Semiconductor Industry in India – Significance & Challenges – Explained Pointwise

Recently, Prime Minister Narendra Modi inaugurated the fifth edition of SEMICON India 2026. The event reflects India’s transition from policy formulation towards actual semiconductor production and a broader domestic ecosystem.
India is emerging as a semiconductor hub, developing indigenous chips like VIKRAM 3201,  DHRUV64 to boost self-reliance. The market is growing from $38 billion in 2023 and is expected to reach $110 billion by FY30 & $200bn by FY35.
This article examines the semiconductor industry in India, focusing on its significance, key challenges, government initiatives, and the way forward.

What are Semiconductors? What is their importance? 

• Semiconductors: Semiconductors are materials whose electrical conductivity lies between that of conductors and insulators. Their conductivity can be controlled by factors such as temperature, impurities, electric fields and light. They can either be pure elements, like silicon or germanium or compounds, like gallium, arsenide, or cadmium selenide.
• Important Properties of Semicondictors:
  • Intermediate conductivity: Their electrical conductivity is between conductors like copper and insulators like glass.
  • Negative temperature coefficient: Unlike metals, their electrical resistance generally decreases as temperature increases, because more charge carriers become available.
  • Conductivity can be controlled: Their conductivity can be deliberately modified by adding small quantities of impurities (a process called doping).
  • Sensitive to light: Some semiconductors change their electrical behaviour when exposed to light, forming the basis of solar cells, photodiodes and light sensors.

Importance of Semiconductors:

1. Foundation of modern electronics: Semiconductor chips are the heart and brain of all modern electronics and communications technology products, contemporary automobiles, household gadgets such as refrigerators, and essential medical devices such as ECG machines.
2. Propeller of emerging technologies: The development of emerging technologies like AI, 5G, or driverless cars is dependent upon a fast and cheap semiconductor industry.
3. Telecommunications: Semiconductors are crucial for 5G/6G equipment, routers, satellites, optical communication and wireless devices, enabling high-speed communication.
4. Economic importance: The semiconductor industry supports high-value manufacturing, R&D, skilled employment, exports and technological innovation. Countries with strong semiconductor capabilities can participate more deeply in the global digital economy.
5. Aiding the further development of electronic devices: Semiconductors make the devices more compact, less expensive, and more powerful. For e.g. Semiconductor chips have enhanced the features of smartphones with powerful processing.
6. Most traded products after petroleum: Semiconductors are globally the most-traded products after petroleum and cars, with an annual turnover of $500 billion.
7. Transformative potential: Semiconductors continue to enable the world’s greatest breakthroughs and transformation in industries, ranging from aerospace and consumer electronics to energy and medicine.

What are the defining features of Semiconductor manufacturing?

Semiconductor manufacturing involves following stages:

Raw materials → Wafer manufacturing → Chip design → Fabrication → Packaging → Testing → Integration into electronic products

1. Front-end manufacturing and back-end assembly: Semiconductor manufacturing comprises the front-end fab manufacturing and the back-end assembly, including packaging and testing. However, the front-end fab manufacturing is a complex process, with only a handful of companies involved in large scale fab-manufacturing.
2. Highly technology-intensive: Manufacturing semiconductors requires advanced technologies such as photolithography, etching, deposition, ion implantation and chemical-mechanical polishing (CMP). Even tiny manufacturing errors can make a chip defective.
3. Extremely high precision: Modern chips contain billions of transistors on a very small area. Manufacturing therefore requires extremely precise control at microscopic and sometimes nanometre scales.
4. Capital-intensive: Setting up a semiconductor fabrication plant (fab) requires enormous investment in specialised equipment, cleanrooms and supporting infrastructure. Advanced fabs can require billions of dollars in capital.
5. Requires ultra-clean environments: Even microscopic particles can damage semiconductor wafers. Fabs therefore operate in highly controlled cleanrooms with strict control over dust, temperature, humidity and vibrations.
6. Highly concentrated global supply chain: Globally, the entire semiconductor value chain has seeped in the interdependence between a handful of countries like the USA, Taiwan, Japan, China, and some European nations. Within this chain, there’s an extraordinary degree of specialisation that makes it vulnerable to shocks. For e.g. 100% of the world’s most advanced (below 10 nanometres) semiconductor manufacturing facilities are located in just two countries, Taiwan and South Korea.
7. Revenue sharing b/w few companies: The top 3 companies in each stage of the semiconductor supply chain take in about 80-90% of the revenue.

