Given that the semiconductor industry is the backbone of modern technology, India is positioning itself as a key player in this high-growth sector by promoting foreign investment as well as increasing domestic manufacturing and production in this sector. The global semiconductor industry is enabling innovations across various sectors from consumer electronics to critical infrastructure systems.
With the aim to strengthen its semiconductor industry and to foster domestic innovation and manufacturing, India has introduced various incentives and schemes to extend fiscal support. The initiatives have led to boost in domestic capabilities and intends to reduce import dependence.
Government Initiatives and Support
The Government of India ("Government") has taken numerous steps to encourage manufacturing of semiconductors domestically and has taken steps towards India's emergence as the leading hub for semiconductor manufacturing in the world.
The Government has from time-to-time launched fiscal/non-fiscal incentives, provided unwavering support for research and development and fostered collaborations with international institutions to make India the preferred destination for semiconductor innovation and manufacturing. To promote growth in this specific sector, the Government has introduced various schemes to bolster semiconductor manufacturing.
In order to stimulate rapid growth of the country's manufacturing and innovation ecosystem, the Government launched the Semicon India Program to provide financial support to companies that invest in semiconductor and display manufacturing ecosystem in India. With a total outlay of INR 76,000 crore this program provides support to establish semiconductor fabrication units ("fabs"), display fabs and compound semiconductors/ silicon photonics/ sensors/ discrete semiconductor fabs, thereby enabling India to establish its international presence in this manufacturing industry. Through this program, the Government has introduced the following schemes extending fiscal support subject to fulfillment of certain conditions and approval of the application.1
1. Modified Scheme for Setting up of Semiconductor Fabs and Display Fabs in India
With the aim to attract substantial investments for establishing semiconductor wafer fabs2 and display fabs for manufacturing TFT LCD or AMOLED based display panels3, the Government launched modified schemes offering fiscal support. Under the schemes, the Government extends fiscal support of 50% project cost on pari-passu basis subject to the approval of the application. In order to be eligible to receive such fiscal support, applicants must meet the capital investment threshold as prescribed by the Government, exhibit their technological know-how and the financial merit to execute such highly capital and resource intensive projects. The structure and quantum of the fiscal support are finalized between the India Semiconductor Mission (ISM) and the applicant selected on the basis of the technological and financial evaluation of their proposals.
2. Modified Scheme for Setting up of Compound Semiconductors / Silicon Photonics / Sensors (including MEMS) Fabs / Discrete Semiconductors Fab & Semiconductor ATMP / OSAT facilities in India
The Scheme provides fiscal support of 50% of the capital expenditure on pari-passu basis for setting up of:
- Compound Semiconductors
- Silicon Photonics (SiPh)
- Sensors (including MEMS) Fab
- Discrete Semiconductor Fab; and
- Semiconductor Assembly, Testing Marking and Packaging (ATMP) / Outsourced Semiconductor Assembly and Testing (OSAT) facilities in India.
To be eligible to receive the said fiscal incentives provided by the Government, the applicants should either (a) possess prior experience in owning and operating a commercial fab in one of the aforementioned categories; or (b) should own or possess licensed process technologies required for the proposed fab. Furthermore, the applicants should meet the capital investment threshold of INR 100 crore (Indian Rupees hundred crore).4 The Government shall be receiving applications until December 2024 for interested candidates to submit their proposals.
3. Design Linked Incentive (DLI) Scheme5
The Design Linked Incentive (DLI) Scheme aims to offer financial incentives as well as design infrastructure support across various stages of development and deployment of semiconductor design(s) for integrated circuits, chipsets and system on chips, and semiconductor linked design(s) over a period of 5 (five) years. The Ministry of Electronics and Information Technology (MeitY) has announced the Design Linked Incentive (DLI) Scheme to offset the disabilities in the domestic industry involved in semiconductor design in order to not only move up in value-chain but also strengthen the semiconductor chip design ecosystem in the country.
In addition to the Government's policies and initiatives, several state governments have also introduced state-specific policies to implement Government initiatives like the Semicon India Program to make such states the preferred destinations for the semiconductor industry.
