India’s Semicon 2.0: Rs 1.27 Lakh Crore Second Phase Aims to Build a Complete Semiconductor Ecosystem

India’s Boldest Semiconductor Bet Yet

On July 15, 2026, the Union Cabinet approved two landmark schemes that together represent the Indian government’s most ambitious push yet to establish the country as a global semiconductor manufacturing hub. The combined outlay of Rs 1.9 lakh crore across the India Semiconductor Mission 2.0 (ISM 2.0) and the Mobile Phone Manufacturing Scheme (MPMS) signals that New Delhi is doubling down on its electronics manufacturing strategy — but with a significantly evolved approach compared to the first phase of incentives.

ISM 2.0, with an outlay of Rs 1.27 lakh crore over a six-year period, is nearly double the allocation under the first phase. But the structure of the program has been fundamentally redesigned. Instead of the uniform 50% subsidy on all semiconductor investments that characterized ISM 1.0, the second phase introduces differentiated support across project categories, with a greater emphasis on building the end-to-end ecosystem of suppliers, materials, equipment, and talent that a semiconductor industry requires to thrive.

Electronics and Information Technology Minister Ashwini Vaishnaw, announcing the Cabinet decision, emphasized that the entire semiconductor value chain — from sand and silicon ingot wafers to fabricated wafers, integrated circuits, electronic bare components, and sub-assemblies — has now been covered under the ISM scheme. This comprehensive coverage is the single biggest differentiator between ISM 1.0 and 2.0.

The Six Pillars of ISM 2.0

ISM 2.0 is structured around six discrete pillars, each targeting a critical gap in India’s semiconductor ecosystem.

1. Chip Design

India’s chip design talent has long been recognized globally — Indian engineers have been designing chips for multinational companies for decades. ISM 2.0 aims to convert this talent into indigenous intellectual property. Startups and MSMEs will receive grants plus equity co-investment, while larger companies get royalty financing or equity co-investment. The government funds the design and recovers a share of revenue from the chip — essentially taking a royalty position rather than writing pure grants.

Strategic chips — those identified by a high-level expert committee chaired by the National Security Advisor and the Principal Scientific Advisor — will be developed through consortia involving Indian companies, multinationals, academia, and startups. This strategic track ensures that chips critical to national security and sovereignty are developed domestically.

The results of the first phase’s Design Linked Incentive program are already visible: 24 design projects were approved, 105 startups were given EDA tools, and 15 have since raised venture capital. Two-nanometer chips are already being designed in India, though they are not yet fabricated locally.

2. Machines and Materials

This pillar represents the most significant strategic shift in ISM 2.0. Under the first phase, the government supported fabs and packaging units but left the crucial supply chain of equipment and materials largely unaddressed. ISM 2.0 closes this gap by offering incentives of up to 30% for investments in semiconductor equipment, specialty chemicals, industrial gases, and materials.

The semiconductor industry depends on 150-500 specialized input materials, many of which are currently imported. By incentivizing domestic production of these inputs, ISM 2.0 aims to reduce supply chain vulnerabilities that became painfully evident during the global chip shortage. The program covers equipment (including refurbished equipment), components, R&D for advanced nodes, and a production-linked incentive for sourcing inputs from domestic companies.

3. Fabrication Units

Fiscal support for silicon fabs has been reduced from 50% under ISM 1.0 to 40% under ISM 2.0. Compound semiconductor and display fabs will receive incentives of up to 35%, while advanced packaging projects also qualify for 35% support. Conventional packaging facilities are eligible for up to 25%.

This reduction in headline subsidy rates is a deliberate choice. As one government official explained, unlike ISM 1.0 — when India had yet to prove its semiconductor manufacturing capability — the country now has three operational packaging plants, demonstrated production volume, and a clear pipeline of projects. The incentive structure has been modulated and spread across a larger area to support more segments of the value chain.

The most visible project under the fabrication pillar remains the Tata fab at Dholera, on 163 acres, currently under construction with a target commissioning date of 2028. India’s current fabs operate at the 28-110nm node, and the R&D pillar specifically targets a 7-3nm path on the same equipment.

