Electronics push: India aims for higher value addition under ISM 2.0

The Union Cabinet’s approval of the ₹62,500 crore Mobile Phone Manufacturing Scheme (MPMS) last week, alongside the ₹1.27 trillion India Semiconductor Mission (ISM) 2.0, will enhance electronics manufacturing. The first phase of production-linked incentives (PLIs) succeeded in putting India on the global map for smartphone assembly. India is now the world’s second-largest mobile phone manufacturer by volume, and smartphones have emerged as a major export item. Yet, India’s electronics industry remains concentrated in final assembly, while high-value component manufacturing and design continue to be dominated by overseas suppliers. The MPMS implicitly acknowledges this limitation. Unlike the earlier PLI, which primarily rewarded incremental production, the new scheme seeks to deepen domestic value addition. Manufacturers will receive incentives ranging from 2.25 per cent to 5 per cent on eligible sales of mobile phones produced in India, with an additional incentive of up to 1.5 per cent linked to domestic sourcing of key components and subassemblies. Companies investing in product design and research & development will receive a further 3 per cent incentive on eligible sales. 

This distinction matters. Final assembly generates employment, but the highest economic returns accrue to firms that control components, design, software and technology. The widening electronics trade deficit in recent months — driven by rising imports of semiconductors, memory chips and other high-value components — underlines why expanding domestic production alone is not enough. India must also reduce its dependence on imported inputs. In fact, in 2025-26, India’s electronics trade deficit reached a high of $68.17 billion on account of rising imports of semiconductors and components. The government expects the new scheme to generate cumulative mobile-phone production of around ₹39 trillion over five years, accompanied by a significant increase in exports. This ambition is reinforced by ISM 2.0. The first phase of the semiconductor mission attracted investment and initiated fabrication and packaging projects. The second phase adopts a broader approach, extending support beyond fabrication to semiconductor design; advanced packaging; manufacturing equipment; specialty chemicals and materials; research & development; and domestic intellectual property. However, it is worth noting that fiscal incentives are necessary but insufficient to build globally competitive electronics and semiconductor industries. Semiconductor fabrication demands highly reliable infrastructure, deep engineering capabilities, and long-term policy certainty. The electronics industry continues to face structural cost disadvantages, which have historically made domestic component manufacturing less competitive than in rival export hubs such as China and Vietnam. Addressing bottlenecks will require regulatory stability, faster approvals, and sustained investment in research and innovation. 

In this context, the government’s recent approval of the Dixon-Vivo joint venture and reduction of import duty on select items highlight that building domestic technological capability does not require isolation from global supply chains. On the contrary, countries that developed export-oriented manufacturing sectors did so by leveraging foreign capital, technology and supplier networks before developing indigenous capabilities. In the long run, the success of the new schemes will be judged by whether India can steadily increase domestic value addition, build competitive component manufacturers, create intellectual property, and reduce its dependence on critical technologies.