India’s semiconductor subsidies should buy qualified suppliers and repeat orders

India’s second semiconductor mission has a better chance of creating lasting industrial capability if it pays for qualified supply chains and repeat commercial orders. The Cabinet approved Semicon 2.0 on 15 July with an outlay of ₹1,27,500 crore. It widens the focus to chip design, equipment and materials, fabrication, packaging, research and skills. That is a sensible response to a constraint a fab subsidy cannot solve by itself. A manufacturer needs inputs of known quality, technicians who can run the process and customers willing to qualify the output. The case for public spending strengthens when the programme can show that it brings those complementary investments together. Cabinet approval of Semicon 2.0 · The Indian Express on the change in subsidy design

The first mission established a baseline of approvals

The Cabinet says twelve manufacturing units have been approved with cumulative investment above ₹1.64 lakh crore. It describes one silicon fab, two other categories of fabrication project and nine packaging units. It expects the first fab to be commissioned in 2028. Those figures describe the pipeline at different stages from actual output. An investment announced or approved today can help suppliers anticipate demand. Only production at consistent quality and a price that a customer accepts creates sustained orders and revenue. Programme reports should separate approvals, commissioning, customer qualification and serial production. Cabinet approval of Semicon 2.0

The broader programme addresses a coordination problem. A producer of high-purity process chemicals may need testing equipment, staff and a dedicated facility before it can win a fab’s order. The fab has a reason to qualify a local supplier once it sees evidence of quality and continuity. Each investment becomes more attractive if the other occurs. An anchor customer’s procurement commitment, conditional on independently verified qualification, can help close that gap. Generic capital assistance can lower a supplier’s entry cost but leaves the commercial question open if no customer is prepared to test and adopt the product.

A lower headline subsidy can still support a more valuable project

The Indian Express reports that the earlier scheme offered a 50 per cent capital subsidy to fabs and assembly plants, while the second mission would offer 40 per cent for silicon fabs and 35 per cent for other fabs. That is an announced change in the support design. On a hypothetical ₹10,000 crore of fully eligible investment in a silicon fab, a 50 per cent rate implies ₹5,000 crore of central support and 40 per cent implies ₹4,000 crore. The difference is ₹1,000 crore before the effects of other support, timing and project terms. The calculation is illustrative. It does not apply to total spending that falls outside the subsidy base or establish the eventual cost of a sanctioned project. The Indian Express on the change in subsidy design

The relevant choice is whether the ₹1,000 crore would buy more productive capacity inside the fab or outside it. Reliable utilities, testing infrastructure and qualified suppliers can reduce disruptions and shorten the time to commercial output across multiple projects. A subsidy paid entirely on construction cost can leave the investor with a cheaper facility and the same difficulty sourcing inputs. A lower subsidy can also make a viable project choose another location. Assessing the trade-off requires bids, investment plans and credible comparisons with other locations, rather than assuming that every rupee withdrawn from a fab can be redirected without affecting the decision to build it. Cabinet approval of Semicon 2.0 · The Indian Express on the change in subsidy design

Operational data make the comparison tangible. If a facility is designed to process 20,000 wafers in a month and loses one week in a four-week month to interruptions, it processes 15,000 wafers at the same operating pace. With fixed costs unchanged, fixed cost per processed wafer is one-third higher. If the disruption also lowers the share of good output, cost per saleable unit rises further. The example uses hypothetical throughput. It shows why the value of a qualified local input may lie in shorter recovery times and continuity, even if its ordinary unit price is similar to that of an import.

Give suppliers a path to qualification and customers a reason to buy

The ministry’s support for machines, materials, chemicals and gases should be evaluated by how many inputs reach commercial use. A firm can install capacity for a chemical at a specified purity and still fail a customer’s test for consistency across batches. Shared test facilities could lower fixed verification costs and let smaller firms submit samples without each investing in a complete lab. Milestone payments can track credible steps, from an independently validated specification to a customer’s first order and then repeat deliveries. The strongest evidence is a second buyer willing to qualify the same supplier without a bespoke subsidy. Cabinet approval of Semicon 2.0

This is also a reason to distinguish local spending from domestic value added. A packaging plant can buy a large volume of foreign inputs, conduct a valuable process in India and export the result. The gross export value includes imported content. Tracking domestic wages, local inputs and operating surplus alongside imported material and capital equipment helps establish how much income and capability the project is creating in India. A near-term increase in imports can be consistent with building capacity. The long-term case depends on what local firms learn and which production stages they can sustain.

The case for backing an anchor fab

A serious counterargument is that a new market may need a large anchor project before ancillary investment is viable. An anchor’s demand can support the entry of several suppliers and attract engineers, contractors and infrastructure to the same region. The resulting benefits may extend beyond the company receiving the initial subsidy. That is a reason to support a project where those links are credible. It also raises the cost of backing a facility with no realistic path to customers or where suppliers depend indefinitely on one buyer and continuing assistance. The terms should leave the sponsor exposed to commercial risk while rewarding verified milestones. Cabinet approval of Semicon 2.0 · The Indian Express on the change in subsidy design

Skills policy should be assessed with the same discipline. The Cabinet reports that 315 universities are providing chip-design training using industry tools and that about 68,000 students have been trained. The next measures are how many people can complete a design or maintain a process to commercial standards, how employers fill specialised jobs and how long trained workers stay in relevant roles. Course completions help show the size of the pipeline. Hiring, retention and work on actual products show whether that pipeline is easing a constraint. Cabinet approval of Semicon 2.0

There is a distributional question about where common infrastructure is financed. A dedicated connection to a single plant can be essential, but it offers fewer spillovers than a testing centre or utility network that several producers can use. State support should distinguish the cost of serving one investor from the cost of expanding shared capacity. If several bidders want the same location once common services are available, the case for paying each of them a large location subsidy is weaker.

What should change the judgement

The programme should publish a sequence of outcomes for supported projects. Track investment deployed, commercial qualification, repeat orders, production yields where disclosure permits, supplier concentration and domestic value added. Compare projects at similar stages. A facility early in commissioning should have a different performance threshold from a plant already selling a mature product. When confidentiality limits detailed disclosure, aggregate measures and independent verification can still show how many projects are meeting milestones and whether public spending has changed the investment decision. Cabinet approval of Semicon 2.0

Evidence that multiple customers are placing repeat orders with new Indian suppliers would strengthen the case that the mission is addressing a coordination failure. Persistent capacity announcements without commercial orders would point to problems that a larger capital cheque may not solve. Semicon 2.0 has created room to fund the inputs and capabilities that determine whether a fab can operate competitively. The spending decision should follow the evidence on which of those constraints is binding. Cabinet approval of Semicon 2.0