The Road Ahead For The Indian Semiconductor Industry

With the right strategies, incentives, and ecosystem support, India can leverage its strengths to establish itself as a semiconductor manufacturing hub and contribute substantially to global semiconductor value chains.

Semiconductors are the backbone of electronic devices, with a diverse range of applications, ranging from consumer electronics and communications to defence, automotive, healthcare, and national security systems. They serve as the lifeline of any modern economy and are indispensable in securing strategic autonomy. Currently, the global semiconductor landscape is dominated by South Korea, Taiwan, China, the United States and Japan. However, supply chain disruptions caused by the Covid-19 pandemic and the ensuing wave of protectionism, exposed vulnerabilities in the existing global semiconductor supply chain. Combined with the tangible shift in the geopolitical climate, fears over the potential weaponization of semiconductor chips, and the rapidly evolving technological landscape, countries have been compelled to endeavour towards developing domestic semiconductor manufacturing capabilities to reduce reliance on foreign sources.

Traditionally, India has been heavily reliant on imports for semiconductor materials and chips. However, in the recent years, India has made concerted efforts to reduce this dependency and expand its presence in the global semiconductor market by developing indigenous design and manufacturing capabilities. The semiconductor market in India is projected to be worth USD 55 billion by 2026, with nearly 60% being driven by three key industries: smartphones & wearables, automotive components, and computing & data storage.¹ India’s strategic geographic location, stable political environment, a rapidly growing economy with an expanding consumer base, and an existing strength in semiconductor chip design (India accounts for nearly 20% of the world’s chip design talent²) make it an attractive destination for investment in semiconductor manufacturing. To leverage these advantages and to achieve the goal of an ‘Atma Nirbhar’ (self-reliant) semiconductor industry, the Indian government has implemented various initiatives and policy measures. This article provides an overview of the regulatory framework, government initiatives, challenges, and the road ahead for India’s semiconductor aspirations.

The Indian Regulatory Landscape:

Foreign investment: Enabling access to open markets is crucial for integrating with global semiconductor supply chains. Under current foreign investment rules, foreign direct investment (FDI) up to 100% is permitted under the automatic route in the ‘manufacturing’ sector, which includes electronics and semiconductors. However, entities from countries sharing a land border with India, or where the beneficial ownership is based or is a citizen of any such a country, can invest only after receiving approval from the relevant government ministry. This provision aims to safeguard strategic interests while attracting foreign capital and expertise.

Protection of intellectual property: The unique, distinctive, and complex nature of semiconductor layout designs necessitates specialized intellectual property protection beyond existing patent, design, trade secret, and copyright-related laws. Consequently, there is a need for a sui generis legislation, which incentivizes investment of financial and technological resources in creating unique layout designs. In the absence of any such intellectual property protection, original chip designs run the risk of being replicated, causing significant monetary and reputational harm to legitimate companies. To address this, India enacted the ‘Semiconductor Integrated Circuits Layout-Design Act, 2000’ (SICLD), a sui generis legislation incentivizing investment in creating original layout designs. Under the SICLD, creators can apply for registration of their layout designs with the Semiconductor Integrated Circuits Layout-Design Registry. Registered layouts receive exclusive rights for 10 years. Infringement of the provisions of the SICLD shall be punishable with imprisonment for a term of up to 3 years, or with fine which may extend to INR 10,00,000, or with both. Certain acts, such as reproducing layouts for scientific evaluation, research, or training purposes, are exempt from infringement. As India aims to become a semiconductor hub, the SICLD will play a crucial role in promoting innovation and growth in the sector. In the 2022-23 annual report, the patent office noted a nearly 700% increase in SICLD application filings compared to the previous year, reflecting rising industry interest.³

Compliance with environmental statutes: Establishing semiconductor manufacturing units require obtaining various permits and authorizations under environmental laws. For instance, units generating hazardous waste must comply with the Hazardous and Other Wastes (Management & Transboundary Movement) Rules, 2016. If any plastic, e-waste, or battery waste is generated as part of the manufacturing process, relevant authorizations will need to be obtained under the Plastic Waste Management Rules, 2016, E-Waste (Management) Rules, 2022 and the Battery Waste Management Rules, 2022, respectively. Further, the establishment of any industrial plant or process will require consents to be obtained from the state pollution control boards, under the Air (Prevention and Control of Pollution) Act, 1981 and the Water (Prevention and Control of Pollution) Act, 1974).

Compliance with Labour Laws: As a labour-intensive industry, semiconductor manufacturers will be required to comply with various labour laws. This includes obtaining registration certificates under state-specific shops and establishment acts for units employing more than a prescribed number of workers. Employers will need to also ensure minimum wage payments as per the Minimum Wages Act, 1948, and the Payment of Wages Act, 1936. Manufacturing units will need to be compliant with the safety standards prescribed under the Factories Act, 1948. Manufacturing units employing women workers must provide paid maternity leave per the Maternity Benefit Act, 1961. Additionally, engaging contract labour will require registration and compliance under the Contract Labour (Regulation and Abolition) Act, 1970.

