By Kalpana Shah

A year-long wait for the Indian government’s semiconductor policy finally ended Thursday.

Dayanidhi Maran, federal minister for IT and telecommunications, announced that the government would pick up 20 percent of the capital expenditures for manufacturing facilities—if the minimum investment by aspiring companies totals $550 million.

The sum seems small, however. The minimum investment that the country’s first private sector fabrication facility, SemIndia, envisages is $3 billion. Known as the Special Incentive Package Scheme, the initiative aims to attract investments for setting up semiconductor-manufacturing plants and allied industries.

The policy has not yet been described in detail, but the Indian government has outlined the broad contours. Details about specific monetary incentives will come in another two weeks’ time. Broad acceptance of the suggestions made by the India Semiconductor Association (ISA), however, has unleashed a wave of optimism in the local industry.

“We are very excited that the semiconductor policy has been announced, and I am sure that it will send the right signals to those who have been waiting to make further investments in India,” said Raj Khare, president of the ISA.

According to the policy document, participating companies will have to set up manufacturing units in special economic zones (SEZ) to qualify for extra tax incentives and tax holidays. The subsidies will come in the form of tax breaks and interest-free loans.

“The policy announcement will give a major fillip to high-tech manufacturing in the country, which can become a significant contributor to the Indian economy,” said SemIndia CEO Vinod Agarwal. SemIndia has proposed building a fab near Hyderabad, the capital of the southern state of Andhra Pradesh.

Lobbying Hard

Ever since a joint study conducted by the ISA and Frost & Sullivan in February 2006 pointed out that chip consumption in India would rise from $2.8 billion in 2005 to about $36 billion by 2015, the semiconductor industry has been lobbying hard to convince the government that it makes sense to manufacture those chips within the country rather than import them.

“If this takes off, the semiconductor industry will be one of the largest job creators in India,” said Mr. Khare. “We believe manufacturing will create 3.6 million direct jobs and another 5.6 million related jobs. Having a fab in India will complete the loop that semiconductor design and testing companies had started rolling out rapidly over the last decade.”

Mr. Maran believes the Indian market can easily absorb production from two or three fabs. “We expect foreign direct investment of $10 billion coming into the country for semiconductor and allied manufacturing,” he said.

SemIndia investors are pleased with the new policy. Bob Kondamoori, a managing partner at Sandalwood Partners, a venture capital firm that has committed $10 million to the proposed fab, points out that the venture capital community had been waiting for a “focused policy with the right package of incentives, and this progressive policy will motivate many more investors like us to look at India as an attractive investment destination in this space.”

He thinks the time is right for India to ramp up its chip manufacturing.

“With growing consumption of IT and consumer electronics, India is now ready for semiconductor production,” he said in a statement. “The policy will also give a boost to the fabless industry in India as it will enable prototyping and market testing for new products.”

Competing with China and Taiwan

Not everyone is convinced, however, that India really needs to spend such huge sums on manufacturing when its Asian neighbors, Taiwan and China, are already way ahead in the game and can supply extremely low-cost chips.

“I think we should build on our strengths, which are in design and testing, and leave manufacturing to those who are most efficient at it,” said Vinod Dham, a Silicon Valley-based venture capitalist. His firm, NewPath Ventures, has invested in design startups such as InSilica, Montalvo, and Telsima.

Others doubt if the infrastructure will ever match a fab’s needs: a clean and plentiful supply of water, lots and lots of power, and an efficient supply chain that requires good roads, airports, and seaports.

At the ISA-organized Vision Summit in Hyderabad two weeks ago, the chief minister of that state promised to put the government machinery behind making the SemIndia project a success.

Whether the fab will succeed or not will depend upon whether there is sufficient demand for the chips it produces.

More questions will probably spring up over the next few days: Will AMD, the Sunnyvale, California-based semiconductor company, commit to buying a certain number of chips in addition to supplying its technology to SemIndia? Will Intel finally bite the manufacturing bullet in India? Are some dark horses waiting in the wings for just such a policy before they jump into the fray?