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Explained | The DLI scheme and the chip making industry in India

Why is India trying to boost the semiconductor ecosystem? What are the incentives being promised?

January 31, 2022 04:12 pm | Updated February 02, 2022 06:21 pm IST

Photo: Getty Images/iStockPhoto

Photo: Getty Images/iStockPhoto

The story so far: India has invited applications from 100 domestic companies, startups and small and medium enterprises to become a part of the design-linked incentive (DLI) scheme. Along with it the IT ministry has sought proposals from academia, start-ups and MSMEs to train 85,000 qualified engineers on semiconductor design and manufacturing.

What is the DLI scheme?

The DLI scheme 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% of the total cost to eligible participants who can set up these fabs in the country, MeitY said in a statement. It will also offer fiscal support of 30% of the capital expenditure to participants for building compound semiconductors, silicon photonics and sensors fabrication plants in India, under this scheme.

An incentive of 4% to 6% on net sales will be provided for five years to companies of semiconductor design for integrated circuits, chipsets, system on chips, systems and IP cores.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, according to MeitY.

How can the scheme make a difference in the semiconductor manufacturing industry in India?

The sudden surge in demand of chips and semiconductor components has underpinned the need to establish a robust semiconductor ecosystem in India. Several sectors, including auto, telecom, and medical technology suffered due to the unexpected surge leading to the scarcity of chips manufactured by only a few countries.

Schemes like the DLI are crucial to avoid high dependencies on a few countries or companies. The inception of new companies will help in meeting the demand and supply and encourage innovation in India, Sanjay Gupta, Vice President and India Managing Director, NXP India, a semiconductor multinational, said to The Hindu .

The DLI scheme aims to attract existing and global players as it will support their expenditures related to design software, IP rights, development, testing and deployment.

It will boost the domestic companies, start-ups, and MSMEs to develop and deploy the semiconductor design. It will also help global investors to choose India as their preferred investment destination, Gupta said to The Hindu .

The firm reckons that this is a big step to bring India on the world map for semiconductor manufacturing.

What are other countries doing to be dominant in the race of chip making?

Currently, semiconductor manufacturing is dominated by companies in the U.S., Japan, South Korea, Taiwan, Israel and the Netherlands. They are also making efforts in solving the chip shortage problem.

U.S President Joe Biden wants to bring manufacturing back to America and reduce the country’s reliance on a small number of chipmakers based largely in Taiwan and South Korea.

These chipmakers produce up to 70% of the world’s semiconductors, according to Gupta.

The European Commission has also announced a public-private semiconductor alliance with the goal of increasing Europe’s chip production share to 20% by 2030.

South Korea has offered various incentives to attract $450 billion in investments by 2030.

From focusing on designs, setting up firms that are highly specialised in the chip making process to building leading-edge expertise, these countries have come a long way in making semiconductors, Gupta said.

What are the challenges in making semiconductors in India?

In India, more than 90% of global companies already have their R&D and design centres for semiconductors but never established their fabrication units, Gupta said to The Hindu .Although India has semiconductor fabs in Mohali and Bangalore t they are purely strategic for defence and space applications only, Rajeev Khushu, chairman of iesaonline, a think tank for Electronic System Design and Manufacturing (ESDM), said to The Hindu .

Setting up fabs is capital intensive and needs investment in the range of $5 billion to $10 billion. Lack of investments and supportive government policies are some of the challenges to set up fabs in India, Khushu said.

New fabs use sub 5 nano meter technology that requires clearance from both the technology provider and the Government. So, a combination of capital and the geopolitical situation comes into play to build new fabs.He also identified infrastructure like connectivity to airports, seaports and availability of gallons of pure water as challenges to set up fabs in India.

He, however, reckons that several gases and minerals which are a part of the global semiconductor supply chain are produced in India. We also have excellent colleges which can produce highly skilled engineers for semiconductor manufacturing. Khushu estimated that the semiconductor industry is growing fast and can reach $1 trillion dollar in this decade. India can grow fast and reach $64 billion by 2026 from $27 billion today.

Mobiles, wearables, IT and industrial components are the leading segments in the Indian semiconductor industry contributing around 80% of the revenues in 2021. The mobile and wearables segment is valued at $13.8 billion and is expected to reach $31.5 billion in 2026, Khushu estimated.

According to Gupta, the Design Linked Incentive (DLI) scheme along with the recent Production-Linked Incentive (PLI) scheme have become crucial in shaping India as an efficient, equitable, and resilient design and manufacturing hub.

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