India may need $80 billion in government incentives by 2035 to build semiconductor ecosystem

In a bold move to bolster its semiconductor industry, India launched the India Semiconductor Mission in 2021, backed by a substantial incentive package of Rs 76,000 crore. This initiative aims to not just enhance chip manufacturing but to secure India’s position in a global technology supply chain increasingly influenced by geopolitical dynamics. The mission seeks to diminish reliance on imports for critical semiconductor technologies and establish India as a formidable competitor in an industry projected to surpass $1 trillion by the end of the decade. The initial phase of this strategy has already yielded positive results, attracting significant investments from major players like Tata Electronics, Micron, and HCL-Foxconn. These projects are pivotal in laying the groundwork for domestic semiconductor production. However, as India strives to expand its semiconductor capabilities, merely establishing fabrication and packaging facilities will not suffice. Experts emphasize that the country’s semiconductor plants will continue to heavily depend on imported equipment, materials, and technologies. PS Subramaniam, a partner at global consulting firm Kearney, stated, "Despite investments in fabs and OSAT facilities, a significant portion of critical inputs into the value chain will still come from abroad." India’s reliance on foreign sources extends to both capital equipment and the essential materials needed for semiconductor manufacturing. Equipment for outsourced semiconductor assembly and test (OSAT) facilities predominantly comes from nations like Japan, Malaysia, and Taiwan, while semiconductor foundries rely on critical fabrication tools imported from the US and other regions. Moreover, the manufacturing process demands a sophisticated supply chain involving gases, chemicals, and wafers, with many of these inputs sourced from countries around the world. According to Danish Faruqui, CEO of Fab Economics, India’s current dependency on foreign suppliers is substantial, spanning a variety of gases and materials essential for production. In contrast to established semiconductor powerhouses like the US, Taiwan, and South Korea, which have developed comprehensive capabilities across the semiconductor value chain, India's future as a semiconductor hub hinges on its ability to localize parts of this ecosystem. Recognizing the existing gaps, the Indian government announced the upcoming India Semiconductor Mission 2.0, which aims to extend support beyond mere fabrication and packaging plants. The initiative will focus on semiconductor equipment, materials, design, research and development, talent cultivation, and supply chain enhancement. However, the challenge remains formidable. Industry projections suggest that India may need to allocate nearly $80 billion in incentives by 2035 to establish a competitive semiconductor ecosystem capable of reducing its reliance on imported technologies. Faruqui outlines a phased approach for this funding, recommending continued financial support across multiple phases of the mission. While immediate localization opportunities may arise in packaging and testing materials, building domestic capabilities for wafer fabrication and advanced equipment will take time. Currently, estimates indicate that over 85% of the costs associated with setting up a semiconductor fab in India stem from imports. Looking towards the future, projections suggest a gradual decrease in import dependence, with expectations of significant reductions in the costs attributed to foreign materials and equipment by 2035. Achieving this will require sustained investment in research, talent development, supplier networks, and collaboration with international firms. As the global demand for semiconductors intensifies, India's success in this critical sector will depend not only on producing chips but also on developing the necessary infrastructure, skills, and local supply chains to support a thriving semiconductor industry.