4. Assembly and Packaging (OSAT/ATMP)

This is where India has already demonstrated the fastest progress. Three plants are now in commercial production: Micron’s facility at Sanand (commenced February 28, 2026), Kaynes Technology (March 31, 2026), and CG Semiconductor (July 4, 2026 — just two weeks before the Cabinet approval of ISM 2.0). One more is expected by the end of 2026.

Tata’s ATMP plant at Jagiroad, Assam — covering 171 acres — is under construction and expected to be operational within the ISM 2.0 timeline. These facilities represent the first wave of what the government hopes will be dozens of packaging and assembly units across the country.

Twelve units were approved under ISM 1.0 with cumulative investment of over Rs 1.64 lakh crore — one silicon fab, one silicon carbide fab, an integrated gallium nitride micro-LED display fab, and nine packaging units (one of which is advanced packaging). The chips produced at these facilities will increasingly be used in electronic products, including mobile phones manufactured in India.

5. Research and Development

The R&D pillar targets a technology roadmap that moves India from its current 28-110nm node capability toward 7-3nm over the program’s duration. Beyond leading-edge node development, the R&D focus includes silicon photonics, advanced packaging technologies, and compound semiconductor research.

India has already signed semiconductor partnerships with the United States (2023, extended via Pax Silica in 2026), the European Union and Japan (2023), Singapore (2024), the Netherlands (2025), and Germany (2026). These international collaborations bring the R&D expertise and equipment access that India needs to advance its node capabilities.

6. Talent Development

Globally, the semiconductor industry faces a shortage of approximately 1 million workers. ISM 2.0 sets a target of 1 lakh (100,000) design engineers within five years, plus operators, engineers, and PhDs for fabrication, packaging, equipment, and materials.

The talent pillar recognizes that semiconductor manufacturing is not just about building fabs — it requires a pipeline of skilled workers who can operate, maintain, and improve those facilities. Existing government schemes have already led to chips being designed by Indian college students across most states, according to the minister, demonstrating the breadth of the talent base that ISM 2.0 can build upon.

The Mobile Phone Manufacturing Scheme

Alongside ISM 2.0, the Cabinet approved the Mobile Phone Manufacturing Scheme with a budget of Rs 62,500 crore over five years (FY2026-27 to FY2030-31). The MPMS replaces the production-linked incentive scheme that lapsed on March 31, 2026, with a significantly evolved incentive structure.

The scheme offers sales-linked incentives ranging from 2.25% to 5%, with additional incentives of up to 1.5% linked to domestic sourcing of key components and sub-assemblies. Indian brands undertaking design and R&D will be eligible for an additional 3% incentive — the first time the incentive is explicitly tied to brand ownership rather than just production volume.

The government expects MPMS to increase domestic value addition in smartphones to 40-45% by the end of the scheme, from 24% currently. Projected outcomes include cumulative mobile phone production of Rs 39 lakh crore, exports of Rs 15 lakh crore, and 600,000 new direct jobs.

India’s PLI 1.0 performance was exceptional: investment of Rs 20,587 crore against a Rs 7,000 crore target (294% of target), production of Rs 11.62 lakh crore (142% of target), and exports of Rs 6.43 lakh crore (132% of target). Approximately 125 crore handsets were manufactured, and 12 lakh jobs were added.

A Fundamentally Different Approach

Industry observers see ISM 2.0 as a significant evolution in India’s semiconductor strategy. As Mohammed Faruqui, a semiconductor ecosystem analyst cited in Business Today, put it: “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.”

This assessment captures the essence of the shift. By shaving 10% off silicon fab incentives and channeling that funding into local raw chemicals, cleanroom equipment, industrial gases, and indigenous IP design, India is structurally matching the ecosystem maturity of established semiconductor nations. The government’s conditionalities for incentives are now aligned with building scale, making India globally competitive, and owning intellectual property.

