In today's Finshots we see how the Indian government intends to make the country a global semiconductor manufacturing hub

The Story

The government has a tough job at hand. They have to create more jobs, invest in this country’s future and grow the economy while at it. And when you’re in the middle of a pandemic, this becomes exponentially harder. And it seems that there is a collective recognition now that they can’t do it alone. They need the private sector to join hands. However, for corporates looking to turn a profit, this could be easier said than done.

They are strapped for cash and investing billions at this juncture may still be a tall order. So the government needs to do something to get them excited. They need to incentivize them to set up shop and drop big money to aid the growth agenda.

What do these incentives look like?

Well, they could be tax rebates, exemptions on import and export duties, easier land-acquisition terms or subsidies. In return the government expects them to produce in India or as we like to call it here “Make in India.” In fact, most incentive structures are tied to production targets. They are called Production Linked Incentive Schemes (PLIs).

So far, the Indian government has introduced PLI schemes for a whole host of industries such as the auto sector, white goods industries, electronics and phone manufacturing. In total, thirteen PLI schemes have already been put in place, and they are expected to cumulatively add up to investments of around $30 billion by 2025. The PLI schemes for mobile phones, in particular, have been a crucial factor in consolidating India’s place as the world’s second-largest mobile phone manufacturer, and boosting India’s mobile phone exports by 250%.

However, despite all the progress, we still don’t make the big money parts — the semiconductor chips. It’s been a sore point of sorts and the government has been trying to fix it.

And to this end, they recently cleared a $10 billion PLI scheme to attract global chipmakers to set up semiconductor plants in the country. That’s right! India wants to be a semiconductor manufacturing hub and they hope to create some 35,000 specialised high-end jobs, 100,000 indirect employment opportunities and attract investments worth $23 Billion in the process.

And unlike previous PLI schemes where the government offered incentives on incremental sales, this one is expected to offset the high costs of setting up a semiconductor factory. The government is expected to bear as much as 50% of the costs associated with setting up a fabricator and it could go a long way in alleviating some of the uncertainty involved in investing in such projects.

Now there is still some confusion on whether this will be a straight cash infusion or include some other kinds of incentives we spoke of earlier. However, both industry incumbents and outsiders have hailed this announcement as a gamechanger.

Having said that, however, incentives alone won’t help us become a manufacturing hub. If you’ve been reading our newsletter, you’ll know that manufacturing semiconductors is no walk in the park. Apart from the obvious high costs, companies have to take into account the infrastructure challenges.

For instance, do you get an uninterrupted power supply? If not, then you can’t set up the plant. Next, you’ll need access to lots of water. Not just any water, but millions of litres of ultra-pure water. In fact, even a basic fabrication unit is known to consume more than 20 million litres of water per day. And sourcing this water has turned out to be China’s Achilles heel in scaling production. Even Taiwan has had trouble with this thing for a while now. Finally, you also have to make sure that you set up the plant at a pristine location. If you can’t get yourself a clean workspace, then the plant is a no go once again.

In fact back in 2017, when India last tried to woo global semiconductor companies, it failed on these accounts. Last time around we offered to waive off customs duties on the import of machinery required for chip manufacturing. But clearly, that wasn’t enough, and there weren’t many takers. However, a lot has changed since then. The world is reeling through a crippling semiconductor shortage and it desperately needs alternatives. And if India can position itself right, by offering the right kind of incentives alongside the other bits, maybe this time will be different.

Until then…

Don’t forget to share this article on WhatsApp, LinkedIn and Twitter

Also, at Finshots we have strived to keep the newsletter free for everyone. And we’ve managed to do it in large parts thanks to Ditto — our insurance advisory service where we simplify health and term insurance for the masses. So if you want to keep supporting us, please check out the website and maybe tell your friends about it too. It will go a long way in keeping the lights on here :)