GS Paper 3
Syllabus: Changes in Industrial Policy and Their Effects on Industrial Growth
Context: As part of the 2nd phase of the design-linked incentive (DLI) scheme for the domestic semiconductor industry, the Indian government is considering a proposal to pick an equity stake in domestic chip design-making companies.
What is the domestic chip industry scenario?
- India is an important destination for global semiconductor companies.
- This is primarily because of its highly-skilled talent pool of semiconductor design engineers, who make up ~20% of the world’s workforce.
- About 2,000 integrated circuits and chips are designed in India every year.
- Global players operating in R&D in the country include Intel, Micron and Qualcomm, etc.
- Over 30 semiconductor design startups have been established in India following the DLI scheme with five already having received government support.
Initiatives to promote the semiconductor industry in India:
- India Semiconductor Mission (ISM): Launched in 2021, it aims to build a vibrant semiconductor and display ecosystem to enable India’s emergence as a global hub for electronics manufacturing and design.
- About SemiconIndia Programme:
- It was approved with a financial outlay of INR 76,000 crore for the development of a sustainable semiconductor and display ecosystem in 2021.
- At the ‘Semicon India 2023’ conclave, the Indian PM made a strong pitch to global investors, saying India will emerge as a global hub of the semiconductor and chip-making industry.
- Approval has been granted for the modernisation of the Semiconductor Complex Limited (SCL) in Chandigarh to transform it into a brownfield chip manufacturing unit.
- The government has also signed agreements with the US and Japan for cooperation on semiconductor development, manufacturing, research, design and talent development.
What is the DLI scheme?
- The DLI scheme (launched by MeitY in 2021) aims to provide financial and infrastructural support to companies setting up fabs or semiconductor-making plants in India.
- It will offer fiscal support of up to 50% (max ₹15 crores per application) of the total cost to eligible participants who can set up these fabs in the country, MeitY said in a statement.
- It is expected to facilitate the growth of at least 20 such companies which can achieve a turnover of more than ₹1500 crore in the coming five years and indigenise innovations.
How will equity stake help?
- Equity will empower design companies to sell their chip-designing services more effectively and attract a broader client base in the market.
- It would prevent companies from selling their majority stake to large global players to scale up the business.
- The equity infusion would be particularly encouraging for local, small and medium-sized firms that potentially face multiple hurdles to be part of the ecosystem.
Challenges faced by the semiconductor industry in India:
- The sector is capital-intensive. Therefore, any policy directed towards the semiconductor industry requires a long-term strategy.
- Returns from the investment are not immediate. According to the NASSCOM, it takes up to 2-3 years before the first product is out.
- R&D becomes challenging as chipsets become smaller and functional requirements change frequently.
- Supply chain disruptions, like what happened during the COVID-related lockdowns in China, could dampen potential investor confidence in the sector.
- India owns a much smaller portion of the intellectual property (IP) relating to the designs, which are mostly retained by global companies.
- The government must consider how it plans to link its investments to drive more innovation and employment generation in the sector.
- It is essential that value-added activities (with respect to chip designing) are brought into the country.
- In other words, moving up in the value chain and enabling the ecosystem must be one of the imperatives of the government.
- The government should put in place a robust framework for target evaluation and governance to mitigate the moral hazard posed by politically driven equity investments.
Conclusion: The above moves have the potential to create a state-of-the-art design ecosystem which will serve the national interest and also be a supplier to the rest of the world.