The Indian government announced on December 15 that it has approved a support package worth Rs760bn ($10bn), to support the chip industry, as it strengthens its bid for high-value manufacturing and tech sovereignty. 

Under this scheme, the government will look to help develop semiconductor fabrication plants (fabs), display labs, packaging and design. It will support 100 domestic semiconductor design companies, the government said in a statement, aiming to facilitate the growth of no fewer than 20 such companies that can achieve turnover of more than Rs15bn ($200m) in the coming five years”.

Prime minister Narendra Modi tweeted on Wednesday that the package “will encourage research and innovation in the sector” and “boost manufacturing and thus strengthen the dream of a [self-reliant India]”. 

Up the value chain

Suranjali Tandon, associate professor at the National Institute of Public Finance and Policy in New Delhi, tells fDi that such a move by the government “does not come as a surprise”.

As India has been “trapped at the lower end of the value chain for quite some time” and wants to compete with countries such as China, she says, the incentive will help it move up the value chain and make it less reliant on imports. 

“I think it’s a significant shift. If you look at the past decade, India’s trade with China was so unequal that it was jarring. India was sending out commodities and China was sending back manufactured goods,” she says. 

The pandemic has only given this trend a boost. Imports from China rose to $78.3bn in the first ten months of 2021 — up 50.8% on the same period in 2020 — according to data from the China General Administration of Customs (GAC). Roughly 47% of Chinese imports to India between January and October have been in electrical equipment and electronics. 

Ms Tandon expects large companies to jump on the bandwagon because the semiconductor industry is linked to other ancillary industries that are looking to make a transition, citing solar panels, electric motors and electronics. 

Indian multinational Tata Group is in talks with three states to invest up to $300m to set up a semiconductor assembly and test unit, according to a Reuters report in November, as it moves into high-tech manufacturing.

Foreign investors

Some foreign electronics companies are already slated to expand further in India. In November, Samsung pledged to hire an additional 1000 staff as part of its “continued growth and expansion plans”. The Samsung Research Institute in Bengaluru is its biggest research and development centre outside of its home territory.

But other foreign investors have not been swayed so far by these growth prospects. According to greenfield investment tracker fDi Markets, investment into semiconductors and electronic components has been declining into 2021. 

Sumedha Dasgupta, senior Asia analyst at the Economist Intelligence Unit says that the government’s incentive plan is “a medium-to-long-term measure, as developing expertise, setting up logistics and even the production line will take a while to function smoothly”.

She expects that the government is “highly likely to take additional measures like easing bureaucratic red tape, making a seamless import–export ecosystem for this segment”.

In August, India scrapped its controversial regulation that allowed the government to tax foreign investment deals retrospectively.

Ms Dasgupta adds that local sourcing will act as an enabler for the growth of electronics manufacturing in India, which currently stands at $75bn and is expected to grow to $250bn over the next five years.

“In the current geopolitical scenario, trusted sources of semiconductors and displays hold strategic importance and are key to the security of critical information infrastructure,” the government said. “The approved program will propel innovation and build domestic capacities to ensure the digital sovereignty of India.”