Finmin denies sops to Fab City semiconductor project
September, 25th 2006
The much-touted Fab City project in Hyderabad supposed to be a launching pad for the semiconductor industry in India is finding it tough to cross the finance ministry hurdle. Apprehensive of revenue loss, the ministry has rejected sops proposed by the information technology department (DIT) and the Andhra Pradesh government to attract multinational chip makers to India. With such roadblocks coming its way, the proposed semiconductor policy may not seem attractive enough for the likes of AMD, Intel and others who were coming together for the SemIndia project in Andhra Pradesh.
The IT department had pitched for a host of incentives for the chip makers, including equity participation of 26%, interest-free loan of up to Rs 400 crore for five years, 10-year interest subsidy and 10-year income tax holiday. Tax credit of up to 30% of investment value spread over three years and sops at par with special economic zones (SEZs) were also discussed.
The proposed sops, it is estimated, would cost over Rs 50,000 crore in the next 15 years. Besides, the state government is also looking at various other incentives like land at concessional rates. As per the finance ministry estimate, the entire spectrum of chip-making and the average decline in price, year-on-year basis, ranged from 4%-5%.
The internal rate of return, keeping the price decline in view, is estimated to be between 130-150% over a 15-year period. Thus, there was no logic in incentivising a project which was intrinsically viable. Also, if the project gets SEZ status, it would avail the incentives that SEZ exporters are eligible for.
Earlier, the finance ministry had suggested capping of incentives at 15% of the total cost of the project like its done in Israel. But the DIT and the Andhra Pradesh government had been pressing for sops, and they had taken it up with the prime ministers office (PMO).
The PMO, then, asked the DIT and the MoF to resolve their differences and reach a common ground. However, with the finance ministry hardening its stance, the semiconductor policy may find it difficult to see the light of the day.