Owing to their critical applications in artificial intelligence, 5G, robotics, and quantum computing, among others, semiconductors are effectively driving today’s digital world. There is high demand for the product. However, because of its ‘boom and bust’ supply cycle and high price volatility, supply is always short. Further, the need to adopt newer technologies to meet the requirements of smaller, faster, and cheaper products is a constant necessity.
The shortage of chips is holding back India’s auto sector just when it had begun to witness early signs of recovery, after sales plunged in 2020, due to the pandemic. Currently, India imports 100 percent of its semiconductors, spending ~$24 billion annually. Tech companies across the world are grappling with chip shortages, as investment in the industry is hit by the high cost of the establishment (roughly $5-7 billion), bureaucratic inefficiencies requiring varied approvals ranging over 2-3 years, unstable power supply, the requirement of high-end technologies with huge investment in R&D, dearth of skilled labour, and uncertain tax regimes.
Governments globally are subsidising the construction of semiconductor plants as chip shortage is hobbling the auto and electronics industries. India aims to establish reliable suppliers for its electronic and telecom industry to cut dependencies on China. Although India has two fabs - SITAR, a unit of the Defence Research and Development Organisation in Bengaluru, and a semiconductor laboratory in Chandigarh, they mainly manufacture silicon chips for strategic purposes like defence and space and not for commercial use.
India invited an “expression of interest” from chipmakers for setting up fabrication units through a consortium of foreign investors and Indian conglomerates, including the Tata Group. The government's push to attract chipmakers is more likely to succeed, following the success in the electronics and automobile industries.
The government has undertaken various initiatives to offer concessions which include waivers on customs duty & R&D expenses, interest-free loans, several policies and schemes such as National Policy on Electronics 2019, Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS), and Modified Electronics Manufacturing Clusters (EMC 2.0) Scheme, among others. The Design-Linked Incentive (DLI) Scheme, modernisation and commercialisation of Semiconductor Laboratory (SCL), fiscal support on capital expenditure on establishing Compound Semiconductors/Silicon Photonics/Sensors (including MEMS) Fabs and Semiconductor ATMP/OSAT facilities, Semiconductor Fabs and Display Fab support the industry. The Production-Linked Incentive Scheme has been announced by the government with a budget outlay of Rs 720 billion to augment the indigenous semiconductor capacity.
Also, the Indian income tax law has introduced a new regime whereby newly set-up domestic manufacturing companies may opt for a reduced corporate tax rate of 15 percent (including surcharge and cess, the effective rate would be 17.16 percent), but without other deductions/exemptions (except labour employment incentive under section 80JJAA of the Income-tax Act, 1961).
With the present Government’s strong resolve of ‘Make in India’, the industry’s strategic importance and to secure critical information infrastructure, the government in the upcoming Budget may consider announcing incentive packages such as activity-based incentives in the form of 150 percent weighted deduction towards in-house R&D expenditure, income tax holiday for chip export businesses, enhanced income tax deduction to companies that aid development, operate and maintain relevant infrastructure, and reduced GST rate from the present 18 percent.
These will be a great support to home-grown chip companies and could go a long way in making India more self-reliant.