Context: 

• The DLI scheme has approved only seven start-ups, markedly short of its target of supporting 100 over five years. This calls for an impact assessment of the scheme.

Three goals of India’s semiconductor strategy:

1. The first is to reduce dependence on semiconductor imports, particularly from China, and especially in strategic and emerging sectors, ranging from defence applications to Artificial Intelligence development. 
2. The second is to build supply chain resilience by integrating into the semiconductor global value chain (GVC). 
3. The third is to capitalise on India’s comparative advantage: India already plays host to the design houses of every major global semiconductor industry player and Indian chip design engineers are an indispensable part of the semiconductor GVC.

Issues with the DLI Scheme:

• • Limited foreign investment: The scheme mandates that beneficiary start-ups maintain their domestic status for at least three years after receiving incentives, and for this they cannot raise more than 50% of their requisite capital via foreign direct investment(FDI).

• Long term process: Semiconductor R&D usually only pays off in the longer term, and the funding landscape for chip start-ups in India continues to be challenging despite promising IP and business potential.  

• Restricted Domestic Investment: Long gestation periods, combined with the lack of success stories caused by the absence of a mature start-up funding ecosystem for hardware products in India, reduce the interest of domestic investors.

• Modest incentives: The relatively modest incentives under the DLI scheme (capped at ₹15 Crore for Product DLI and ₹30 Crore for Deployment Linked Incentive, per application) would not make for a worthwhile trade-of for start-ups standing to lose out on access to crucial long-term funding(FDI).
• Narrow focus: The scheme prioritises “India-designed” chips, neglecting broader design capabilities.
• Nodal agency conflict: Centre for Development of Advanced Computing’s (CDAC) role as the nodal agency appraising proposals by applicants under the DLI scheme and its role as a market player in the Indian chip design sector, shows a concern of conflict of interest.

Proposed Solutions:

• Delink ownership from incentives: Foreign funding is crucial for this sector’s long term growth and so ownership as a limitation for getting support should be done away with. 
• Broaden scope: The scheme needs to be revised to focus on the broader objective of facilitating design capabilities for a wide array of chips within the country, so long as the entity engaging in the design development process is registered in India
• Increase financial support: Enhance the scheme’s budget to accommodate a broader focus. This can increase the incentives provided to the beneficiary start ups.
• Change nodal agency: Consider a model like Karnataka’s Semiconductor Fabless Accelerator Lab(SFAL) to provide startups with mentorship, industry connections, and financial support.

A revamped scheme with a broader scope, increased funding, and a suitable implementing agency can help India to reach the three goals of its semiconductor strategy.