Subject: Economics

Why in the News?

Recently, NITI Aayog Frontier Tech Hub report was released and it assesses the country’s readiness for chip manufacturing. India has approved its first semiconductor fabrication unit at Dholera and launched a ₹76,000 crore India Semiconductor Mission. But, the report finds that the domestic ecosystem is still not equipped to meet national demand.

How Has India Built the Foundations of a Semiconductor Ecosystem?

1. Policy Priority: Semiconductor manufacturing has been identified as a strategic national priority.
2. India Semiconductor Mission (ISM): Operates with a corpus of ₹76,000 crore.
3. Financial Support: Provides incentives for fabs, compound semiconductor facilities, packaging units, design initiatives, and research.
4. Capital Subsidies: Major projects receive capital support of up to 50%.
5. Production Incentives: Several projects receive production-linked and output-linked incentives.
6. Dholera Fab: India’s first semiconductor fabrication facility is expected to become operational by 2028.
7. Ecosystem Development: Multiple packaging and testing facilities have been approved.

India Semiconductor Mission

1. The India Semiconductor Mission (ISM) is a specialized, independent business division within the Digital India Corporation under the Ministry of Electronics and Information Technology (MeitY). 
2. It was launched in 2021 with an original financial outlay of ₹76,000 crore.
3. Its core purpose is to build a vibrant, sustainable semiconductor and display ecosystem to transition India from a chip consumer into a global electronic manufacturing and design hub.

Core Schemes & Financial Support: The initiative operates as a single-window nodal agency that evaluates proposals and distributes a 50% fiscal subsidy on a pari-passu basis across critical segments:

1. Semiconductor Fabs: Financial backing to set up silicon-based wafer fabrication plants.
2. Display Fabs: Incentives for building TFT LCD or AMOLED display manufacturing units.
3. Compound Semiconductors & ATMP: Support for Silicon Photonics, Sensors, and Assembly, Testing, Marking, and Packaging (ATMP/OSAT) plants.
4. Design Linked Incentive (DLI): Financial and infrastructure support for domestic fabless companies developing Integrated Circuits and Systems on Chips (SoCs).

ISM 2.0

1. Announced in the latest 2026 Union Budget, ISM 2.0 drives local supply chain self-sufficiency. 
2. It receives a targeted ₹1,000 crore budgetary provision for FY 2026-27 alongside an overall ₹8,000 crore layout for the modified manufacturing program. 

Key targets include:

1. Upstream Supply Chains: Localizing production of specialty gases, chemicals, and lithography tools.
2. Indian IP & Processors: Scaling indigenous open-source RISC-V processors like DHRUV64 under the Digital India RISC-V (DIR-V) programme to secure digital sovereignty.
3. Talent Pyramid: Training over 85,000 to 100,000 engineers via the Chips to Startup (C2S) program and dedicated SMART Labs.
4. NITI Aayog Roadmap: Aligning with the NITI Frontier Tech Hub’s newly released “Future of India’s Semiconductor Industry” roadmap to target a $100-110 billion domestic market by 2030.

Why Does the Report Argue That India Remains Semiconductor-Dependent?

1. Import Dependence: India depends almost entirely on external suppliers, importing an estimated $15+ billion in electronics hardware. Major suppliers include China, Hong Kong, Taiwan, and Singapore
2. Domestic Supply Gap: India’s semiconductor ecosystem cannot fully meet domestic demand. The domestic semiconductor ecosystem is largely limited to Assembly, Testing, Marking, and Packaging (ATMP) rather than full-scale fabrication.
3. Electronics Vulnerability: Growth in electronics manufacturing remains dependent on external suppliers.
4. National Security Concerns: Defence systems rely on imported semiconductor components.
5. Supply-Chain Risks: Geopolitical disruptions could affect access to critical technologies and components.

What Structural Challenges Limit India’s Semiconductor Manufacturing Ambitions?

1. Time-Intensive Manufacturing Cycle
   1. Long Gestation Period: Semiconductor fabs generally require 4-5 years before commercial production.
   2. Yield Optimisation: Reliability and quality improvement continue for several quarters after production begins.
2. Technological Complexity
   1. Equipment Dependence: More than 50 specialised equipment categories are required.
   2. Global Supplier Concentration: Critical manufacturing tools are controlled by a limited number of international firms.
3. Capital Intensity
   1. High Investment Requirements: Semiconductor manufacturing demands massive upfront capital expenditure.
   2. Financial Risks: Long project cycles increase uncertainty for investors.
4. Skill Requirements
   1. Advanced Expertise: Requires highly skilled engineers, designers, and process specialists.
   2. Technology Gaps: Domestic capabilities remain under development.

Should India Replicate the Entire Global Semiconductor Value Chain?

India should not replicate the entire global semiconductor value chain, as doing so is financially impractical and technologically inefficient. The global semiconductor industry is highly fragmented, capital-intensive, and reliant on decades of hyper-specialization across different countries.

1. Selective Strategy: The report discourages attempts to replicate the complete global manufacturing spectrum.
   1. Example: Instead of trying to build complex extreme ultraviolet (EUV) lithography machines (a sector monopolized by ASML in the Netherlands), India is focusing on specific nodes (like 28nm and above) that serve automotive and consumer electronics markets.
2. Capital Efficiency: Setting up a single advanced semiconductor fabrication plant (fab) can cost upwards of $10 billion to $20 billion. Replicating the entire chain would require hundreds of billions of dollars.
   1. Example: By directing capital toward Assembly, Testing, Marking, and Packaging (ATMP) and Outsourced Semiconductor Assembly and Test (OSAT) facilities, such as the Tata Electronics facilities, India can enter the manufacturing ecosystem faster and at a fraction of the cost of a leading-edge logic fab.
3. System-Level Differentiation: Emphasises strategic specialisation rather than broad replication.
   1. Example: India houses nearly 20% of the world’s semiconductor design engineers. By utilizing the Design-Linked Incentive (DLI) scheme, local startups can design specialized, proprietary chips for Artificial Intelligence (AI), 5G communications, and Internet of Things (IoT) devices, establishing a unique global niche.
4. Resource Optimisation: Supports targeted investments in high-potential segments.