Initiatives implemented by the central government: The National Policy on Electronics 2019 (NEP 2019), unveiled by the Ministry of Electronics and Information Technology, highlighted the need to develop manufacturing capabilities across the electronics sector, including semiconductor and display fabrication facilities. Following the NEP 2019, the government established the ‘India Semiconductor Mission’ (ISM) to serve as the nodal agency catalysing the Indian semiconductor ecosystem across manufacturing, packaging, and design. The ISM’s key objectives include developing long-term strategies, encouraging technology transfer, promoting intellectual property generation, collaborative research, and skill development.

The Union Cabinet also approved the ‘Semicon India Programme’ (Programme) in 2021, with a financial outlay of INR 76,000 crore for the development of a semiconductor and display manufacturing ecosystem.⁴ Four schemes have been introduced under the Programme as on date: (1) the Modified Scheme for setting up Semiconductor Fabs in India offers fiscal support of 50% against the eligible project cost on a pari-passu basis for setting up semiconductor fabs⁵; (2) the Modified Scheme for setting up Display Fabs in India, offers fiscal support of 50% against the eligible project cost on a pari-passu basis for setting up display fabs⁶; (3) the Modified Scheme for setting up of Compound Semiconductors / Silicon Photonics / Sensors Fab/ Discrete Semiconductors Fab and Semiconductor Assembly, Testing, Marking and Packaging (ATMP)/ Outsourced Semiconductor Assembly and Test (OSAT) facilities in India, offers fiscal support of upto 50% of the capital expenditure, on a pari-passu basis⁷; and (4) the Design Linked Incentive Scheme (DLIS) offers financial incentives and design infrastructure support across various stages of development and deployment of semiconductor design for integrated circuits, chipsets, system on chips. Fiscal incentives offered under the DLIS include reimbursement of upto 50% of the eligible expenditure subject to a ceiling of INR 15 crore (under the product design linked incentive) or incentives of 6% to 4% of net sales turnover over 5 years, subject to a ceiling of INR 30 crore (under the deployment linked incentive).⁸

Benefits under the schemes detailed at serial numbers (1), (2) and (3) above, are available to all private or public limited companies, and the benefits under the DLIS are available to domestic companies (i.e., where more than 50% of the share capital is beneficially owned by resident Indian citizens and/or Indian companies, which are ultimately owned and controlled by resident Indian citizens), start-ups (as defined under the notification dated February 19, 2019 issued by the Department for Promotion of Industry and Internal Trade or existing norms) and micro, small and medium enterprises (as defined as per the notification dated June 1, 2020 issued by the Ministry of Micro, Small and Medium Enterprises). Further, while the ISM functions as the nodal agency for the schemes detailed at serial numbers (1), (2) and (3) above, the nodal agency for the DLIS is the Centre for Development of Advanced Computing (C-DAC), a premier R&D organization of the Ministry of Electronics and Information Technology (MEIT).

Moreover, the Semiconductor Laboratory (SCL) which serves as an integrated device manufacturing facility for strategic and defence purposes, has been identified as an autonomous institution under the MEIT. Efforts are underway to modernize and upgrade the Mohali-based SCL through collaborations with private players. In the interim budget announced on February 1, 2024, the government allocated INR 6903 crore for the semiconductor and display manufacturing industry, a nearly 200% increase over the previous fiscal year’s budget.⁹

These reforms aim to build infrastructure facilities and create a conducive regulatory environment for the semiconductor industry. Recently, the Union Cabinet approved the establishment of three new semiconductor manufacturing facilities in partnership with international companies: (i) Dholera, Gujarat (a collaboration between Tata Electronics Private Limited and Powerchip Semiconductor Manufacturing Corporation, Taiwan); (ii) Morigaon, Assam (an initiative of Tata Semiconductor Assembly and Test Private Limited); and (iii) Sanand, Gujarat (a partnership between CG Power, Renesas Electronics Corporation, Japan, and Stars Microelectronics, Thailand).¹⁰ Reports also suggest that Israel-based Tower Semiconductor has submitted a proposal to set up a USD 8 billion chip manufacturing facility in India¹¹, demonstrating the country’s potential as a global semiconductor manufacturing hub.

Initiatives implemented by state governments: To attract semiconductor investments, various states have implemented comprehensive policies and incentive packages. For instance, Odisha introduced the ‘Odisha Semicon Fabless Policy (2023)’ to establish an end-to-end semiconductor ecosystem within the state. The policy offers a range of benefits, including a 25% capital investment subsidy, single-window clearance for project approvals, exemptions on stamp duty payments and electrical duty for 10 years from commercial production, reimbursement of power tariffs, water supply incentives, and workforce training programs.

