As the world grappled with a global semiconductor shortage borne out of supply disruptions caused by the COVID-19 pandemic, Prime Minister Narendra Modi, in late September, had a face-to-face with Cristiano Amon, semiconductor firm Qualcomm’s CEO during his visit to the United States. Of the meet, Amon said, “We talked about semiconductors, which is kind of an important topic of conversation.” 

The meeting’s significance came to light on Wednesday when the Union Cabinet approved a highly-anticipated incentive plan to scale manufacturing of semiconductors in the country. 

For several years, India has been trying to court chip makers from across the world to the country yet nothing has truly materialised. Chip manufacturing requires huge capital investment, availability of specific infrastructure, a favourable ecosystem of materials suppliers, consistent policies and, crucially, a steady supply of electricity and water. 

According to some reports, Intel had expressed an interest in setting up a semiconductor fabrication plant in India but, ultimately, came to see China and Vietnam as more attractive destinations. An expression of interest (EoI) floated by the central government in 2020 was also met with a tepid response. 

But the disruptions caused by the pandemic have alerted companies to the vulnerabilities in their supply chains and with many now seeking to adopt a ‘China + 1’ model, India appears to have finally grabbed the opportunity. 

What are semiconductors? Why is there a shortage?

Call them what you want – semiconductors, microchips, or computer chips – these tiny pieces of hardware form the brains of every electronic device we’ve come to rely on in our daily lives from laptops to toothbrushes. 

Technological leaps being made in the fields of artificial intelligence, wireless networks, blockchain infrastructure, IoT, robotics, gaming and quantum computing are all only made possible by the continued development and supply of microchips.

But despite their size, these devices are remarkably complex and challenging to make. What’s more, it isn’t like your phone or laptop needs just one of these to work. In many cases, an electronic device’s design may warrant the installation of hundreds of microchips all working in unison. 

Like nearly every industry, the COVID-19 pandemic threw into disarray the manufacturing targets of the world’s largest chipmakers in 2020, particularly those in South Korea and Taiwan. This wasn’t much of a problem initially since restrictions on mobility drove down sales of automobiles even while demand for laptops, computers and phones rose, as those sheltering in place looked to keep themselves occupied. 

But as restrictions were gradually unwound, the huge pent-up demand for electronic devices yielded a spike in demand for semiconductors, as companies struggled to keep pace. 

The massive disruptions in the complicated microchip supply chain meant that semiconductor manufacturers could not churn out enough of these vital components, thereby causing huge demand-supply mismatches in a variety of industries from automobiles, to laptops, to gaming devices and more. 

The shortage has highlighted the huge dependence that thousands of companies have on Taiwan and South Korea, two countries responsible for the large majority of all semiconductors manufactured globally.

A Crisil Ratings analysis of India’s top three passenger vehicle-makers that accounted for nearly 71 per cent of market share noted that the semiconductor shortage will drive down India’s passenger vehicle sales by 11 to 13 per cent this financial year, around 400 to 600 basis points lower than what it would have been in the absence of semiconductor scarcity. 

Enter India’s incentive scheme

According to the latest reports, India rolling out the red carpet to semiconductor manufacturers will involve incentives to the tune of Rs 76,000 crore. The central government intends to set up over 20 semiconductor design, components manufacturing and display fabrication (fab) units in the country over the next six years, according to a report from The Economic Times. 

Now that the Cabinet has approved the scheme, a semiconductor policy will be drafted and applications sent for companies to invest. Some reports indicate that Israel’s Tower Semiconductor, Foxconn and a Singapore-based consortium have already shown interest in setting up semiconductor fabrication units in the country. 

Additionally, New Delhi has also greenlit a design link incentive (DLI) plan to spur 100 local companies in semiconductor design for integrated circuits and chipsets, said technology minister Ashwini Vaishnaw on Wednesday. 

“The scheme for setting up of compound semiconductors/ silicon photonics/ sensors fabs and semiconductor ATMP/ OSAT facilities in India shall extend fiscal support of 30 per cent of capital expenditure, to approved units,” said an official release. A specialised and independent ‘India Semiconductor Mission’ is also to be established as the country seeks to develop a long-term, sustainable semiconductor and display ecosystem. 

Beyond providing short-term relief to India’s automakers, many of which had already announced supply cutbacks in view of the semiconductor shortage, the latest measures are forward-looking. According to some reports, India’s semiconductor demand is pegged at roughly $24 billion (Rs 1.8 lakh crore) and is expected to rise to $100 billion (Rs 7.5 lakh crore) by 2025.