The need to overhaul a semiconductor scheme
The semiconductor Design-Linked Incentive (DLI) scheme, a crucial component of India’s $10 billion Semicon India Program, faces scrutiny as it falls short of its target to support 100 start-ups over five years. This mid-term appraisal provides an opportunity to assess and reshape the scheme, addressing its limitations and aligning it with India’s semiconductor goals.
GS-02 (Government policies & interventions), GS-03(Growth and Development)
- Critical infrastructure
“An overhauled Semiconductor Design-Linked Incentive scheme would fortify India’s comparative advantage and augment its forays into other stages of the semiconductor global value chain”, Comment. (250 words)
Dimensions of the Article:
- What are semiconductor chips?
- Need for Promoting Semiconductor Industry
- Goals of India’s Semiconductor Strategy
- Design-Linked Incentive (DLI) scheme
- Challenges and Issues with the DLI Scheme
What are semiconductor chips?
- Semiconductors are materials with a conductivity between conductors and insulators.
- They can be pure elements like silicon or compounds like gallium arsenide.
- Semiconductor chips are the basic building blocks of modern electronics and information technology products.
- They are essential components in automobiles, household gadgets, and medical devices.
- The COVID-19 pandemic has increased the demand for semiconductor chips as more activities shift online.
- Shortages of semiconductor chips have caused disruptions in various industries, leading to pent-up demand and subsequent supply shortages.
Need for Promoting Semiconductor Industry:
- Semiconductor chips are essential for the functioning of electronic products and drive the development of information and communication technologies (ICT).
- They play a crucial role in critical infrastructures, such as communication and power transmission, with implications for national security.
- Developing the semiconductor industry has a multiplier effect across various sectors of the economy and strengthens integration into the global value chain.
- Only a few countries, including the United States, Taiwan, South Korea, Japan, and the Netherlands, dominate the semiconductor manufacturing industry.
Goals of India’s Semiconductor Strategy:
- India’s semiconductor strategy aims to reduce dependence on semiconductor imports, build supply chain resilience, and leverage its design expertise to become a semiconductor powerhouse.
- The Design-Linked Incentive (DLI) scheme plays a pivotal role in stimulating the design ecosystem, a less capital-intensive stage with the potential for strong forward linkages.
Design-Linked Incentive (DLI) scheme:
- The DLI Scheme aims to provide financial incentives and infrastructure support to domestic companies, startups, and MSMEs involved in semiconductor design.
- Incentives will span various stages of ICs, Chipsets, SoCs, Systems & IP Cores, and semiconductor-linked design over a 5-year period.
- Eligible applicants must maintain domestic status for three years post claiming incentives, with more than 50% ownership by resident Indian citizens or Indian companies ultimately controlled by them.
- Meeting Threshold and Ceiling Limits is crucial for incentive disbursement, and a dedicated portal facilitates the application process.
Challenges and Issues with the DLI Scheme:
- Limited Start-up Approvals: The DLI scheme, focused on providing design infrastructure access and financial subsidies, approved only seven start-ups against its target of 100. This stark underperformance calls for a critical review.
- Barriers to Domestic Status: The scheme’s requirement for start-ups to maintain domestic status and restrict foreign capital raises significant barriers. The three-year commitment and the 50% cap on foreign direct investment limit the growth potential and risk appetite of domestic investors.
- Funding Landscape Challenges: Semiconductor R&D demands long-term investment, and the funding landscape for chip start-ups in India faces challenges. The absence of a mature funding ecosystem for hardware products and the scheme’s ownership restrictions hinder domestic investors’ participation.
- Modest Incentives and Trade-offs: The relatively modest incentives under the DLI scheme may not justify the trade-off for start-ups facing challenges in accessing long-term funding. Delinking ownership from development and adopting more start-up-friendly investment guidelines is essential.
Reframing the DLI Scheme:
- Broadening Objectives: The primary goal of the DLI scheme should be cultivating semiconductor design capabilities in India, fostering the creation of indigenous companies. The scheme should be revised to focus on facilitating design capabilities for various chips, emphasizing India-based registration rather than ownership.
- Financial Outlay Enhancement: To support this policy shift, a substantial increase in the financial outlay of the scheme is necessary. The recent government statement advocating “India-designed chips” aligns with this direction.
- Reevaluating Nodal Agency: The role of the Centre for Development of Advanced Computing as the nodal agency should be re-evaluated due to potential conflicts of interest. Exploring the Semiconductor Fabless Accelerator Lab (SFAL) model, with partnerships and a focus on mentoring, could enhance the effectiveness of the DLI scheme.
- Implementing Agency Blueprint: Considering SFAL’s success, an agency under the India Semiconductor Mission could serve as a blueprint for implementing the DLI scheme. This agency, similar to SFAL, would provide start-ups access to mentors, industry connections, and financial institutions.
- Tolerating Failure and Exploration: A recalibrated policy should view beneficiary start-ups as exploratory risk-taking vehicles. This approach, steered by a capable institution, can tolerate a certain failure rate and contribute to establishing India’s foothold in the high-tech semiconductor sector.
A comprehensive reevaluation and reframing of the Design-Linked Incentive (DLI) scheme to align it with India’s semiconductor goals is the need of the hour. The emphasis should be on broadening objectives, enhancing financial support, and establishing a capable implementing agency. Tolerating a certain failure rate and treating start-ups as exploration vehicles will contribute to India’s long-term success in the semiconductor domain.