New Delhi: The cabinet on Thursday gave in-principle approval to a proposal for setting up two semiconductor manufacturing facilities to reduce dependence on imports of electronic products, especially electronic chips.

The investment envisaged for the two units is around ₹ 25,000 crore and the level of government support for these units will be decided through negotiations with chip makers. The figure may be an underestimate given that chip fabrication units are highly capital-intensive and typically require investment in the range of $3-5 billion.

Citing telecom minister Kapil Sibal, PTI said these semiconductor fabrication plants, or fabs, would assist in checking imports of electronic products.

According to industry experts, India’s electronic imports may surpass its oil import bill by 2030. Currently, India imports $33 billion of electronic goods, behind only oil and gold.

India consumes close to $7 billion of semiconductor products every year. By 2020, this is expected to rise to $55 billion. With the location of fabs in India, the country could achieve a degree of self-sufficiency in electronics, and partially reduce the very high supply chain risks that it is exposed to, without an alternative source for procurement.

The two fab projects were shortlisted from around 30 applications by a committee comprising Sam Pitroda, adviser to the Prime Minister, and V. Krishnamurthy, chairman of the National Manufacturing Competitiveness Council, among others.

Specifics of the projects weren’t disclosed.

Previous efforts by the government to get chip makers to invest in India have floundered mainly because of India’s deficient infrastructure. For instance, some experts say manufacturing even a single chip requires hundreds of gallons of pure water, hard to find in India in the required quantities.

The government invited proposals to set up fabs in the country almost 36 months ago with the aim of attracting around $40 billion in foreign direct investment, but nothing came out of it. In his 2013 Budget speech, finance minister P. Chidambaram said the national electronics policy was intended to promote the production of electronic goods in India.

“We recognize the pivotal role of semiconductor wafer fabs in the ecosystem of manufacture of electronics. I propose to provide appropriate incentives to semiconductor wafer fab manufacturing facilities, including zero customs duty for plant and machinery," he said.

Heavy subsidies required as incentives for such units met with opposition from the Planning Commission, which was reportedly concerned that they could widen the fiscal deficit.

P.V.G. Menon, president of electronics lobby body, the India Electronics and Semiconductor Association (IESA), welcomed the government’s move “The IESA deems the fab a highly strategic game changer for India, welcoming the fructification of the proposal," Menon said in a statement. Menon pointed out that a number of countries including the US, France, Germany, Ireland, Japan, Singapore, Taiwan and China, Malaysia and Israel have their own fabs that continue to contribute significantly to the growth and development of their economies. “We hope that this would be the case in India as well," he said.

India excels in chip design with over 100 designers, including subsidiaries of world-class chipmakers. However, countries like China and Taiwan score when it comes to Integrated Device Manufacturing (IDMs—they perform every step of the chip-making process including design, manufacturing, testing and packaging).

The country faces other hurdles.

It takes around 1.5-2 years for a fabrication plant to come up. In the meantime, technologies could become obsolete, caution analysts, which is why the semiconductor fab companies will have to future-proof their technologies.

The government has been in talks with two consortiums to set up chip fabrication units in the country, Mint had reported in March, citing people familiar with the matter.

One of the consortiums was led by Jaypee Group that has drafted International Business Machines Corp. (IBM) as its technology partner, and the other by chip-maker Hindustan Semiconductor Manufacturing Corp. (HSMC), which has teamed up with Geneva-based STMicroelectronics NV, the report said. Spokespersons for HSMC, IBM and STMicroelectronics declined to comment at the time. Jaypee Group did not respond to an email query

On Thursday, Jaypee Group welcomed the government’s decision while declining to comment on the reported talks. “It is a right decision taken by the government since there was a need for such a facility in India..," said Askari Zaidi, senior vice-president of corporate communications at the group. “It will have an overall positive impact on the country."

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