What Rs 76k-cr semiconductor PLI scheme means for MSMEs working with electronic manufacturing industry

Ease of Doing Business for MSMEs: “The program would promote higher domestic value addition in electronics manufacturing and will contribute significantly to achieving a $1 trillion digital economy and a $5 trillion gross domestic product (GDP) by 2025,” the Cabinet had said announcing the programme.

In December last year, the government had also issued an Expression of Interest (EoI) for setting up and expansion of existing fabs or acquisition of those outside India. (Image: Pexels)

Ease of Doing Business for MSMEs: The government’s nod to the Rs 76,000 crore production linked incentive (PLI) scheme for the development of the semiconductor and display manufacturing ecosystem in India would have benefits spread horizontally, according to experts. What that means is instead of backing the growth of only the semiconductor industry, it would percolate across segments involved in electronic manufacturing, where MSMEs are significantly present, right from automotive to smartphones, television, refrigerators, laptops, air conditioners, medical equipment, and more. Essentially it would help in electronic or smart device penetration further in the country. However, all that would be derived from the execution of the programme in the coming years. 

So, what exactly the government is offering? Here’s a quick recap of what the Cabinet announced on Wednesday: 

  • Fiscal support up to 50 per cent of the cost of setting up semiconductor fabs (fabrication or manufacturing plants) and display fabs in India to eligible businesses. 
  • Fiscal support of 30 per cent of capital expenditure to approve units setting up of compound semiconductors, silicon photonics, sensors, fabs and semiconductor assembly, testing, marking, and packaging (ATMP), and outsourced semiconductor assembly and test (OSAT) facilities in India. Minimum 15 of the units of compound semiconductors and semiconductor packaging likely to be set-up with government support. 
  • Product design-linked incentive up to 50 per cent of eligible expenditure and product deployment-linked incentive of 6 per cent – 4 per cent on net sales for five years under Design Linked Incentive (DLI) scheme. Here, 100 domestic companies of semiconductor design for integrated circuits (ICs), chipsets, system on chips (SoCs), systems & IP cores and semiconductor linked design will be provided support.

“The program would promote higher domestic value addition in electronics manufacturing and will contribute significantly to achieving a $1 trillion digital economy and a $5 trillion gross domestic product (GDP) by 2025,” the Cabinet had said announcing the programme. While basic chip fabrication is a large ticket size item and hence only large Indian and foreign businesses would be putting millions of dollars such as Tata, which is planning to get into semiconductor manufacturing as per media reports, but its development would benefit MSMEs directly or indirectly.

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“Chip shortage and dependence on imports of semiconductors have impacted MSMEs working with the electronic manufacturing industry. Their capacity is not fully utilised. One has to look at things in their entirety here. For example, the waiting period for cars is very high as chips are not available and as a result production for carmakers has been down 40 per cent. This means that everybody else such as MSMEs that supply goods including gearbox, seat cover or seat belt, etc., to that car company, are suffering for no fault of theirs. Once India has its own ecosystem, it would drastically improve manufacturing in India and its MSMEs,” Sandeep Aurora, Vice President, India Electronics & Semiconductor Association (IESA) told Financial Express Online. Aurora was earlier the Director-marketing at Intel India. 

The demand for the semiconductor in India, which is met entirely through imports, is worth approximately $24 billion and is expected to grow to $100 billion by 2025, according to Invest India. The semiconductor demand would likely come on the back of technology growth in the country such as artificial intelligence, the internet of things, 5G, and others. In such a scenario, the chip shortage has made it critical for India to develop its own resources. Currently, Taiwan’s Taiwan Semiconductor Manufacturing Co. (TSMC) is the world’s biggest contract manufacturer of semiconductor chips that supplies to companies such as Nvidia, Apple, AMD, Intel, and others.

Importantly, as per a Bloomberg report in September this year, India and Taiwan had discussed a deal that would lead to the setting up of a chip plant worth around $7.5 billion in India. “It is important to attract manufacturers to set up units in India so that downstream can open up…MSMEs are ready to grab that opportunity. But there has to be a certain anchor manufacturer that has to start in India,” Charu Mathur, Director General, Indian Electrical and Electronics Manufacturers’ Association had told Financial Express Online. 

In December last year, the government had also issued an Expression of Interest (EoI) for setting up and expansion of existing fabs or acquisition of those outside India. The proposals, however as per Invest India, are under evaluation by the Ministry of Electronics and IT (MeitY) on the basis of the proposed technology, proposed wafer capacity, fab loading strategy, the financial viability of the project and incentive support from the government.

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“As fabs get setup here and local manufacturing becomes more prevalent over the years, MSMEs will significantly benefit from supply chain ease. This would also make the market more competitive with more players that would come in. Also, it would lead to the creation of a specialised workforce of engineers in the semiconductor industry that currently stands at around 20,000 involved in chip designing. The government intends to increase this to 85,000 engineers through this incentive programme. This would be a big contributor to India’s Make in India vision and help it in truly becoming a technology powerhouse,” an executive at a software technology company in India told Financial Express Online seeking anonymity. 

The auto sector is currently one of the biggest users of semiconductor chips. Saurabh Poddar of Sellowrap Industries, which makes auto parts, said that if requirements for the supply of auto parts comes to MSMEs from automakers under the scheme, it will benefit small units. Nonetheless, until the semiconductor ecosystem develops “the business for MSMEs will resume once the chip shortage is over.” Poddar was earlier the co-chair for the western region at the Automotive Component Manufacturers Association of India (ACMA).

With the approval of the Rs 76,000-crore programme, the government said it has announced incentives for every part of the supply chain worth Rs 2.30 lakh crore including electronic components, sub-assemblies, and finished goods. This included Rs 55,392 crore worth incentive under the production-linked incentive (PLI) scheme for large scale electronics manufacturing, PLI for IT hardware, scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS) and Modified Electronics Manufacturing Clusters (EMC 2.0) scheme. Further, PLI incentives worth Rs 98,000 crore were approved for allied sectors comprising of ACC battery, auto components, telecom and networking products, solar PV modules and white goods.

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