On the Semiconductor Design-Linked Incentive (DLI) scheme

Source: This post on the Semiconductor Design-Linked Incentive (DLI) scheme has been created based on the article “The need to overhaul a semiconductor scheme” published in “The Hindu” on 24^th January 2024.

UPSC Syllabus Topic: GS Paper 3 Indian Economy – Changes in industrial policy and their effects on industrial growth.

News: The article discusses India’s semiconductor strategy and the issues with the Semiconductor Design-Linked Incentive (DLI) scheme.

A detailed article on Semiconductor Manufacturing in India can be read here.

Background:

The Semiconductor Design-Linked Incentive (DLI) scheme has approved only 7 start-ups till now, falling short of its target of supporting 100 over 5 years.

What are the goals of India’s semiconductor strategy?

1. Reduce dependence on semiconductor imports, particularly from China, and especially in strategic and emerging sectors.
2. Build supply chain resilience by integrating into the semiconductor global value chain (GVC).
3. Taking advantage of India’s comparative advantage such as the presence of the design houses of every major global semiconductor industry player and Indian chip design engineers.

What are the issues with the DLI scheme?

1. Barriers on FDI: It mandates that beneficiary start-ups maintain their domestic status for at least 3 years after receiving incentives, and for this they cannot raise more than 50% of their funds via FDI.
2. Lack of Domestic Funding: Costs for semiconductor design startups are significant. The funding landscape for chip start-ups in India continues to be challenging due to an absence of a mature start-up funding ecosystem.
3. Incentives Not Enough: Incentives under the DLI scheme are not very high, making it unattractive for start-ups (For e.g. it is capped at ₹15 Crore for Product DLI).
4. Issues with the Nodal Agency: As the nodal agency Centre for Development of Advanced Computing (C-DAC) is also a market player in the Indian chip design sector, there are concerns of conflict of interest.

What should be the way forward?

1) Focusing on the Broader Objective: The scheme should focus on facilitating design capabilities within the country, as long as the entity engaging in the design development process is registered in India.

2) Focusing on the Design Stage: Stimulating the design ecosystem is less capital-intensive than the foundry and assembly stages of the semiconductor GVC. The financial outlay of the scheme must be enhanced.

3) Regarding Nodal Agency Reform: The Karnataka government’s Semiconductor Fabless Accelerator Lab (SFAL), with its specific partnerships with the Indian Electronics and Semiconductor Association, vendors, IP, and testing companies, could be an appropriate example for an implementing agency for DLI.

A recalibrated policy focused on chip design implemented by a capable institution can help establish India’s foothold in this high-tech sector.

Question for practice:

What is the Semiconductor Design-Linked Incentive (DLI) scheme? What are the various issues plaguing it? Suggest steps to reform it.