A good initiative

States hold key to success of semiconductor incentive plan

The Cabinet decision to extend the production-linked incentive, or PLI, scheme to semiconductors with a budgeted incentive of Rs 76,000 crore over the next six years should encourage investment flows. While India has excellent semiconductor design houses, including many R&D units owned by global majors, the lack of fabrication capacity leaves a huge gap in the electronics value chain.

The scheme envisages support to outfits engaged in silicon semiconductor fabs, display fabs, compound semiconductors, silicon photonics and sensors fabs, semiconductor packaging, and semiconductor design. At the least, the PLI targets kick-starting two greenfield semiconductor fabs and two display fabs as well as refurbishing the brownfield government-run semi-conductor laboratory (SCL) in a partnership, or joint venture, with a commercial partner. In various categories, the scheme suggests support of 25-50 per cent of investment on pari passu or an equal rights basis. In order to succeed, this will need to be backed up by proactive policy from state governments. Semiconductor manufacture has three imperatives. A fab facility needs stable, guaranteed power 24x7; it needs pure water in vast quantities; and it needs land, since scale is critical. These areas are state subjects and it will be up to state governments to create the right climate for easy implementation of semiconductor projects.

This will not only require cutting through the red tape to smoothen processes; it will also require attention to details like transport logistics — good roads, and rail and air connections to the site will be critical, for instance. Ensuring there is no adverse environmental impact is also important if this is to be successful in the long term. States like Himachal Pradesh and Uttarakhand, which have abundant access to pure water, are also environmentally fragile. The average fab unit incurs capital expenditures of several billion dollars since high capacity is crucial for competitive costs. Samsung’s new advanced logic facility in Texas, United States, announced a month ago, will incur capex of $17-18 billion, for instance. In that context, the $10 billion outlay, which seems generous at first glance, may eventually need a booster though it would surely be enough to get things rolling.
 

Several companies, including Israel’s Tower Semiconductor, Apple’s contract manufacturer Foxconn, and a Singapore-based consortium have reportedly shown an interest in setting up fab units. There are also reports that Vedanta Group is interested in a display fab unit. Semiconductors, or chips in common parlance, were among the industrial items most affected by shutdowns. There is still a critical global shortage of many categories of chips — this is retarding global automobile production, for instance, and the global prices of many electronic items, ranging from microwaves to mobiles, have escalated due to this missing link. 

Every industrial segment generates demand for chips of various categories, and the demand is growing rapidly as smart power networks, Internet of Things, driverless cars, drones, etc. become more common. Setting up domestic manufacturing capacity should help to insulate India against future supply crunches and any intellectual property that accrues will be a big bonus. Domestic fabs would also add a layer to IT security. Chips are made with embedded instructions, which may contain malware or backdoors and are impossible to diagnose. This is one reason why the US has banned Huawei equipment for use in 5G networks. This PLI is a good initiative on several counts; it is to be hoped that there is a pragmatic follow-through.