Similarly, Gujarat has also unveiled the ‘Gujarat Semiconductor Policy (2022),’ offering incentives such as reimbursement of stamp duty and registration fees, access to quality water and waste disposal systems, power tariff subsidies, exemption from payment of electricity duty and facilitating land procurement. Gujarat also envisions the establishment of the ‘Dholera Semicon City’ with projects set up in the region being offered 75% subsidy on the purchase of the first 200 acres of land. Further, the government of Uttar Pradesh, under the ‘Uttar Pradesh Semiconductor Policy (2024)’ has announced capital subsidies, land rebates, exemptions on stamp duty and registration fees, exemptions on payment of electricity duty, establishment of skill development and training programmes, investment in research and development (including establishment of a centre of excellence to promote research and innovation in the semiconductor sector), reimbursement of patent registration fees, access to reliable power and water facilities and exemption from generic inspection under certain statutes. Coupled with the initiatives undertaken by the central government, the measures implemented by the state governments offer lucrative benefits to semiconductor manufacturers.

The Road Ahead

In a recent report titled ‘Assessing India’s Readiness to Assume a Greater Role in Global Semiconductor Value Chains’, released by the Information Technology & Innovation Foundation in February 2024, it was highlighted that India’s ability to substantially contribute to global semiconductor value chains hinges on the government upholding its investment policies, maintaining a conducive regulatory and business environment, and avoiding measures that create unpredictability.¹² Given the semiconductor industry’s complex and capital-intensive nature, manufacturers evaluating potential sites must assess parameters like access to reliable power, water, and logistics infrastructure. While government initiatives facilitate such infrastructure access, specific challenges around land acquisition, reliable power supply, water infrastructure and logistics for semiconductor operations will need to be addressed.

Further, critics argue the incentives currently being offered may not be commensurate with those provided by other countries like the US and EU.¹³ Thus, the government must focus on offering more attractive incentive packages, minimizing infrastructural constraints, and providing greater policy clarity on taxation, imports, customs, labour, and land acquisition. Continuous policy review and recalibration based on evolving technological and geopolitical landscapes will be crucial. Additionally, India’s regulatory framework can seem daunting and unfamiliar to semiconductor manufacturers. While engaging experienced advisors can help navigate the complex legal system, streamlining administrative processes and regulations will further enable India to attract semiconductor investments.

Another significant challenge is India’s ability to create and sustain a business and policy environment that promotes a vibrant and innovative semiconductor ecosystem encompassing all aspects of production, from research and development to design, fabrication, assembly, testing, and packaging (ATP)¹⁴. In addition to chip fabs, efforts will be needed to develop an ecosystem for other critical semiconductor components like PCBs, passives, electro-mechanical components etc. required in electronic systems. Therefore, alongside incentives for setting up semiconductor fabs and facilities, India will need to develop a domestic supply chain for critical inputs like semiconductor manufacturing equipment, materials like silicon wafers, chemicals, gases etc. to strengthen its semiconductor ecosystem. Holistic policies are essential as the industry’s success depends on entire supply chains operating efficiently to avoid delays or shortages.

While the semiconductor market in India is projected to be driven by key verticals like smartphones, automotive, and computing, India could highlight specific high-growth application focus areas like mobility, IoT, AI hardware etc. that it aims to target.

Furthermore, ready access to a skilled workforce is critical for semiconductor manufacturers. While India has introduced various technical courses and programs like Chips-to-Startup (C2S) to train 85,000 engineers¹⁵, it is crucial to design curricula that bridges the gap between industry demands and skill sets. Continuous collaboration between industry players, stakeholders, and universities on developing vocational training programs and a focus on STEM education can help generate the required talent pool.

Incorporating sustainability principles in semiconductor manufacturing is also imperative. Investments in new technologies, innovative and environmentally-friendly waste management processes, sustainable material usage, and encouraging reuse and recycling can promote a sustainable semiconductor industry.

Developing a robust intellectual property regime is also vital for the growth of the semiconductor industry. While the SICLD provides a legal framework to prevent unauthorized copying of layout designs, additional measures such as simplifying procedures, strengthening enforcement mechanisms, and facilitating accessibility for designers and stakeholders can further strengthen IP protection.

International cooperation and concerted efforts from private players will be essential for developing a comprehensive semiconductor ecosystem. The recent memorandums with the US¹⁶, Japan¹⁷, and the EU¹⁸ to collaborate on information sharing, technology transfer, and research are positive steps. Further, public-private partnerships can result in efficient resource sharing, economies of scale, and access to expertise.

Conclusion

Building a domestic semiconductor supply chain from the ground up requires substantial investment in terms of time, money, effort, and resources. The global semiconductor landscape is constantly evolving with technological advancements and changing consumer demands. India faces stiff competition from other global players. Consistent and robust policymaking, constant interface with stakeholders, investment in building a talented workforce, and a focus on developing an end-to-end supply chain will yield long-term returns. Resilience will be key as India embarks on its journey to become a significant player in the global semiconductor market. With the right strategies, incentives, and ecosystem support, India can leverage its strengths to establish itself as a semiconductor manufacturing hub and contribute substantially to global semiconductor value chains.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.