In a move that would boost investments in the semiconductor sector and provide an impetus to the country's beleaguered economy, the Union Cabinet on Thursday gave its in-principle approval to subsidise setting up of chip-fabrication units.
The facilities are expected to provide a significant push to domestic electronics manufacturing and act as magnets for the electronics components & ancillary industry, setting the stage for a conducive electronics manufacturing ecosystem in the country.
For the past few weeks, the government has been in an overdrive, pushing stuck projects with the larger aim to improve the country's economic growth, which had fallen to a four-year low of 4.4 per cent in the first quarter of this financial year. On Wednesday, it had approved nine projects, worth Rs 1.20 lakh crore, of the Delhi-Mumbai Industrial Corridor. (Investment magnet for the sector?)
Of the two chip-fabrication projects the government had shortlisted for subsidy, the consortium for one is led by Jaypee Group, which has partnered with IBM as its technology partner. The other has been mooted by domestic chipmaker Hindustan Semiconductor Manufacturing Corp (HSMC), which will get technology support from Geneva-based STMicroelectronics NV. The projects are said to be worth Rs 25,000 crore each.
According to sources in the know, some Cabinet ministers questioned the fact that only two projects had come up for such a significant subsidy amount and suggested the Department of Electronics and Information Technology wait for four weeks to see if no other consortium put in its candidature for the project. Sources said the proposal could be brought back to the Cabinet after four weeks.
News agency PTI quoted IT & Communications Minister Kapil Sibal as saying the Cabinet had accepted the two offers - in principle - and also approved the incentives to be given to these consortia. The same incentives could also be extended to other players interested in setting up semiconductor plants here.
"Incentives... are already covered under existing policies, which account for about 62 per cent; the balance 38 per cent is in the form of loan provision, which is refundable. The burden on the government will only be of interest charges," Sibal added.
The government had invited applications for fab units in 2011. The two projects - led by Jaypee and HSMC - had been shortlisted from among 30 applications by an empowered committee of the PM's advisor, Sam Pitroda, National Manufacturing Competitiveness Council chairman V Krishnamurthy and others. The ambitious proposals had run into rough weather, as the Planning Commission was reportedly against such large-scale subsidy payouts at a time when the country was battling a wide fiscal deficit.
J Satyanarayana, secretary in the department, refused to comment on the specifics but said the approval was great news for the country's thrust on domestic manufacturing.
Chips form the core of any electronic device and command the bulk of the monetary value. If these were manufactured locally, it would create the right ecosystem, as it involves a lot of downstream work, said Neel Ratan, executive director of audit and consultancy firm PwC India.
"Fab is like a mother unit that will give a fillip to the overall manufacturing activity in the country. A majority of fabrication units are based in China and Taiwan. And, the whole electronics manufacturing ecosystem in these countries could easily be attributed to their presence," he added.
He, however, sounded a note of caution, saying the chip industry was a cyclical one and the current global supply for chips was higher than demand. "There is a bit of an oversupply but the demand for electronics is picking up. We should ensure that procedural delays do not derail the project, as the project itself has a long gestation period."
Setting up a fab unit here, a long-standing aim of the country, was revived because it was felt India's import bill for electronics could soon exceed that for oil. In 2007, the government was in talks with Intel Corp to set up a facility in India but the discussions failed and the firm, instead, set up a unit in China.
Identifying the rise in electronic goods imports as a significant cause for concern, the government had in 2011 unveiled a series of policies to incentivise investments in the electronics manufacturing sector, under the National Electronics Policy, to kick-start domestic manufacturing. According to government estimates, the country would need $400-billion electronics by 2020 and, if local manufacturing is not incentivised, India might have to import at least $300 billion worth of products. Also, the current account deficit issue has necessitated cutting down of imports and boosting of exports.
In July last year, the Cabinet had approved Rs 10,000-crore incentives for manufacturing electronics products and components under the Modified Special Incentive Package Scheme (M-SIPS). Under M-SIPS, companies that invest in special economic zones get 20 per cent subsidy on capital expenditure, while those operating out of SEZs get 25 per cent support. The fab proposals, will get the subsidy under M-SIPS, with some additions. The details were not elaborately disclosed by the government on Thursday.