Rupee fall may reduce effective incentives for semiconductor projects

The impact could be significant because nearly 65% of the cost of a semiconductor project is spent on machinery, most of which has to be imported and paid for in dollars

The effective incentive available to eligible companies under the India Semiconductor Mission (ISM) could decline because of the sharp depreciation of the rupee against the dollar, a senior official in the Ministry of Electronics and Information Technology (Meity) said.

 

The impact could be significant because nearly 65 per cent of the cost of a semiconductor project is spent on machinery, most of which has to be imported and paid for in dollars. A large part of this investment typically takes place in the third and fourth years of a project, when equipment starts getting installed.

 

The rupee has depreciated by more than 26 per cent against the dollar since the ISM scheme was announced in December 2021. It has fallen by more than 9 per cent in the past year.

 

“The cost of rupee depreciation against the dollar has to be borne by the companies, not the government. The incentives are pegged to Indian rupees, and every eligible player has known this from the beginning. We have not heard any complaints or concerns from companies on this issue. Even if the effective incentive comes down to 50 per cent, it is still very good,” the official said.

 

Under the ISM scheme, the government had earmarked Rs 76,000 crore, then equivalent to about $10 billion, as subsidy for eligible companies setting up semiconductor plants. This did not include the cost of land, technology transfer fees paid by companies, or the value of using international patents held by others.

 

The central government provides an upfront subsidy of 50 per cent to eligible companies while the plant is being constructed. State governments where the plants are located offer another roughly 20 per cent, taking the total incentive support to about 70 per cent.

 

However, the depreciation of the rupee could reduce the effective value of these incentives because much of the project cost is dollar-linked. According to MeitY officials, major machinery-related investments are expected to be made in the third and fourth years of the projects.

 

In FY27, the total investment by ISM-eligible players is expected to be around Rs 7,000 crore, matched by an equal amount from the government.

 

The government has already earmarked most of the ISM funds for 12 semiconductor projects. These include nine outsourced semiconductor assembly and test/assembly, testing, marking and packaging (OSAT/ATMP) plants, one silicon fabrication plant by Tata Electronics with an approved investment tag of Rs 91,000 crore, and two compound semiconductor fabrication units.

 

The government has also announced the next phase of the semiconductor programme, under which incentives of Rs 1.27 trillion have been earmarked for the sector. This will cover more fabrication plants, the backend ecosystem, design and other areas.