India’s ISM 2.0 cuts chip subsidies, bets on building a deeper ecosystem

For decades, India’s semiconductor ambitions were seen as more aspirational than achievable. High capital costs, technological complexity and the lack of a domestic manufacturing ecosystem kept the country on the sidelines as East Asia, the US and Europe built their chip industries.

That perception began to change after the government made semiconductor manufacturing a strategic priority and launched the India Semiconductor Mission in December 2021.

Nearly five years later, India has secured commitments for its first commercial semiconductor fab and several assembly, testing, marking and packaging, or ATMP, and outsourced semiconductor assembly and test, or OSAT, facilities.

The government is now seeking to build on that momentum through ISM 2.0, approved by the Cabinet with an outlay of Rs 1.27 lakh crore, almost twice the allocation under the first phase. But the new programme also marks a significant shift in how government support will be deployed.

Building momentum

When India entered the global semiconductor race in 2021, it offered a flat 50% fiscal support package to overcome investor concerns about setting up manufacturing in a country without an established chip ecosystem.

The approach helped attract Micron Technology, which established a semiconductor assembly and testing facility in the country. The project was followed by other proposals involving global technology partners.

Tata Electronics’ commercial silicon fab has Taiwan’s PSMC as its technology partner, while CG Power’s packaging facility is being developed with support from Japan’s Renesas Electronics.

In all, 12 projects were approved under ISM 1.0. Industry watchers see this as a meaningful start, particularly given India’s previous failed attempts to attract large semiconductor manufacturing projects.

“After the chip crunch earlier this decade, many countries without a semiconductor manufacturing ecosystem aspired to get it and especially a high-volume silicon fab, perhaps only India succeeded. In that sense, ISM1.0 is a success. The fact that about 9 OSATs were approved is a success as well as a weakness at the same time as the program looks more OSAT-heavy,” said Arun Mampazhy, an independent semiconductor analyst.

However, he said the failure to secure a proposed fab based on Tower Semiconductor’s analogue technology, which could have complemented the Tata facility, and the lack of commercialisation at the government-owned Semiconductor Laboratory were among the shortcomings of the first phase.

Lower headline subsidies

ISM 2.0 signals that New Delhi remains committed to developing India as a global semiconductor manufacturing hub. However, it replaces the uniform incentive structure under the first phase with differentiated support across project categories.

Fiscal support for silicon fabs has been reduced from 50% to 40%. Compound semiconductor and display fabs will receive incentives of up to 35%, as will advanced packaging projects. Conventional packaging facilities will be eligible for support of up to 25%.

Industry experts, however, said the lower headline subsidies may not discourage serious investors, since semiconductor investment decisions depend on a wider set of factors.

“While global semiconductor leaders such as the US, China, South Korea, Japan, and Europe offer comprehensive incentive packages combining subsidies, tax benefits, financing, infrastructure, and workforce support, India's competitiveness under ISM 2.0 should not be judged solely by subsidy levels. India's expanding electronics manufacturing base, rising semiconductor demand, skilled engineering talent, competitive costs, and supply chain diversification opportunities remain key advantages,” said Manish Rawat, semiconductor analyst at TechInsights.

Danish Faruqui, chief executive officer of Fab Economics, said India’s incentive model also differs from those offered by countries with more mature semiconductor industries.

“India’s ISM 2.0 remains unique globally for offering heavy, upfront capital expenditure (capex) cash grants on a pari-passu (equal footing) basis. In contrast, Western and mature Eastern hubs focus heavily on back-end tax rebates, operational subsidies, or major long-term corporate tax holidays,” Faruqui said.

Countries such as South Korea and Taiwan rely more heavily on tax deductions and operating incentives because they already have established semiconductor ecosystems, he added. India’s model is closer to Japan’s targeted grants, which provide direct financial support to offset the high initial cost of setting up manufacturing capacity.

Filling supply-chain gaps

The biggest change under ISM 2.0 is its sharper focus on the wider semiconductor ecosystem.

The chip industry depends not only on fabs but also on suppliers of materials, chemicals, industrial gases, manufacturing equipment and precision components. The absence of these supporting industries can raise logistics costs, lengthen lead times and expose manufacturers to supply-chain disruptions.

ISM 2.0 seeks to address these gaps by offering government incentives of up to 30% for investments in semiconductor equipment, chemicals, gases and materials.

“While the drop from a uniform 50% down to 25–40% appears weaker on paper, the structural design of ISM 2.0 solves the practical bottlenecks that hindered India during ISM 1.0. India moved from a brute-force approach (offering a flat 50% cash back on anything) to a supply chain-first approach. By shaving 10% off silicon fabs and channelling that money into local raw chemicals, cleanroom equipment, industrial gases, and indigenous IP design, India is structurally matching the ecosystem maturity of mature Eastern nations,” Faruqui said.

The change suggests that the government is moving away from using incentives primarily to attract standalone manufacturing projects and towards developing the suppliers and infrastructure required to sustain them.

Execution will be key

While ISM 2.0 widens India’s semiconductor ambitions, the bigger test will be converting proposals into operational projects.

Semiconductor facilities require uninterrupted power and water, specialised infrastructure, skilled workers, reliable suppliers and timely regulatory approvals. Delays in any of these areas can sharply increase costs and affect production timelines.

“Investment decisions in semiconductors extend beyond subsidies, with policy stability, execution certainty, infrastructure, skilled talent, supply chain resilience, and market access playing equally critical roles. If ISM 2.0 delivers faster approvals, clearer policies, and reliable infrastructure, India can remain an attractive destination even with lower financial incentives,” Rawat said.

Much of the manufacturing capacity approved under ISM 1.0 is still being built. ISM 2.0 provides policy continuity and greater visibility for companies assessing investments that may run into billions of dollars and take several years to become operational.