Why Does the Report Advocate a Shift Towards Mature and Strategic Nodes?

Semiconductor nodes represent the transistor size, with advanced (3-7nm) focusing on density for high-end computing and mature nodes (28nm+) offering reliability for industrial use. The report advocates shifting toward mature and strategic nodes because they cost significantly less to build, have higher market demand in India, and directly secure critical industries like defense and automotive.

1. Technological Feasibility: India currently lacks the manufacturing ecosystem, equipment base, and process expertise required for competitive production at advanced 3-7 nanometre nodes.
2. Capital Efficiency: Mature-node semiconductor facilities require significantly lower investment and entail lower commercial risks than cutting-edge fabrication plants.
3. Market Demand: Mature-node chips continue to dominate demand in automobiles, industrial machinery, consumer electronics, power systems, and telecommunications equipment.
4. Strategic Utility: Domestic production of mature semiconductors can strengthen supply-chain resilience in defence, telecom, automotive, and critical infrastructure sectors.
5. Comparative Advantage: Compound semiconductors offer niche opportunities where India can develop specialised capabilities without directly competing in the most advanced fabrication segments.
6. Faster Capability Creation: Focusing on mature technologies enables quicker ecosystem development, workforce training, and industrial scaling than pursuing frontier-node manufacturing.

Why Can Semiconductor Packaging Become India’s Most Viable Entry Point into the Global Semiconductor Industry?

1. Lower Capital Requirement: Packaging and testing facilities require substantially lower investment than semiconductor fabrication plants, making entry easier for India.
2. Technological Accessibility: Packaging operations involve lower technological complexity than advanced-node chip fabrication, reducing entry barriers.
3. Workforce Advantage: India’s large pool of engineers and technical professionals can support labour-intensive assembly, testing, and packaging operations.
4. Faster Capacity Expansion: Packaging facilities can be established and scaled more quickly than fabrication units, enabling rapid ecosystem development.
5. Import Substitution Potential: Domestic packaging capabilities can reduce dependence on foreign assembly and testing services in high-volume semiconductor segments.
6. Global Value Chain Integration: Packaging provides a practical route for India to participate in international semiconductor supply chains without mastering frontier-node manufacturing.
7. Foundation for Ecosystem Growth: A strong packaging industry can create demand for ancillary industries, skills, logistics networks, and future fabrication investments.

What Does “Sovereign Design and Research Capability” Mean for India?

1. Design Leadership: Moves beyond manufacturing toward intellectual-property creation.
2. R&D Excellence: Strengthens indigenous innovation capabilities.
3. AI Integration: Promotes application of Artificial Intelligence in semiconductor engineering.
4. Deep Capabilities: Supports transition from service-led design activities to original technology creation.
5. Architectural Innovation: Encourages development of differentiated semiconductor systems and integration technologies.

How Should India Structure Future Semiconductor Investments?

1. Second Phase of ISM: Future policy support is under consideration.
2. Investment Requirement: The report estimates $45-60 billion over a ten-year period.
3. Bankability Focus: Recommends prioritising projects with clearer commercial viability.
4. Risk Management: Encourages investment in segments with stronger return potential.
5. Targeted Expansion: Supports gradual ecosystem deepening rather than large-scale expansion across all segments.

Which International Partnerships Are Critical for India’s Semiconductor Strategy?

1. Strategic Partners: Identifies the United States, Japan, European Union, and South Korea as priority partners.
2. Technology Access: Facilitates acquisition of critical manufacturing tools.
3. Lifecycle Support: Strengthens equipment servicing and maintenance.
4. Knowledge Transfer: Expands access to advanced manufacturing practices.
5. Packaging Advantage: Leverages India’s workforce and packaging ecosystem.

What Are the Broader Strategic Implications for India?

1. Economic Security: Reduces dependence on external technology suppliers.
2. Supply-Chain Resilience: Protects against geopolitical disruptions.
3. National Security: Supports defence and critical infrastructure requirements.
4. Industrial Competitiveness: Strengthens electronics manufacturing.
5. Technological Sovereignty: Enhances control over critical technologies.
6. Global Positioning: Improves India’s role in future technology ecosystems.

Conclusion

India’s semiconductor strategy is entering an execution phase where success will depend less on replicating the entire global value chain and more on building competitive strengths in areas aligned with domestic capabilities. The NITI Aayog report advocates a pragmatic approach centred on mature-node manufacturing, semiconductor packaging, design innovation, and strategic international partnerships. By prioritising commercially viable segments while gradually deepening technological capabilities, India can strengthen supply-chain resilience, reduce strategic vulnerabilities, and establish itself as a credible participant in the global semiconductor ecosystem.

PYQ Relevance

[UPSC 2025] India aims to become a semiconductor manufacturing hub. What are the challenges faced by the semiconductor industry in India? Mention the salient features of the Indian Semiconductor Mission

Linkage: The PYQ tests understanding of high-technology manufacturing, industrial policy, technological self-reliance, and strategic sectors. The article evaluates India’s semiconductor strategy through the NITI Aayog report, highlighting challenges in fabrication, supply chains, investment, and skills while assessing the future direction of the India Semiconductor Mission