In a move that is perceived as a partial victory for the high-tech manufacturing sector in India and expected to attract investments of over $10 billion, besides generating employment, the Central government has announced a host of incentives in its much-awaited semiconductor policy, to buoy the semiconductor ecosystem.

The government will bear 20 per cent of the capital expenditure in the first 10 years if a unit is located inside Special Economic Zones and 25 per cent in case of other units. The countervailing duty on capital goods would also be exempted in case of units outside SEZs.

For semiconductor manufacturing (wafer fabs) plants, the threshold Net Present Value of investments would be Rs 2,500 crore and the NPV of investments for manufacturing other products would be Rs 1,000 crore.

Assuming the projects have a 1:1 debt to equity ratio, the government is likely to restrict its participation to around 26 per cent of the equity.

The remaining "will be in the form of interest-free loans, tax subsidies, and concessions," according to Union Minister for IT and Communications Dayanidhi Maran, who announced the semiconductor policy on Thursday.

"It is up to state governments to provide additional incentives," he added.

Within India, Andhra Pradesh has been the most aggressive on this front.

The policy covers LCDs, plasmas, storage devices, solar cells, photo-voltaics and nanotechnology products and includes assembly and testing of these products.

The domestic market for electronics goods is expected to reach $363 billion by 2015 and the domestic demand for semiconductors alone is predicted to touch $43 billion.

Maran acknowledged that "India lacks a full-fledged fab. Since we did not have a clear-cut policy so far, we lost several companies to Vietnam and Israel."

He conceded he had been in touch with Craig Barrett, chairman of Intel, the world's largest chip-maker, adding, "It is for Intel (which chose Vietnam over India) to decide now. But this offer is valid only till 2010."

An Intel spokesperson, however, said, "Once the comprehensive policy document is circulated, we will evaluate it and respond."

Meanwhile, Vinnie Mehta, executive director of the Manufacturers' Association for Information Technology, said the fab policy, along with the broadband initiatives, could result in an increase in sales of personal computers, ADSL modems, and set-top boxes in India.

Vinod Agarwal, chairman & CEO, SemIndia, said, "This synergy will positively motivate global investors and semiconductor companies to come to India."

India Semiconductor Association president Poornima Shenoy termed it an "extremely positive" policy adding, that the single largest benefit is the grant of SEZ status.

There are some concern areas too. India may be excited about semiconductor manufacturing, yet there have been two reports from J P Morgan and Gartner this month that have categorically stated the country should not go ahead with chip manufacturing since it is not economically feasible without a "huge subsidy" from the government.

The government subsidy (expected to be 22-25 per cent of project cost) falls short of expectations. India still needs to compete with China, Ireland, Israel and Malaysia for tax breaks to semiconductor makers.