Context: India has invited applications from 100 domestic companies, startups and small and medium enterprises to become a part of the design-linked incentive (DLI) scheme.
About DLI scheme

• The DLI scheme aims to provide financial and infrastructural support to companies setting up fabs or semiconductor making plants in India.
• It aims to attract existing and global players as it will support their expenditures related to design software, IP rights, development, testing and deployment.
• Centre for Development of Advanced Computing (CDAC), a scientific society operating under MeitY, will serve as the nodal agency for the implementation of the DLI scheme.

Components of the scheme
It has three components which are

• Chip Design infrastructure support: C-DAC will set up the India Chip Centre to host the state-of-the-art design infrastructure (viz. EDA Tools, IP Cores and support for MPW (Multi Project Wafer fabrication) & post-silicon validation) and facilitate its access to supported companies.
• Product Design Linked Incentive: Reimbursement of up to 50% of the eligible expenditure subject to a ceiling of Rs. 15 Crore per application will be provided as fiscal support to the approved applicants who are engaged in semiconductor design.
• Deployment Linked Incentive: An incentive of 6% to 4% of net sales turnover over 5 years subject to a ceiling of ?30 Crore per application will be provided to approved applicants whose semiconductor design for Integrated Circuits (ICs), Chipsets, System on Chips (SoCs), Systems & IP Cores and semiconductor linked design are deployed in electronic products.

Why need such a scheme?
Growing semiconductor demand in India

• The semiconductor industry is growing fast and can reach $1 trillion dollar 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.

A boost to semiconductor manufacturing

• The sudden surge in demand of chips and semiconductor components has underpinned the need to establish a robust semiconductor ecosystem in India.
• Several sectors, including auto, telecom, and medical technology suffered due to the unexpected surge leading to the scarcity of chips manufactured by only a few countries.
• The inception of new companies will help in meeting the demand and supply and encourage innovation in India.

What are other countries doing to be dominant in the race of chip making?

• Currently, semiconductor manufacturing is dominated by companies in the U.S., Japan, South Korea, Taiwan, Israel and the Netherlands.
• They are also making efforts in solving the chip shortage problem.
• US wants to bring manufacturing back to America and reduce the country’s reliance on a small number of chipmakers based largely in Taiwan and South Korea.
• These chipmakers produce up to 70% of the world’s semiconductors.

Challenges in India

• No incubation: In India, more than 90% of global companies already have their R&D and design centres for semiconductors but never established their fabrication units.
• Strategic sector: Although India has semiconductor fabs in Mohali and Bangalore, they are purely strategic for defence and space applications only
• Capital requirement: Setting up fabs is capital intensive and needs investment in the range of $5 billion to $10 billion.
• Lack of supportive policies: Lack of investments and supportive government policies are some of the challenges to set up fabs in India.
• Geopolitical limitations: A combination of capital and the geopolitical situation comes into play to build new fabs.

Road Ahead

• Further incentivization: Schemes like the DLI are crucial to avoid high dependencies on a few countries or companies.
• Raw material supply: Several gases and minerals which are a part of the global semiconductor supply chain are produced in India.
• Large talent pool: We also have excellent colleges which can produce highly-skilled engineers for semiconductor manufacturing.