The future of India’s chip industry

NITI Aayog’s Frontier Tech Hub released a report last week that had two main messages: first, that India faces steep challenges in developing world-class semiconductor manufacturing capabilities, and second, that national interest necessitated pursuing this field doggedly regardless of those difficulties.

The Union government has made chipmaking a priority, since semiconductors are a part of nearly all electronics, from consumer gadgets to defence gear. Yet, India does not have a single fabrication unit, with the first expected to open in Dholera, Gujarat by 2028, with a total of ten in various stages of development. Multiple semiconductor packaging and testing facilities have been generously subsidised and supported by the Union government (as well as some State governments), through initiatives like the India Semiconductor Mission (ISM).

The ISM is a ₹76,000 crore corpus, and it is almost fully earmarked to projects across semiconductor fabs, incentives for component manufacturing, and bulk subscriptions to industry-grade semiconductor design applications for students and academia. While the most cutting edge and ambitious projects — fabs — have received capital subsidies of upwards of 50%, other projects have received production- or output-linked incentives.

The report, titled ‘Future of India’s Semiconductor Industry’, reiterates that these are yet early days for the semiconductor industry, since even chips used in domestic electronics assembly operations are largely sourced from outside the country. “India’s local ecosystem is not ready to fully meet domestic demand for semiconductors,” the report said. But it insisted that there was still a need to manufacture locally, as geopolitical pressures like a disaster in Taiwan could massively disrupt the electronics supply chain. “As many semiconductor parts used in defence systems are produced outside India, deploying them in our aerospace and defence programmes is increasing threats to national security,” the report adds.

The sector “requires sustained, mission-mode commitment over a decade or more,” the report said.

Fab gestation

The report points to several challenges in this indigenisation process, not least of which is the time involved. “Typically, fab units require four to five years before commencing production,” the report points out. “During the gestation phase, these units need to invest in purchasing more than 50 specialised equipment from global players. Even after the production is over, processes like yield optimisation and reliability test take several quarters before chips reach the market.” Developing talent to work in these fabs is also, as a result, time consuming, the report says.

The report urges the government to work on “building sovereign design and research capabilities, R&D excellence and harnessing agentic AI for semiconductor engineering,” since “building deep capabilities” in materials sciences and silicon designing will “move India from a services-led design base to a creator of differentiated IP, architectures and integration technologies that define next generation systems.”

Capital investment

While the details on the second phase of the India Semiconductor Mission are yet to be revealed, the report pegs the necessary capital expenditure from the state at $45-60 billion over a period of ten years. This amount should, however, be spent on projects where the risk is less and “bankability” can assure returns to investors, the report warns. This translates to a shift away from directing public funds towards frontier chips, whose transistors are the smallest — 3 to 7 nanometres — and towards “mature, advanced—aligned with strategic relevance—as well as compound nodes,” the report says.

The report is key in understanding the potential scope of ISM 2.0, since its ambition is defined and largely stays out of big-ticket frontier fab projects. It advocates, for instance, “selective depth, capital efficiency and system-level differentiation, rather than attempting to replicate the full global manufacturing spectrum.”

For instance, packaging, which is among the last steps of a chipmaking process, and less expensive and complex than fabrication, is identified as a “core production pillar, not a downstream activity” in the report. The report calls for “[r]apid import substitution in high volume domestic segments”.

Trusted partners

The report implies that China is an adversary in chipmaking in spite of the recent thaw in relations. In a list of “priority partners,” the report highlights the U.S., Japan, the European Union, and South Korea as partners with whom to work to get “access to critical tools, equipment servicing and lifecycle support,” and to take advantage of “India’s market scale, talent base and packaging capacity.”

“With sustained commitment and strategic clarity, India can build a competitive semiconductor ecosystem that strengthens economic resilience and positions the nation as a key player in the future of advanced technology,” the report concludes. IT Secretary S. Krishnan welcomed the report as a “structured, actionable framework,” and said in a foreword that, “India is well positioned to convert its semiconductor ambition into enduring industrial and strategic reality”.

Published – June 03, 2026 07:30 am IST