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The Need to Overhaul a Semiconductor Scheme

Context:

The imminent mid-term assessment of the Semiconductor Design-Linked Incentive (DLI) scheme prompts a crucial moment for reflection. Despite its initial announcement, the DLI scheme has granted approval to only seven start-ups, significantly falling short of its ambitious target of supporting 100 start-ups over a five-year period. This impact evaluation offers policymakers a valuable opportunity to scrutinize and potentially revamp the scheme.

Relevance:

GS-2- Government Policies and Interventions

GS-3-

  • Growth and Development
  • Indigenization of Technology
  • Industrial Policy
  • Scientific Innovations and Discoveries

Mains Question:

An overhauled Semiconductor Design ­Linked Incentive (DLI) scheme would fortify India’s comparative advantage and augment its forays into other stages of the semiconductor global value chain. Comment. (15 Marks, 250 Words).

About Semiconductors:

  • Semiconductors belong to a category of crystalline solids that exhibit electrical conductivity levels falling between those of conductors and insulators.
  • These materials are widely utilized in the production of diverse electronic devices, ranging from diodes and transistors to integrated circuits.
  • The compact size, reliability, energy efficiency, and cost-effectiveness of such devices contribute to their extensive use.

Semicon India Program:

  • Semicon India, hosted by the India Semiconductor Mission (ISM), is an annual conference with the principal aim of fostering the expansion and advancement of the semiconductor industry in India.
  • This platform serves as an opportunity for the nation to showcase its prowess in semiconductor design and manufacturing, facilitating networking and the exchange of knowledge among participants.
  • India’s Semicon India Program, with a financial commitment of $10 billion, has yielded mixed results at best.

Objectives of the Program:

  • Reducing dependence on semiconductor imports, especially from China, particularly in critical sectors like defense and emerging technologies such as Artificial Intelligence.
  • Another goal is to enhance supply chain resilience by integrating into the global semiconductor value chain (GVC).
  • The third objective is to leverage India’s existing strengths, as the country already hosts the design hubs of major global semiconductor industry players, with Indian chip design engineers being integral to the semiconductor GVC.

Way Forward:

  • While these objectives are commendable, resource constraints necessitate a strategic approach in industrial policy to ensure maximum benefits from investments.
  • Prioritizing the stimulation of the design ecosystem, which is less capital-intensive compared to the foundry and assembly stages in the semiconductor GVC, can create robust forward linkages to a burgeoning fabrication and assembly industry in India.

DLI Scheme:

Challenges Associated with the DLI Scheme:

  • At first glance, the Semiconductor Design-Linked Incentive (DLI) scheme seems to be well-conceived, emphasizing access to design infrastructure, including electronic design automation (EDA) tools, and providing financial subsidies for various stages of the chip design process. However, despite its apparent merits, the scheme has encountered several challenges.
  • One major impediment is the requirement for beneficiary start-ups to maintain their domestic status for a minimum of three years after receiving incentives.
  • Additionally, these start-ups are restricted from raising more than 50% of their necessary capital through foreign direct investment, presenting a substantial barrier.
  • The high costs associated with semiconductor design start-ups pose another significant challenge.
  • Semiconductor research and development typically yield results in the long term, and securing funding for chip start-ups in India remains difficult, despite promising intellectual property and business potential.
  • The capital demands, coupled with the absence of success stories due to the lack of a mature start-up funding ecosystem for hardware products in India, diminish the risk appetite of domestic investors.
  • Consequently, the reluctance of domestic investors to take risks may lead to a shortfall in investment for DLI beneficiary start-ups, potentially necessitating foreign equity financing, if not for the stringent ownership conditions imposed by the scheme.

Revaluation of the DLI Scheme’s Incentives and Objectives:

  • The relatively modest incentives provided by the DLI scheme, capped at ₹15 Crore for Product DLI and ₹30 Crore for Deployment Linked Incentive per application, may not present a compelling trade-off for start-ups that risk losing access to essential long-term funding.
  • Therefore, it becomes imperative to separate ownership considerations from semiconductor design development and adopt more startup-friendly investment guidelines.
  • The primary focus of the DLI scheme should be to nurture semiconductor design capabilities within India, acknowledging that indigenous intellectual property (IP) will naturally evolve as local talent contributes to the establishment of homegrown companies over time.
  • The scheme requires a revision to concentrate on the broader objective of facilitating design capabilities for a diverse range of chips within the country, as long as the entity engaged in the design development process is registered in India.
  • The recent statement by the Union government emphasizing that the product should be an “India-designed chip” indicates a step in this direction. To support this policy shift, a substantial increase in the financial allocation of the scheme is necessary.

Conclusion:

A revamped approach could broaden the focus of the DLI scheme, making it more inclusive for a diverse range of semiconductor design start-ups, not just those geared for volume production. By assisting start-ups in overcoming initial challenges in developing design concepts, a recalibrated policy, guided by a capable institution, can tolerate a certain failure rate and perceive beneficiary start-ups as vehicles for exploratory risk-taking, thereby solidifying India’s presence in this high-tech sector.


 

February 2024
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