The government has taken the right step by making suitable changes in the semiconductor incentive scheme for domestic manufacturing. The scheme was formulated after a series of production-linked incentive schemes were rolled out. Realising that semiconductor manufacturing was different from, say, smartphones, IT hardware, or electric vehicle batteries, the government did not put the clause of achieving incremental production and sales target against the base year here, for an approved set of companies to claim incentives. In that sense, the scheme is different from the PLIs. The scheme was announced in December 2021 and three companies had applied in February 2022. Reportedly, all of them are facing problems with regard to finding a technology partner.
Sensing that the incentive structure is a bit skewed, the government made the first modification in September 2022, by making the fiscal support of 50% of project cost uniform across all technology nodes for setting up semiconductor units. Initially, the government had provided for financial support of up to 50% of project cost for at least two semiconductor and two display fabs for a minimum of six years. For others, like compound semiconductors, sensor fabs, etc, fiscal support of 30% was to be offered. With companies evincing interest in the project still finding it difficult to find technology partners, the government last week made three key changes. One, it invited fresh applications and allowed even early applicants to re-apply. Second, applicants can now manufacture even 40-nanometre chips, which are less complex and expensive than 28-nanometre chips, for which the earlier applicants had applied for. Third, unlike the first time round when the application window was kept open for only 45 days, now it is open for an indefinite period of time , giving companies time to finalise their plans.
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Analysts point out that there may be few takers for 40-nanometre chips as they are thicker than the 28-nanometre ones, therefore devices would have less space to pack in additional features. This at a time when the technology has become so advanced that even 4-nanometer chips are being produced. Since chips are now being used in virtually every kind of industry, it would not be correct to say that the demand for 40-nanometre chips would just go away. Further, once the ecosystem for domestic manufacturing gets created, scaling up would happen in due course of time. It would be premature to draw any final conclusions on the semiconductor incentive scheme as it is a work in progress and further tweaks cannot be ruled out. As reported by this newspaper, a department of telecommunications constituted panel has suggested that incentives of up to 75% should be provided for domestic design and manufacturing of telecom chipsets. Communications and IT minister Ashwini Vaishnaw is correct when he said that India is the most cost effective country for manufacturing semiconductors. India has talent, expertise and gets orders for semiconductor design, but these then flow outside the country for fabrication. Thus, India misses out on manufacturing.
What is then needed is the right policy prescription with loads of patience for the desired results. The success of smartphone PLI has proved that India can achieve domestic manufacturing of electronics items in a phased manner—domestic assembly first, followed by indigenising the supply chain. Having learnt through industry feedback that the IT hardware PLI was not yielding the desired result, the government recently revised it also. No policy should be cast in cement, improvisation through industry feedback is the way forward.