Semiconductor manufacturing status in India:

1. Semiconductor R&D footprint in India: India has an existing base for design and verification for the semiconductor industry. Most of the global semiconductor companies having an R&D footprint in India.
2. Fabrication facilities limited to strategic semiconductor development: India has two fabs – SITAR, a unit of the Defence Research and Development Organisation (DRDO) in Bengaluru, and a semiconductor laboratory in Chandigarh. These build silicon chips for strategic purposes like defence and space, and not for commercial use.
3. High import dependence: 100% of our semiconductor chips, memory, and display cards are imported into the country. In 2020, India spent $15bn on electronic imports, with 37% coming from China.
4. Rapid expansion of ATMP/OSAT (Packing & Testing) facilities: India has made faster progress in Assembly, Testing, Marking and Packaging (ATMP)/Outsourced Semiconductor Assembly and Test (OSAT).
5. Strong position in chip design: India already has a significant advantage in semiconductor design and engineering talent. Government data indicates that India hosts about 20% of the global semiconductor chip-design workforce and around 7% of global semiconductor-domain GCCs.
6. Progress under ISM 1.0: As of December 2025, 10 projects worth Rs. 1.60 lakh crore have been approved across 6 states, covering silicon fabs, silicon carbide fabs, advanced packaging, and ATMP facilities.

   

Why is there a global race to diversify semiconductor supply chains?

1. Over concentration of manufacturing units: Semiconductor chip manufacturing is concentrated in a few countries. For e.g. Taiwan produces over 60% of the world’s semiconductors, and along with South Korea makes 100% of the most advanced chips (below 10 nanometers). A disruption in one major producing region can affect industries worldwide.
2. Supply chain disruption due to epidemic: The semiconductor industry experienced significant supply shortages during the pandemic due to disruptions in China’s production. The pandemic demonstrated how semiconductor shortages can disrupt automobiles, electronics, telecommunications and other downstream industries. Because chips are an upstream input used across numerous industries, a shortage can have economy-wide effects.
3. Geopolitical conflicts: The ongoing Russia-Ukraine conflict has resulted in shortages of raw materials for domestic industries. For e.g. Ukraine plays a critical role as a key supplier of neon, which is an essential input in semiconductor manufacturing.
4. Emerging geopolitical contestations: Growing US–China strategic competition, export controls, trade restrictions and technology disputes have made dependence on a limited number of suppliers a strategic concern. Governments therefore want greater control over critical semiconductor capabilities. For e.g. US has restricted its firms and its allies from assisting the Chinese production of 16 nanometers or smaller chips.
5. Economic and national-security importance: Semiconductors are essential not only for consumer electronics but also for AI, telecommunications, automobiles, defence, satellites and critical infrastructure. Consequently, reliable access to chips has increasingly become an element of economic and technological security.
6. Rise of AI and advanced computing: The rapid expansion of AI, data centres and high-performance computing is increasing the strategic importance of advanced chips. This has encouraged countries to secure domestic or trusted access to semiconductor manufacturing and related technologies.
7. Pursuit of technological sovereignty: Countries increasingly want to reduce excessive dependence on foreign suppliers for technologies considered strategically important. This has led to policies supporting domestic fabs, chip design, advanced packaging, semiconductor equipment and materials.

Therefore, many countries are looking to diversify their supply chain. India seeks to take advantage of countries eyeing for diversification of supply chains.

What is the significance of development of indigenous semiconductor industry in India?

1. Tackling supply shocks: The pandemic and the subsequent lockdowns impacted the supply of chips to India. For e.g. Automobile manufacturers like Mahindra & Mahindra and Tata group were compelled to reduce their production due to the shortage.
2. Meeting the rising demand: Experts estimate that around 50 crore people will join the internet in the next decade, which will increase the demand of more phones and laptops. Similarly, the post-pandemic world is showing a greater inclination towards work from home culture. This warrants an enhanced demand for servers, internet connectivity, and cloud usage. Hence, indigenous semiconductor industry is needed to meet the rising demands. There is a huge domestic market for semiconductors which could exceed $60 billion by 2026.
3. Reduce import dependence: A domestic ecosystem can reduce India’s dependence on imported chips and other critical semiconductor components, particularly as domestic demand for electronics, EVs, AI and data centres expands.
4. Boost high-value employment: The semiconductor industry requires specialised engineers, technicians, researchers and manufacturing professionals. It can therefore create high-skilled, high-productivity employment and strengthen India’s technical talent base.
5. Revenue boost: Indigenous capacity would attract local taxes and boost the export potential. Further, India would be required to import fewer semiconductor chips, which would decrease the import bill. For e.g. India imports almost all semiconductors to meet its demand, which is estimated to reach around $100 billion by 2025.
6. Enhanced Security: Chips made locally will be designated as “trusted sources” and can be used in products ranging from CCTV cameras to 5G equipment. This would improve the national cybersecurity profile.
7. Geopolitical Benefits: Countries having a sufficient supply of chips would be in a better position to mold the future course of geopolitics, driven by data and the digital revolution. Further self-sufficiency will decrease reliance on Chinese chip imports, especially during hard times like the Galwan Valley border clash.
8. Promote R&D and innovation: Building fabs and advanced packaging facilities can encourage research in materials science, electronics, nanotechnology, chip architecture and semiconductor equipment, while creating stronger links between universities, startups and industry.
9. Generate economic multiplier effects: Semiconductor manufacturing can stimulate related industries such as specialty chemicals, gases, precision machinery, electronics, logistics, testing and advanced materials, creating a wider industrial ecosystem.

