Revisiting India’s Semiconductor Manufacturing Incentives

History of Semiconductor Manufacturing Incentives

 The month of December saw a landmark announcement made by the Minister of Electronics and Information Technology (MeitY) on the floor of the Parliament. A 76,000 crore ‘comprehensive program for the development of a sustainable semiconductor and display ecosystem’ finally gave semiconductors their share of the spotlight. With a focus on building different stages of the semiconductor supply chain, the program has veered away from the government’s sole focus on bringing semiconductor manufacturing to the country. But setting up a fabrication facility in India still remains one of the key objectives of the government with new incentives provided in this program for interested companies with the necessary technical expertise. 

There have always been questions about why India has not managed to attract even a mid-tier semiconductor manufacturer to set up a fab in the country. Is it the business ecosystem that has driven away potential firms or is the incentives just not up to the mark? As per an answer provided by a government official in the Lok Sabha on the 8th of December, India currently has three semiconductor fabs but none are commercial in nature and no semiconductor manufacturing project has been approved as of that date. However, despite repeated failures, the government looks to be serious this time in finalising the deal for a commercial fab. It is imperative that previous incentives have to be revisited to understand why semiconductor fabrication companies have not yet set up shop in the country.

India’s Attempts at Semiconductor Fabrication and Manufacturing

Prior to 2019, the semiconductor initiative was driven by the recommendations of an Empowered Committee (EC). This committee was set up by the Union Cabinet in 2011 to identify potential investors for building a fabrication facility. The committee, after extensive deliberations, came out with two main recommendations. One was the need for the existence of two commercial fabs in the country to bring in competitiveness in a large and diverse Indian market. The other was the need for a set of incentives and support by the government for the project. This resulted in the formulation of the Modified Special Incentive Package Scheme (M-SIPS). The M-SIPS scheme offered interest-free loans capped at 20% of capital expenditure which on commencement of operations could be converted into 11% equity. Along with this, M-SIPS also provided tax deductions, custom duties exemptions, and financial incentives. 

This resulted in two letters of intent being submitted to the government. One was led by the company HSMC and the other was led by the Jaypee Group. However, both the projects failed to materialise with the Jaypee group voluntarily pulling out saying that the project was not commercially viable. The M-SIPS scheme was in effect till the end of 2018 and despite its incentives, there was no other proposal that was received during this time period. 

It was in 2019 that a National Policy on Electronics was approved by the government. This introduced the Production Linked Incentive (PLI) scheme for large-scale electronics manufacturing as well as the Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS) which focused on fabs. The SPECS scheme offered the exact same incentives as M-SIPS with regard to customs duties and tax deductions. The only difference was in the raising of financial incentives to 25% of capital expenditure and the reduction of corporate tax to 15%. Though electronics hardware manufacturing in India had grown at a compound annual growth rate of 23% from 2014-15 to 2019-20, the SPECS scheme for setting up a fab did not manage to garner any proposals. 

The previous packages by the government have not changed much over the last eight years and this has significantly reduced the government’s ability to attract potential investors. However, the recent program has indicated fiscal support of up to 50% of the total project cost (depending on the node and technology) along with working with certain state governments to provide high-grade power and water supply. While this is a step up compared to the previous announcements, there is a caveat of this program replacing the SPECS scheme which is supposed to be still in effect. It is not clear whether the components of the SPECS scheme now are a subset of the new announcement of 50% financial support or whether the previous scheme has been withdrawn altogether. If the new announcement is indeed an encapsulation of previous incentives, there might not be any step up with regard to the actual financial support offered by the government. But the positive takeaway from the scheme is that the government has committed to upfront financial support on an equal footing basis and not as reimbursements like before. 

The government has to realise that the incentives which were offered before were not successful in bringing semiconductor manufacturing to the country. A rehaul of incentives has been tried and offered to firms looking to build fabrication facilities in India with the new package. Semiconductor manufacturing still is a highly capital-intensive process that requires huge sums of money. While government support is critical for the project to materialise, there is also the need to combine government direction with private capital and market forces. Attracting potential investors and not relying on state-owned entities for funding must be the long-term goal. It should be the collective responsibility of MeitY, industry bodies, and academic institutes to formulate a clear-cut list of incentives post-2021 to finally get semiconductor manufacturing companies to India.