Chips on the table: Phase 2 of semiconductor mission must shift the focus

Modi says India will capture a major share of global semiconductors as ISM Phase 2 shifts focus to ecosystem support and supply chain resilience

Prime Minister Narendra Modi, speaking this week to an audience from the semiconductor industry in New Delhi, said that India would capture a “major share” of the sector globally in the coming years. He was speaking in the context of the India Semiconductor Mission (ISM), which was approved by the Union Cabinet in December 2021. The second phase of the ISM is now being planned, and the government has said that it will focus on the development of a supportive ecosystem. The semiconductor mission has received subsidies from the government on a significantly larger scale than its other forms of support. It has also achieved some notable successes. Electronics & IT Minister Ashwini Vaishnaw has pointed out, the pilot line of one project, owned largely by CG Power & Industrial Solutions but with significant technological input from Japan, is complete, and the first “made in India” chips have been presented to the Prime Minister. 

Shifting to supporting the ecosystem in the second phase of the ISM is, in some ways, a natural transformation. The initial budgetary outlay of ₹76,000 crore is hard to replicate on an ongoing basis, and hopefully the small and medium enterprises involved in the second phase will expect less assistance with their capital expenditure. The government will also have noted that location choices by many investors were determined in large part by the availability of an ecosystem. For example, both CG and Tata Electronics (together with Powerchip of Taiwan) have invested in plants close to the Dahej chemicals cluster in Gujarat, which might assist in the provision of the nearly 250 precision gases required for chip production. The importance of a stable ecosystem was made clear by such choices, and thus it makes sense for the government to support it. 

There are, however, some points that the government must keep in mind. To begin with, support must be strategic in nature. India cannot expect to localise the entire supply chain; it should focus on providing incentives to those specific aspects of the ecosystem in which foreign dependence, particularly on China, can be evaluated as a strategic risk. Equivalently important to such support is a predictable foreign-trade policy, which can assure investors that supply chains will not be interrupted by New Delhi even if other geopolitical issues might intervene. Such predictability costs nothing, and should be seen as a key part of the semiconductor mission. The government should also raise its level of ambition when it comes to timelines. It took 18 months between the Cabinet approving the funds and the first project being cleared. In comparison, Israel took only six months to clear $3.2 billion for Intel in 2023, and viewed this as being excessively long. 

The first grant under the United States’ CHIPS (Creating Helpful Incentives to Produce Semiconductors) Act was handed out to BAE Systems only a few months after the law passed. Japan’s Rapidus Initiative gave its money out in just over six months. Given that ecosystem support in the second phase is to support choices being made with first-phase money, it should be completed along a swifter time scale. International comparison also highlights certain specificities about Indian support that may have shaped the decision to focus on domestic companies. The ISM’s pari passu support of capital expenditure differs from the grants and loan guarantees, often early and one-time disbursements, used elsewhere. The latter are more likely to lure top-end manufacturers like TSMC and others because they minimise risk and investors see them as ensuring sustained non-monetary support, including on regulations. This too should be reviewed for effectiveness in the second phase.