Context: According to media sources, the Indian government is debating a proposal to choose an ownership share in domestic chip design firms as part of the second phase of the design-linked incentive (DLI) scheme for the semiconductor industry. 

• The aim behind the scheme is to establish a stable ecosystem and promote the growth of “fabless companies” in India—entities that design chips but outsource manufacturing.

• However, this policy requires a long-term strategy due to the capital-intensive nature of the semiconductor sector and the lengthy gestation periods for setting up design and fabrication units.

What is DLI Scheme?

• DLI scheme is a program aimed at providing financial and infrastructural support to companies establishing semiconductor manufacturing plants in India.

• Eligible participants who set up fabrication units in the country can receive fiscal support of up to 50% of the total cost.

• Additionally, participants building compound semiconductors, silicon photonics, and sensors fabrication plants can avail fiscal support of 30% of the capital expenditure under this scheme.

• Companies engaged in semiconductor design for integrated circuits, chipsets, system-on-chips, systems, and IP cores will receive incentives of 4% to 6% on net sales for a duration of five years.

• The scheme is expected to promote the growth of at least 20 such companies, achieving a turnover of more than Rs 1500 crore in the next five years.

Present Chip Dynamics

• Capital Intensity: The semiconductor industry as a whole demands a sizable capital investment for both manufacturing and design. Costly expenses are involved in setting up fabrication facilities, expanding manufacturing capacity, and carrying out research.

• Long Gestation Period: Because chip design and fabrication units require lengthy gestation periods before the first product is released to the market, returns on investment do not occur immediately.

• Complexity of Chip Design: Chip design costs more to develop than standard software. Research and development are becoming more difficult as chipsets get smaller and functional requirements alter.

• Interruptions in the supply chain: The semiconductor business is susceptible to interruptions in the supply chain, which might erode investor confidence.

Domestic Chip Industry Scenario

• Talent Pool: India has a highly-skilled talent pool of semiconductor design engineers, making up around 20% of the world’s workforce, working for global companies like Intel, Micron, and Qualcomm, among others.

• IP Ownership: Despite a thriving talent pool, India owns a smaller portion of the intellectual property (IP) related to chip designs, which is mostly retained by global companies.

• DLI Scheme for Chip Designing: The DLI scheme introduced in December 2021 aimed to indigenize innovations and support the growth of chip design companies with financial incentives.

• Changing Landscape: The scheme has led to the establishment of over 30 semiconductor design startups in India, with some already receiving government support.

Growing market in India

• The semiconductor industry is growing fast and can reach $1 trillion dollars in this decade. India can grow fast and reach $64 billion by 2026 from $27 billion today.

• Mobiles, wearables, IT, and industrial components are the leading segments in the Indian semiconductor industry contributing around 80% of the revenues in 2021.

• The mobile and wearables segment is valued at $13.8 billion and is expected to reach $31.5 billion in 2026.

Challenges and Considerations

• Inefficiency of Government Venture Capital: Investing in chip design businesses as a venture capital firm could be useless and inefficient. Due to increased valuations and access to a worldwide ecosystem of clients and investors, companies might favour foreign acquisitions.

• Lack of Venture Capitalists: Indian semiconductor businesses’ ability to expand is hampered by the lack of venture capitalists in the country’s private sector.

• Limited income of Design Companies: In comparison to the industry’s potential, the total yearly income of domestic semiconductor design companies is pitiful. Investors and venture capitalists are put off by lengthy gestation periods.

• Global Competition: The semiconductor industry is fiercely competitive on a global scale, and India is up against stiff opposition in its efforts to become a centre for the production of semiconductors and chips.

Government’s role as Regulatory authority in Semiconductor Chip Industry

• Support for Regulations: The government’s equity involvement may offer regulatory assistance to chip design firms, supporting a stable environment for their expansion.

• Aligning Interests: The government guarantees that design firms’ interests are aligned with the success of projects by holding an equity investment, resulting in shared risk and benefit.

• Preventing Foreign Ownership: Equity injection can stop enterprises from selling a majority stake to larger international players, retaining the business and its advantages in India.

• Small and medium-sized businesses in the area would benefit from an equity infusion since it would allow them to take part in the semiconductor ecosystem.

Conclusion

• In conclusion, it is critical for creating a robust and competitive ecosystem for the Indian government to concentrate on assisting the indigenous semiconductor industry, particularly chip design. Even if there are difficulties, the government’s equity interest proposal aims to resolve some of these problems and encourage the expansion of homegrown chip design firms, making India a global hub for the semiconductor and chip manufacturing industry.