India’s semiconductor push should focus on revamping the DLI scheme

The 2021 semiconductor initiative by India cannot be allowed to stall in momentum and the urgency factor has to be brought into the picture. Effectively and efficiently utilising India’s position in the global semiconductor value chain is through the development of a thriving design ecosystem in the country

In December 2021, when the Government of India announced the new semiconductor package worth ₹76,000 crore, one of the interesting aspects was the breadth of the policy itself. Announcing that India needed a long-term vision for building its semiconductor ecosystem, the minister for electronics and information technology, Ashwini Vaishnaw, unveiled four different schemes covering all areas of the semiconductor supply chain. One of these was the Design Linked Incentive (DLI) scheme that aimed at cultivating and building on India’s expertise in semiconductor design.

One of the critical factors for the slow growth on the design front in the country comes down to the accessibility to capital for domestic semiconductor design firms. (REUTERS)

Given India’s comparative advantage in human capital, DLI is a welcome change from focusing solely on chip manufacturing. However, six months after the updated semiconductor policy created ripples in the industry, the traction for DLI scheme has been underwhelming. The minister of state, Rajeev Chandrashekar, in a conversation at Semicon India 2022, mentioned how the government had received feedback on the DLI scheme being too narrowly designed and a restrictive cap on funding disincentivising startups to apply. The scheme was meant to attract 100 potential semiconductor design firms to provide capital investment, financial support in terms of licensing fees (for EDA and other design tools) and covering expenditure for Intellectual Property (IP) filing and registration. Under the Centre for Development of Advanced Computing (CDAC) as a nodal agency, the DLI scheme was meant to support multiple MSMEs and startups involved in the field of semiconductor design.

But the growth of the design ecosystem has been stagnant. What is it that is ailing the semiconductor design ecosystem in the country? It is imperative to understand the roadblocks for the design industry. Chip design is a costly affair and designing a leading edge node (5nm) chip in 2020 costs $540 million. The semiconductor design market is growing and was forecasted to grow to $33.1 billion by 2020 in India. It is in the country’s to capitalise India’s semiconductor push must put its weight behind the comparative advantage that the state possesses in the value chain.

Financing and Ownership

One of the critical factors for the slow growth on the design front in the country comes down to the accessibility to capital for domestic semiconductor design firms. There is a major disconnect between the business world (including investors and funding agencies) and what the government expects. Unlike the software industry, the semiconductor industry has a longer gestation period for return on investments. With at least a minimum of three years required for tapeout and a final product going out to the market, semiconductor design firms are unable to attract potential investors and venture capitalists the same way that software companies have. Another caveat has been that most Indian semiconductor design firms had received considerable investments from Chinese investors. But the Galwan crisis and the Line of Action (LAC) standoff, which saw the government clamp down on Chinese investments in India, the funding has dried up from across the border too.

In order to receive any government incentive through the DLI scheme, the firm has to be registered in the country along with a 51% ownership stake from India itself. The government has claimed that this condition has been deliberately set as a majority of India’s semiconductor design workforce is employed with multinational companies and this is a way to incentivise them to work for domestic firms instead. While the intention is admirable, the fact that many of these design startups don’t even have the seed money to get started on operations and sustain themselves for a period of time is a negating factor. Also, many Indian companies find it easier to raise money in the US, or headquarter themselves in places such as Singapore for tax or business reasons, even though most of their work happens out of their India offices.

Government incentives which act as support systems for the firms are of secondary importance when compared to the primary funding that they receive from private investors. The threat of hostile takeovers by corporate houses with little funding also discourages the spirit of entrepreneurship in the field itself. Hence, there has been little success for Indian firms in accessing and getting government funding.

Trade and Market Restrictions

Another one of the reasons that the semiconductor design ecosystem in India has not blossomed to its potential is the lingering effect of some unfavourable trade policies and the operating electronics market mechanisms in the country.

Due to existing anti-dumping policies, many domestic semiconductor design firms are not allowed to import second hand tools which are used in the design process. These can range from thermal and sensor simulation tools to other licensed tools. This places extra financial burden on fledgling MSMEs and startups to provide for the licences of these tools due to the import restrictions placed.

While there is access to significant human capital in terms of semiconductor design knowledge, the domestic firms find it hard to find clients within the country to sell their designs to. The problem of low domestic consumption forces these firms to be reliant on exports to cover their costs. There is also the problem of having no commercial fabrication facility in the country which can manufacture the chip designs being developed. Smaller firms are forced to rely on global industry heavyweights for the fabrication of their designs. Hence, most design firms are catered towards providing design services to other MNCs rather than developing in-house IP.

The Road Forward

In order to develop the semiconductor design ecosystem in the country, there has to be increased focus from the government side. Design cannot be treated as an extension to the fab policy and must be made central to India’s semiconductor push.

The first thing would be to encourage design development in the country leading to the creation of home-grown IP in the semiconductor design process. Instead of ownership and investment clauses as a barrier to obtain government support, the government should focus on an indigenous IP development clause as an incentive to financially support domestic design firms. Ensuring that the workforce in domestic firms is majorly Indian and the majority of the design development would happen on Indian soil should suffice for applying for the DLI scheme. This would result in a large number of applications helping the government zero in on potential firms.

Another thing that the government can do is to improve the investment climate with regard to the semiconductor industry. Removing barriers through facilitating more FDI (whether through Chinese sources or not) and long-term foreign-domestic private sector linkages can help integrate India’s semiconductor design market with the global markets. The DLI scheme should not only be a government incentive programme but should also be an initiative to increase the inflow of capital to MSMEs and startups in the semiconductor design space.

The 2021 semiconductor initiative by India cannot be allowed to stall in momentum and the urgency factor has to be brought into the picture. Effectively and efficiently utilising India’s position in the global semiconductor value chain is through the development of a thriving design ecosystem in the country.

Arjun Gargeyas is research analyst, The Takshashila Institution. Pranay Kotasthane is chairperson, high tech geopolitics programme, the Takshashila Institution

The views expressed are personal