India's Semiconductor Ambitions Evolve with ISM 2.0
India has significantly refined its strategy for semiconductor manufacturing with the approval of ISM 2.0, a new phase of the India Semiconductor Mission. With an outlay of Rs 1.27 lakh crore, nearly double the initial allocation, the government aims to move beyond attracting standalone manufacturing units to fostering a comprehensive domestic ecosystem.
The first phase, ISM 1.0, launched in December 2021, offered a flat 50% fiscal support for manufacturing, successfully attracting key investments. This included Micron Technology's semiconductor assembly and testing facility, Tata Electronics' commercial silicon fab in partnership with Taiwan's PSMC, and CG Power's packaging facility with Japan's Renesas Electronics. While these were seen as crucial first steps, analysts like Arun Mampazhy noted a heavy reliance on OSATs (Outsourced Semiconductor Assembly and Test) and the failure to secure certain fab proposals.
New Subsidy Structure and Ecosystem Focus
ISM 2.0 introduces a differentiated incentive structure, moving away from the uniform 50% support. Fiscal support for silicon fabs is now reduced to 40%, while compound semiconductor and display fabs, along with advanced packaging projects, will receive up to 35%. Conventional packaging facilities are eligible for up to 25% support.
Industry experts believe these lower headline subsidies will not deter serious investors. Manish Rawat, a semiconductor analyst at TechInsights, emphasizes that global investment decisions consider a broader set of factors, including India's expanding electronics manufacturing base, rising demand, skilled engineering talent, competitive costs, and supply chain diversification opportunities.
Danish Faruqui, CEO of Fab Economics, highlights India's unique model of offering heavy, upfront capital expenditure cash grants, contrasting it with Western and mature Eastern hubs that often focus on back-end tax rebates or operational subsidies. This approach, similar to Japan's targeted grants, directly addresses the high initial costs of establishing manufacturing capacity.
Bridging Supply Chain Gaps
The most significant shift under ISM 2.0 is its sharper focus on the wider semiconductor supply chain. Recognizing the critical role of materials, chemicals, industrial gases, manufacturing equipment, and precision components, the mission now offers government incentives of up to 30% for investments in these essential supporting industries. This aims to reduce logistics costs, shorten lead times, and mitigate supply-chain disruptions.
Faruqui describes this as a move from a "brute-force approach" to a "supply chain-first approach." By reallocating funds from silicon fabs to local raw chemicals, cleanroom equipment, industrial gases, and indigenous IP design, India is strategically building an ecosystem that structurally matches the maturity of established Eastern nations.
Execution Remains Critical
While ISM 2.0 broadens India's semiconductor ambitions, the ultimate success hinges on effective execution. Semiconductor facilities demand uninterrupted power and water supply, specialized infrastructure, a skilled workforce, reliable suppliers, and timely regulatory approvals. Delays in any of these areas can significantly escalate costs and impact production timelines.
Rawat underscores that investment decisions extend beyond subsidies, with policy stability, execution certainty, infrastructure, skilled talent, supply chain resilience, and market access playing equally critical roles. ISM 2.0 provides policy continuity and greater visibility, crucial for companies undertaking multi-billion dollar, multi-year investments.