Furthermore, to facilitate the increasing presence of India as the innovation hub and to foster collaboration between industries, the Government has also set up a dedicated research and development department under the India Semiconductor Research Centre (ISRC). The ISRC shall be a research institution focusing on semiconductor processes, advanced packaging, compound semiconductors and fabless design and Electronic Design Automation (EDA) tools.
The Government recognizes the strategic importance of electronics hardware manufacturing as they are the foundation of both "Make in India" and "Digital India" initiatives, and has implemented following additional programs particularly focusing on the development of electronics manufacturing and components ecosystem:
4. Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS)
With the objective of strengthening India's electronics manufacturing ecosystem, the SPECS scheme was introduced to mitigate cost disadvantages in domestic manufacturing of electronic components and semiconductors. The scheme offers a financial incentive of 25% on capital expenditure for an identified list of electronic goods including without limitation chip modules for smart cards, SMT components, camera modules and electromechanical components.
The SPECS scheme, initially notified in April 2020 was open for applications until March 31, 2024, and vide its amendment has increased the scheme duration to March 31, 2029.6 This scheme is applicable to both new manufacturing units and existing units undertaking expansion of capacity/ modernization and diversification. As an additional benefit, any incentive offered by the state government or any of its agencies or local bodies can be availed over and above the incentive available under this scheme. As of, June 30, 2024 incremental investment of INR 8,803.14 crores had been made under the SPECS scheme which led to production of INR 18,083.55 crores, showcasing the effectiveness of the SPECS scheme in driving domestic manufacturing.
5. Production-Linked Incentive (PLI) Scheme
The PLI scheme provides financial incentives based on incremental sales, specifically targeting semiconductor and electronics manufacturers who establish facilities in India. This scheme was initially introduced to promote the manufacturing of electronic products but has been extended to semiconductor manufacturing. The incentive ranges from 3% to 6% of incremental sales, offering substantial financial benefits to eligible companies committed to long-term investment and revenue generation in the sector.
India Semiconductor Mission7
Furthermore, with the objective to establish India as a global hub for semiconductor manufacturing and attract both domestic and international investments, the Government set up the India Semiconductor Mission (ISM). The ISM is led by global experts in semiconductor and display industry and is designed as the nodal agency for efficient implementation of the schemes mentioned above for setting up of semiconductor and display fabs.
The ISM aims to facilitate the adoption of trusted electronics through secure semiconductors and the creation of a resilient supply chain. It further intends to provide support in the form of EDA tools and other suitable mechanisms for early-stage startups to enable a multi-fold growth of the semiconductor design industry, while also enabling collaborations and partnership programs with national and international agencies for catalyzing collaborative research and skill development.
Basic Custom Duty (BCD) Exemption for Semiconductor Manufacturing in India and Foreign Investment
The Government, recognizing the strategic importance of semiconductors, has introduced a series of exemptions from BCD for specific items essential to semiconductor production.8 These exemptions are intended to reduce the cost burden on manufacturers by lowering import duties for equipment and raw materials that are otherwise not readily available in India. The exemption is provided on specific capital goods, machinery, electrical equipment, other instruments and their parts for manufacturing, as provided by the appropriate authorities from time to time.
Additionally, the Government introduced and formulated an investor friendly FDI policy under which FDI up to 100% is permitted under the automatic route in the manufacturing sector, subject to applicable conditions and regulations. The liberalized entry routes under the current FDI policy are aimed to attract potential investors as it has made it easier for foreign companies to invest in India.
Conclusion
The schemes launched by the Government collectively highlight the Government's commitment to establish India as a global hub for advanced electronics and semiconductor manufacturing. The schemes, incentives and support provided by the Government collectively have fostered innovation domestically enabling a competitive and self-reliant ecosystem within the country.
Owing to the Government fiscal initiatives and policies, customs duty exemptions, streamlined procedures, India's semiconductor industry is well equipped for rapid growth and has been an attractive industry for investors. As India takes strides towards self-reliance in semiconductor production, these facilities are expected to contribute significantly to economic growth, technological advancement, and job creation.
Footnotes
2. Modified Scheme for setting up of Semiconductor Fabs in India
3. Modified Scheme for setting up of Display Fabs in India
5. India Semiconductor Mission: Design Linked Incentive
7. India Semiconductor Mission
8. BCD Exemption for Semiconductor Manufacturing in India
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