilitate the growth of 20 such companies, which can achieve a turnover of more than Rs 15 billion in the next five years.

In order to drive the long-term strategies for developing a sustainable semiconductor and display ecosystem, a speci­ali­sed and independent “India semiconductor mission (ISM)” has been set up. The ISM will be led by global experts in the semiconductor and display industry. It will act as the nodal agency for efficient and smoo­th implementation of semiconductor and display ecosystem schemes.

Outlook

The newly launched semiconductor policy is expected to reap great results. Besides helping the country reduce import dependency, the scheme to boost semiconductor production will bring in massive investments and create a large number of jobs. As per estimates, the scheme will lead to the creation of 35,000 specialised jobs as well as 100,000 indirect employment opp­ortunities. It could also generate investments to the tune of Rs 1.7 trillion. If successful, this scheme will also help stabilise the economy during the pandemic and boost demand. As of now, the Tata Group, Intel, Taiwan’s Foxconn and other manufacturers have expressed interest in setting up manufacturing plants in India.

The new semiconductor policy heralds massive strategic advantages for India, considering factors such as low labour cost and vast production capacity. It would not only help domestic companies reduce de­pendence on semiconductor imports, but also generate revenue from exports to oth­er countries.

At present, China, Taiwan, Ja­pan, the US and South Korea account for nearly all of the semiconductor fabrication in the world. However, the pandemic has shed light on the limited production capacity of semiconductors across the world. India can tap this opportunity in disguise and leverage this supply shortage to become a key semiconductor provider in the world by boosting its own manufacturing capabilities. The US is now looking elsewhere to source its chips, and India, with its low labour costs, could be a good alternative to China and Taiwan.

Industry experts have said that though the scheme’s benefits will take at least three to five years to materialise, it will en­sure that there is no sudden shortage of chips, thus preventing massive price hikes across various segments of electronics, cars and high-tech goods.

Going forward, industry leaders have opined that the global supply chain, which is currently heavily dependent on China, will see a major change in the post-pandemic world, with businesses shifting their dependencies to other countries.

Diksha Sharma