This week, India’s Finance Minister P Chidambaram offered incentives to chip makers to set up headquarters in India, in an effort to encourage local electronics manufacturing. However, the response from the industry has been less than positive. Many believe that it is a good start, but far from sufficient.

While presenting the Union Budget for 2013-14, Chidambaram said the Indian government will waive customs duty for plants and machinery in the semiconductor sector.

"We recognize the pivotal role of semiconductor wafer fabs in the ecosystem of manufacture of electronics. I propose to provide appropriate incentives to semiconductor wafer fab manufacturing facilities, including zero customs duty for plant and machinery," Chidambaram said, while presenting the budget.

"A company investing Rs.100 crore or more in plant and machinery during the (next fiscal) period will be entitled to deduct an allowance of 15 percent of the investment," he continued. "This will be in addition to the current rates of depreciation. There will be enormous spill-over benefits to small and medium enterprises."

While India has held its own in terms of semiconductor design, very little manufacturing is currently done in the country. Today, India has close to 4,000 electronics manufacturing units and about 300,000 units directly or indirectly supporting the electronics manufacturing industry. The Indian semiconductor design market is anticipated to grow to $14.5 billion by 2015, according to a report, but India’s electronic products manufacturing sector could shrink by as much as 7% in revenue during that same time, indicating that government efforts may not succeed.

As many in the industry know, the semiconductor industry lives and dies by Moore’s law, making fab-launching business ventures a risky move for any start-up.  With the need for constant equipment upgrades, many companies have turned to “fabless” business models, farming out their chip-making to established foundries.

“Building and running a fab is a complex business that is very sensitive to utilization and improvements in technology,” says Satya Gupta, chairman of the Indian Semiconductor Association. “Somebody who knows the fab business has to run it, not the government.”

Many experts point to India’s rising middle class as the main reason to consider India as a potential location for fabs. Much of India’s electronics are imported, meaning India is currently footing a huge import bill to meet the growing demand. As much as 65% of electronic products demand is currently met by imports, which is estimated to grow from $28 billion in 2011 to $42 billion in 2015, according to industry body Indian Electronics and Semiconductor Association, which also report that local manufacturers could lose out on nearly $200 billion of potential revenue by 2015.

But the import bill isn’t the only factor discouraging potential fab-owners.

"I wish it was as simple as offering an import duty exemption. What about availability of land, power and all other government clearances?" said a senior executive at one of the large computer manufacturers told the India Times, requesting anonymity.

What do you think of India’s efforts to encourage fabs? Let us know your thoughts in the comment section below.