Production Linked Incentive (PLI) Scheme- Is it prudent to subsidise industry?


Shri G C Murmu
Comptroller & Auditor General of India (CAG)

Dear Shri Murmu,

I write this in continuation of my letter dated 23-11-2022 (, in which I had expressed my concerns at the excessively large capital subsidies provided to profit earning private corporate groups in the guise of the stated objective, “building Indian capabilities in semiconductor manufacturing is an imperative for industrial growth, digital sovereignty, technological leadership, national security, selfreliance and for India’s goals to be a significant player in the global electronics and semiconductor value chains” [Press release dated 6-4-2022 by Ministry of Electronics & Information Technology (MEITY)]

In addition to the concerns I had already raised in my letter cited, I wish to raise the following important issues additionally, to enable the CAG to conduct a meaningful performance audit of the scheme in question.

  1. There are apparently three applicants as of now for semiconductor chip manufacturing, who will qualify for the 50% project cost subsidy offered by MEITY under the “Modified Scheme for Setting up of Semiconductor Fabs” notified by MEITY vide W-38/21/2022-IPHW dated 4-10-2022. Their offers are for setting up units for 28 nanometer (nm) technology mode of fabs.
  2. The Vedanta Group signed an MOU on 13-9-2022 with the Gujarat government ( clearly that the unit proposed to be set up in Gujarat “will operate on the 28 nm technology node“. While the other two applicants seek to manufacture for exports, Vedanta’s unit is expected to supply chips for the domestic market. In either case, while the 28 nm technology chips may have some demand in the short-run, it is at least two to three generations behind the state-of-art technology and will become non-competitive. This will severely limit the scope for exports and render domestic supplies non-competitive.
  3. Intel, IBM and other major chip suppliers are racing towards sub-2 nm technology mode. Apple’s latest iPhones and MacBooks use a 5 nm processor and will graduate to the 3nm node, later this year. IBM has already come up with a chip of 2 nm nanosheet technology. Taiwan Semiconductor Manufacturing (TSMC), the world’s largest chipmakerand Apple’s leading supplier, is set to start high-volume production of 2-nanometer (N2) technology starting in late 2025 ( TSMC is upgrading its R&D wing into a 1.4 nm process R&D team, to be able to remain competitive in a rapidly changing market. The US customers are reported to be pushing TSMC into setting up a fab unit in Arizona with upgraded chip technology.
  4. Against this background, the Vedanta-Foxconn unit and the others in the pipeline will become not only non-competitive but also have a limited utility for the kind of downstream applications that will emerge in India for many strategic services, including defence applications.
  5. The government will be diverting more than Rs 15,000 Crores of scarce public funds annually (Rs76,000 Crores spread over 5-6 years) to subsidise projects based on a semiconductor technology like this, that may become somewhat outdated and lose utility soon, while on the other side, the government is unable to fulfill adequately, its Constitutional obligation to allocate enough funds for food security (Public Distribution System), rural employment guarantee (MGNREGA), social justice schemes, schemes for the welfare of the tribals, and so on.
  6. Even within the semiconductor sub-sector, there are many other segments of activity that call for a budgetary boost. Devoting a huge slice of budgetary resources for a chip fabrication unit like this, without adequately funding the other, more crucial segments of the value chain of semiconductor technology, is not only short-sighted but also imprudent in the long-run. Fabrication units locking the country into a static technology like the 28 nm mode would merely force India to lag behind others and fail to give it a lead in semiconductor technology, without an R&D ecosystem that promotes research into material sciences for the industry in this fast evolving scenario, that promotes R&D for compressing the chip size to yield more efficient processing speeds, higher energy efficiencies, higher end-use efficiencies for raw material inputs, design innovations etc.,
  7. Material resources that go into chip manufacturing pose a future challenge to the country in its effort to insulate itself from monopolistic forces that could render Indian-made chips non-competitive in the long run. For example, China has a 95.7% production share in primary low-grade gallium, 83.6% in tungsten, 82% in magnesium and 64% in silicon (most widely used in fabs). China has dominance in rare earths, whereas the USA and its partners have large reserves of some of these resources, yet to be mined and developed [“The Semiconductor Supply Chain: Assessing National Competitiveness (Centre for Security & Emerging Technology, 2021 (] While India should locate alternate sources for these mineral resources, promoting R&D in material sciences to find alternatives, will be of far more critical importance.