The change in the design pillar is particularly notable. Under ISM 1.0, the government provided grants. Under ISM 2.0, it takes equity and royalty positions — exiting at either equity valuation or 1.5 times the royalty financing. This creates a self-sustaining funding model where successful chip designs generate revenue that can be reinvested in the next generation of design projects.

Ashok Chandak, CEO and President of SEMI India and IESA, described ISM 2.0 as providing “policy continuity” that will help strengthen India’s manufacturing capabilities. “India has already gained the credibility,” he said. “This is the policy continuity. And it is going to result into the capability.”

What This Means for India’s Electronics Future

India’s electronics manufacturing ecosystem has grown seven-fold since FY2014-15, reaching Rs 13.1 lakh crore in production by FY2026. Exports have grown 11-fold to Rs 4.2 lakh crore. Electronics was 1.7% of merchandise exports in 2014-15; by 2025-26, it had reached approximately 11% — moving from the ninth to the third largest export category.

Smartphones, which were outside the top 100 export commodities in 2014-15, now rank first among India’s export categories, accounting for 61% of electronics exports and 48% of electronics manufacturing. India is now the second-largest manufacturer of handsets by volume, and 99.2% of phones used in the country are locally made.

The target set by the Prime Minister is $500 billion of electronics production by 2030-31, $240 billion of exports, and employment of approximately 60 lakh — 35 lakh above current levels. ISM 2.0 and MPMS provide the policy framework and financial backing to pursue these targets.

The bigger test, however, will be converting proposals into operational projects. Semiconductor facilities require uninterrupted power and water, specialized infrastructure, skilled workers, reliable suppliers, and timely regulatory approvals. Delays in any of these areas can sharply increase costs and affect production timelines. As Manish Rawat, semiconductor analyst at TechInsights, noted: “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 headline financial incentives. The semiconductor industry is a long game, and ISM 2.0 positions India to play it.

Frequently Asked Questions

What is ISM 2.0?

The India Semiconductor Mission 2.0 is the second phase of India’s flagship semiconductor manufacturing program, approved with an outlay of Rs 1.27 lakh crore. It covers the entire semiconductor value chain: chip design, machines and materials, fabrication units, assembly and packaging, R&D, and talent development.

How does ISM 2.0 differ from ISM 1.0?

ISM 2.0 reduces the uniform 50% subsidy for fabs to a differentiated 25-40% structure but expands support to the broader ecosystem including equipment, chemicals, gases, and materials. It also introduces royalty financing and equity co-investment for chip design, replacing the grant-only approach.

Which semiconductor plants are already operational in India?

Three plants are in commercial production: Micron at Sanand (February 2026), Kaynes Technology (March 2026), and CG Semiconductor (July 2026). The Tata fab at Dholera is under construction targeting 2028 commissioning.

What is the Mobile Phone Manufacturing Scheme?

The MPMS is a Rs 62,500 crore scheme replacing the PLI that lapsed in March 2026. It provides 2.25-5% sales-linked incentives with additional incentives for domestic sourcing and Indian brand design and R&D, targeting 40-45% domestic value addition in smartphones.

What is India’s target for electronics production?

The government’s long-term target is $500 billion in electronics production by 2030-31, with $240 billion in exports and approximately 60 lakh jobs in the electronics manufacturing ecosystem.

How do ISM 2.0 incentives compare globally?

India’s 40% silicon fab incentive is competitive with major semiconductor subsidy programs globally, including the US CHIPS Act (up to 25% investment tax credit), European Chips Act (up to 40% in some cases), and similar programs in Japan, South Korea, and Taiwan.

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Sources

• Economic Times: Cabinet Clears Rs 1.9 Lakh Crore Push for Chip, Mobile Phone Manufacturing
• Business Today: India’s ISM 2.0 Cuts Chip Subsidies, Bets on Building a Deeper Ecosystem
• Times of India: Union Cabinet Clears Rs 1.9 Lakh Crore Push for Chips, Mobile Phones
• The Print: Cabinet Clears Rs 1.9 Lakh Crore for Chip & Mobile Manufacturing
• Economic Times: Semicon 2.0 Gives Policy Continuity — IESA Chief

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