At a time when the global shortage of semiconductor chips has crippled industries across segments ranging from electronics to automotive, the Indian government’s push to incentivise development of semiconductors and display manufacturing has been well received by local businesses. Today, a whole host of electronic items already require chips to function; rapid digitisation and rising tech adoption by consumers mean more innovation and the need to develop more sophisticated devices for which establishment of indigenous capabilities is an imperative.

Sanjeev Agarwal, chief manufacturing officer at Lava International says that during the pandemic, mobile phone companies struggled to source critical components through alternative supply chains, leading to an increased cost of production of smartphones that could not be passed on to consumers due to market competition.

“Though the process may take another two to three years to fructify, the policy push will create a new and alternative semiconductor ecosystem. The process will pave the way for smartphone manufacturing to become at least 80% indigenous and more affordable for the masses,” says Agarwal.

Countries across the globe are firming up policy measures to boost local production of semiconductors. The U.S., for instance, is lining up investments worth at least $50 billion as part of its plan to subsidise domestic manufacturing and chip research. The European Union (EU) plans to implement a European Chips Act that aims to link together the bloc’s semiconductor research, design and testing capacities, according to reports in international media. Today, global chip manufacturing is primarily restricted to a few east Asian countries. Taiwan’s TSMC, South Korea’s Samsung along with manufacturers in Japan and China dominate this space, Counterpoint Research said in a blog published in October.

Arvind Singhal, CMD at Technopak Advisors, says that between 2021-2041, India’s demand for electronic products ranging from smartphones to modern technology cars will peak and the local market has the potential to touch an estimated $250 billion. “It is a very encouraging move by the government and the timing is absolutely right,” says Singhal.

India’s ₹76,000 crore scheme to support development of semiconductors and display ecosystem in the country seeks to provide incentive aid to companies and consortia that are engaged in silicon semiconductor fabs, display fabs, compound semiconductors, semiconductor packaging and semiconductor design.

Ather Energy says the automobile industry has been facing severe headwinds due to the global shortage of semiconductors. While the situation is improving, the supplies are expected to remain affected through 2022.

“Manufacturing chips is a highly capital-intensive process. The initiative will empower Indian electronic chip manufacturing. Given how digitisation has picked up pace post-Covid-19, building an indigenous electronic manufacturing ecosystem is critical,” the firm says.

Hemant Mallapur, co-founder and executive VP of engineering at homegrown fabless semiconductor company Saankhya Labs, says that for companies operating in the space, supporting tech manpower involved in chip development accounts for the bulk of the cost which can sometimes go up to as much as 70% of the total expenses incurred.

“Now with the design linked incentive scheme we are led to believe that such R&D expense is also eligible for matching reimbursement. The huge talent pool that India already has in semiconductor design will enable many more Indian startups to come up,” says Mallapur.

A Voltas spokesperson said that semiconductors are useful in the PCB and the scheme is expected to augment the availability of PCBs for the local air conditioner industry in the long run.

The Vedanta Group is looking to invest up to ₹60,000 crore to set up a chip and glass manufacturing ecosystem in India over the next three years. The investment will be made through group company AvanStrate, a Japanese glass substrate manufacturer. The Tata Group is also reportedly eyeing the semiconductor chip business and is in discussions with global firms.

Recently, Intel welcomed the government’s semiconductor policy push. “Glad to see a plan laid out for all aspects of the supply chain: talent, design, manufacturing, test, packaging and logistics,” tweeted Randhir Thakur, SVP and President at Intel Foundry Services.

However, challenges remain. Few analysts observed that implementing the proposals of the scheme requires availability of advanced technology which is not available in the country.

“Will the likes of Samsung, LG be moving the technology into the country? That is a question mark as of now. The real tech is held by them,” said an analyst.

Also, the capex size required to set up a display fab is estimated to be at least $2-$3 billion and the government will only provide about 30% to 50% of the capex to companies in the form of the scheme, raising concerns on whether foreign firms would be ready to invest so much money into the country. Besides, many governments like Indonesia and Thailand are also offering lucrative sops to chip makers, toughening competition, analysts said. Technopak’s Singhal, though, opines that foreign companies now may find it worthwhile to make investments in India given the current and the projected domestic demand.

Follow us on Facebook, X, YouTube, Instagram and WhatsApp to never miss an update from Fortune India. To buy a copy, visit Amazon.