  8. India is one of the leading centers for global semiconductor design companies. Most global semiconductor design companies have set up design R&D innovation centers in India owing to an exceptional semiconductor design talent pool of 20% of the world’s semiconductor design engineers and a large number of design Patents/ IPR registered in India. Overseas chip manufacturers, constantly on the vigil, have been appropriating the work of the Indian start ups and claiming IPRs. Less than 5% of the chips consumed in India are designed with IPs owned by home-grown companies
  9. It is not enough that MEITY and other agencies of the government express their concerns and announce schemes addressing these aspects, without funding R&D projects by enhancing budgetary allocations in real terms. The budgetary allocations for R&D schemes of MEITY, Dept of Science & Technology, the CSIR labs, DRDO, ISRO etc. with special reference to areas cited above are so small that they make little impact on the sector. Over the last few years, including the current year, the budgetary allocations and expenditure for these departments have remained stagnant, showing no sign of any anxiety on the part of the government to identify thrust areas and create the necessary R&D environment for the country to compete with others in the field of semiconductors. The R&D Statistics published by the Dept of Science & Technology for 2019-20 continued to show the share of R&D in GDP stagnating at around 0.7%, with the share of semiconductor-related R&D remaining a miniscule part of it.
  10. Instead of pouring a huge subsidy amount of the order of Rs 76,000 Crores into a few 28 nm technology fab units, a corresponding amount invested in R&D and for linking design start ups with the local agencies, especially the public sector labs like the semiconductor labs at Mohali, would generate many times more of value addition in the long run and carry the country faster towards self-reliance.
  11. Apparently, the government has no meaningful overall strategy for promoting self-reliance in semiconductor technology and it seems to be reacting with knee-jerk responses to offers from promoters of individual projects in a highly ad hoc manner.
  12. The “Modified Scheme for Setting up of Semiconductor Fabs” notified by MEITY vide W-38/21/2022-IPHW dated 4-10-2022, soon after Vedanta announced the project in Gujarat, states, “Support for R&D, Skill Development and Training: Up to 2.5% of the outlay of the scheme shall be earmarked for meeting the R&D, skill development and training requirements for the development of semiconductor ecosystem in India”, which is no more than a token allocation for the sake of it, not as a part of a well considered strategy.
  13. In the specific case of the Vedanta-Foxconn project, as already indicated in my earlier letter, it appears that the promoters announcing the project in Gujarat seemed to have made all the difference, resulting in a rush of indiscreet responses from the Centre and the State, without due consideration for an optimal choice being made on technical considerations w.r.t the location, availability of the right kind of skilled workforce, availability of the inputs needed etc. Of course, the Centre made huge fiscal commitments, without taking into account the overall priorities of sectoral budgetary allocations and without considering the more pressing commitments that needed to be made, as for example on R&D in semiconductors, to create an environment that would have genuinely promoted self-reliance in the field.
  14. From what one gathers from news reports, while the Centre has committed to subsidise the project cost upto 50%, which works out to around Rs 75,000 crores over a timeframe of 5-6 years and the State has also made huge concessions, the company has not specifically guaranteed any employment generation, exceptindicating in broad terms that the project will employ a lakh of persons, which in effect is a non-enforceable statement. If a corresponding amount is to be invested on MGNREGA, which stands inadequately funded today, the same amount would generate guaranteed rural employment many times more, which in turn would strengthen the much needed social security cover for the most disadvantaged sections of the rural communities across  the country.
  15. In my earlier letter, I had pointed out how a similar Foxconn project launched with much fanfare in Wisconsin state in the USA in 2017 is yet to take off and how a legislative fiscal body analysed the costs and benefits of the project comprehensively for the Wisconsin legislature to understand and discuss the project meaningfully. The office of the CAG could similarly audit the “Modified Scheme for Setting up of Semiconductor Fabs” in general and the Vedanta-Foxconn project in particular, for the Parliament to be able to discuss it in detail.

I thought that I should place these concerns before the office of the CAG for appropriate action.


Yours sincerely,

E A S Sarma
Former Secretary to Government of India


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