In Software-obsessed India, Hardware Finally Gets a Place in the Sun

Pranay Kotasthane and Arjun Gargeyas

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The Union Cabinet, on December 15, approved a much-awaited ‘comprehensive programme for the development of a sustainable semiconductor and display ecosystem’. Holding up a silicon wafer and a semiconductor chip, Ashwini Vaishnaw, Minister of Communications and Electronics & Information Technology, outlined the focus areas in a press briefing that’s sure to garner attention from major global semiconductor firms. The programme will cost the government Rs 76,000 crore over six years. The government expects an overall investment of Rs 170,000 crore in return.

There are five reasons to like the programme announced by the minister.

Reason 1: A focus on the entire ecosystem, not merely on one fabrication unit.

The programme envisages building the entire semiconductor ecosystem—from design to manufacturing to assembly and packaging—instead of just focusing on one semiconductor fabrication to start operations in India. This articulation is significant because India’s comparative advantage has long been in semiconductor design; nearly every major global firm in the sector has its design house here. The Rs 76,000 crore package will support 100 domestic semiconductor design companies, 15 compound semiconductors and semiconductor packaging units, two fabrication units, and two display fabs.

Reason 2: A 20-year roadmap, not merely a one-off incentive scheme

The package includes creating an independent India Semiconductor Mission (ISM) of global experts to “drive the long-term strategies for developing sustainable semiconductors and display ecosystem”. This announcement is significant because attracting investments in this sector requires a long-term vision and commitment. It took decades of accumulating knowledge, substantial investments, favourable trade policies, and government focus for Taiwan and South Korea to become semiconductor powerhouses. The commitment to building engineering talent and ecosystem over 20 years is likely to assuage key concerns of semiconductor companies.

Reason 3: A shot in the arm for domestic semiconductor design firms

Though India is a semiconductor design powerhouse, few Indian companies own these designs’ intellectual property (IP). In this regard, an emphasis on semiconductor design through the new Design Linked Incentive (DLI) scheme for semiconductor design firms is a positive step. The DLI scheme provides financial incentives to help domestic design firms obtain costly software licenses (also known as Electronic Design Automation tools) and reduce IP acquisition costs.

Reason 4: A clear target of two semiconductor fabs and two display fabs

Fabrication units require billions of dollars of recurring capital investment. World over, governments have played a role in sharing this investment burden. The programme mentions fiscal support of up to 50 per cent of the total project cost. In the past, the government had committed to an incentive of 25 per cent on capital expenditure. Besides fiscal support, this stage also requires high-grade power and water supply, subjects that fall under the remit of state governments. Another positive step is the commitment to work with a few state governments to create suitable infrastructure (land, uninterrupted water and power).

Reason 5: Incentives for the assembly, test, and packaging stage

The outsourced assembly and test (OSAT) segment in the semiconductor supply chain is a significant opportunity for a labour-abundant country like India. These units are not as capital intensive to set up or run as fabrication facilities. Government support in the form of financial support of 30 per cent of the total capital expenditure can attract major OSAT semiconductor companies to the country.

Some Caveats and Some Unknowns

First, readers should note that the programme will not mitigate the current semiconductor supply shortage issue. Building new production facilities can take up to five years after approval. For the current supply shortage to ease, companies will have to rely on the already installed production facilities. All this programme can do at best is reduce the severity of such shocks in the long term.

Next, while there is much to welcome about this programme, converting good ideas into good policies requires significant regulatory and financing capacity—an area of weakness of Indian governments. There are at least three such areas that need work.

One, the Ministry of Electronics and Information Technology, in a written reply to a question on the floor of the Lok Sabha on December 8, had indicated that fabrication units were to receive a 25 per cent incentive for capital expenditure, custom duty exemptions for importing capital goods, and reduction in corporate tax and rebate on income tax. It is not clear if these components now form a subset of the new announcement of 50 per cent incentive for overall project cost or have been withdrawn. Notably, the previous package hasn’t significantly changed over the last eight years and was unable to attract any fabrication companies to set up shop in India.

Two, no country can become self-sufficient in semiconductors. The industry is far too complex and costly for any country to sustain on its own. Despite the new programme, the need for plurilateral cooperation is a necessity, not a choice. The government needs to bolster the recently announced Quad Semiconductor Supply Chain Initiative to achieve the goal of a resilient and secure supply chain. By pooling their resources and expertise together, each of the Quad countries will gain from the others’ complementary strengths.

Finally, it is crucial to guard against protectionism. Industrial policies are susceptible to rent-seeking. Once a few companies start receiving government benefits, they seek to block competition from new entrants and international players. Therefore, it is in India’s national interest to ensure the free movement of labour, ideas and capital in this sector. Reduced import tariffs, fair and equal treatment of global players, and a predictable business environment are all pre-conditions for the programme to deliver desired outcomes.

For now, the Union Cabinet has signalled India’s intent to focus on semiconductors. A few months ago, discussions on technology centred almost exclusively on software in the popular imagination. With this programme, the government aims to make hardware a vital element of India’s technology stack.