A make-or-break opportunity for Budget to help India fill chip industry lacuna created by China

The world is embroiled in a chip war, and Budget comes at the perfect time for India to prove it’s a serious contender to dominate wafer manufacturing in the world.

The world’s supply chain has yet to recover from the adverse effects of Covid-19. In fact, it was the pandemic that kick-started the chip shortage. The long-reaching effects of the pandemic — including new outbreaks, labour challenges and geopolitical uncertainties — further fueled the agony for the component that is used in just about anything from televisions to cars.

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Now, the latest outbreak in China that has crippled most of its activities has also forced the factory floor to hit a pause on massive investments aimed at building a chip industry to compete with the US. Amidst this, the supply chain continues to be extremely disrupted and there are no signs of recovery in the near term.


In such a scenario, India’s continued effort to incentivise local chip manufacturing can go a long way, not only for domestic needs, but also to grow as an exporter.

Currently, almost all the semiconductor demand in India is met by imports from countries such as the US, Japan and Taiwan.

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In this sector, India has a significant human-capital pool, which is currently concentrated in design, in the absence of an end-to-end manufacturing base. In other words, India may have the expertise in designing chips, but the lack of fab pushes it to depend on imports.

“The biggest advantage that India has is the entire design ecosystem. We have around 24,000 design engineers working in India. So, that's a huge ecosystem. That means the talent is there, how to apply the talent, that application process is there. So, that is what gives us a very big advantage,” said Ashwini Vaishnaw, Minister for Railways, Communications, Electronics & Information Technology.

Renewed boost to PLI
In December 2021, the government approved a Rs 76,000 crore production-linked incentive (PLI) scheme, a first of its kind, to boost semiconductor and display manufacturing in the country.

The move is aimed to help India strategically make the most of the global shortage of semiconductors, to boost manufacturing and reduce import dependency.

However, there are some loopholes that the government needs to address.



Setting up even a small-scale fabrication facility costs billions of dollars. When factoring in the introduction of the more recent technological developments, the cost will shoot up further. In addition to this, fabrication units consume enormous quantities of clean water and require a stable power supply.

“Even if the PLI scheme gives a fiscal support of 50% of the cost of establishing at least 2 greenfield fabrication units, not much of the current scheme’s outlay would be left out for other aspects like display fabrication units, testing facilities, packaging facilities, chip design centers, etc,” write Rajeev Singh and Abhishek Malik, Deloitte Touche Tohmatsu India LLP.

Attracting the Bigwigs
The Ministry of Electronics and IT (MeitY) is also said to be working on an incentive scheme, with a likely financial outlay of around Rs 10,000 crore to Rs 12,000 crore, to promote domestic manufacturing of high-end components that could go into products such as smartphones, servers and personal computers.

The objective of the components incentive scheme is to develop a complete ecosystem of electronics manufacturing in India, officials aware of the details of the plan told ET. The move may further help attract global majors such as Apple to deepen local production, say experts.

“The scheme may offer incentives on production of components as well as capital support for setting up production facilities. The final contours of the scheme are still to be finalised, but we are aiming to come out (with the policy) by next financial year (starting April 1),” an official said on the condition of anonymity.

The government has already indicated that it would be open to joint venture (JV) partnerships with the Chinese firms for high-tech components, which will enable the likes of Apple to further expand manufacturing in India. The incentive scheme for components will aid companies located in geographies such as Taiwan, Korea and Japan to relocate or set up new units.

Budget Support
On its part, the electronics industry has written to the government asking for an extension in the promotion of the manufacturing of electronic components and semiconductors (Specs) scheme by five years, as well as an increase in the outlay to at least Rs 10,000 crore, from the current Rs 3,000 crore.

Under Specs, the government is offering financial incentives of 25% on capital expenditure for manufacturing electronic components, semiconductor or display fabrication facilities, assembly, testing, and capital goods that comprise the downstream value chain of electronic products.

“As the scheme was launched for three years, the sunset period of Specs will be in March 2023, which means the industry will not be able to take the benefits beyond this time," the Indian Cellular and Electronics Association has submitted in its recommendations to the government, according to a Mint report.

India’s first chip factory
Construction of India's first chip manufacturing plant is slated to begin next month as part of the country's drive to become a bigger semiconductor hub.

International semiconductor consortium ISMC’s $3 billion semiconductor chip-making plant has given Karnataka the lead in cornering investments under the government’s $10-billion incentive scheme for semiconductor companies.

Along with ISMC, Taiwan's Foxconn and India’s own Vendanta have lined up to build their own fabrication plants in Gujarat. Also in the works, a $3.2 billion semiconductor park in Tamil Nadu proposed by Singapore's IGSS Ventures.

Risk Protection
India needs to bat for a multi-nation Supply Chain Resilience Fund to protect the supply chain from geopolitical risks, Deloitte’s Singh and Malik highlight.

Countries like the United States already have such safeguards in place.

While the United States restarts manufacturing at leading-edge nodes (<5 nanometers), Quad should fund specialised trailing-edge fabs (45 nanometers and above) in India, Japan, or Australia.

Over the past few years, the Centre has been increasing import duties. Such policies could significantly hamper India’s semiconductor prospects.

“Reduction of import taxes could go a long way in building a strong plurilateral semiconductor ecosystem, as a fab in India will still be deeply connected with the world — buying equipment from some countries and selling chips to others,” they add.