What have been the government efforts towards development of semiconductor industry in India?

What are the challenges in the semiconductor industry in India?

1. Very high capital requirements: Setting up a semiconductor fabrication plant requires billions of dollars of investment in cleanrooms, specialised machinery and supporting infrastructure. As per a government estimate, it would cost roughly $5-$7 billion to set up a chip fabrication unit in India.
2. Dependence on imported equipment and technology: Advanced semiconductor manufacturing requires highly specialised equipment, materials and intellectual property. India remains dependent on global suppliers for several of these critical inputs, limiting complete technological self-reliance.
3. Shortage of specialised skilled manpower: While India has a large pool of engineers and a strong chip-design workforce, there is a relative shortage of professionals with hands-on expertise in fab operations, semiconductor process engineering, equipment maintenance, materials science and advanced packaging.
4. Bureaucratic inefficiencies: The process of establishing an indigenous semiconductor facility requires clearances and approvals from multiple government departments. Further, there exists a considerable degree of bureaucratic delays at each stage that discourages the establishment of manufacturing units.
5. Infrastructure requirements: Fabs require uninterrupted power, large quantities of ultrapure water, specialised gases, chemicals, cleanrooms and reliable logistics. Establishing this ecosystem at scale is complex and expensive.
6. Technological Constraint: The indigenous manufacturing of semiconductors requires the use of high-end technologies. These technologies are licensed from patent holders at a very high price.
7. Structural Flaws: FDI in electronics is less than 1% of the total FDI inflow because of the dearth of skilled labor, delays in land acquisition, and the uncertain tax regime.
8. Competition from established semiconductor hubs: India faces competition from established manufacturing ecosystems in Taiwan, South Korea, Japan, the United States, China and Singapore, which possess decades of accumulated technological expertise, supplier networks and manufacturing experience.

What should be the focus area for Indian Semiconductor Industry?

What Should be the Way Forward?

1. Build an end-to-end ecosystem: India should develop capabilities across the entire value chain (chip design, semiconductor-grade materials, equipment, wafer fabrication, packaging, testing and electronics manufacturing) rather than focusing only on fabs.
2. Strengthen semiconductor R&D: Greater public and private investment should be directed towards semiconductor process technology, materials, equipment, chip architecture and indigenous intellectual property (IP). Stronger industry–academia–research-institution linkages can accelerate commercialisation.
3. Develop specialised human capital: India should create specialised programmes in semiconductor fabrication, process engineering, equipment maintenance, materials science, chip design and advanced packaging. Industry-oriented training and apprenticeships can complement conventional engineering education.
4. Ensure reliable infrastructure: Semiconductor clusters need 24×7 high-quality electricity, ultrapure water, waste-treatment facilities, cleanrooms, high-speed logistics and robust digital infrastructure. Dedicated semiconductor industrial clusters can help provide these facilities.
5. Provision of adequate funding: Adequate funding must be provided to augment the research and development potential of technical institutes. For e.g. IIT Madras developed a microprocessor named ‘Moushik’ with funding support from the Ministry of Electronics and Information Technology.
6. Expeditious execution of Sovereign Patent Fund (SPF):  The Sovereign Patent Fund (SPF) under National Policy on electronics should be established expeditiously. It is a wholly or partly Government-backed entity that aims to bolster domestic businesses through the acquisition and licensing of patented technology.
7. Support of businesses: The government should also support businesses in the acquisition of semiconductor manufacturing units in other countries. This is easier than setting up a domestic facility and can be done swiftly for ensuring a continuous supply of chips. Hand-holding startups of entrepreneurial engineers can also produce large payoffs.
8. Initial Focus on back-end of manufacturing: Semiconductor foundries are the world’s most expensive factories, accounting for 65% of industry capital expenditure but only 25% of the value addition. Therefore, to lower the risks of investment, India should especially look at back-end of manufacturing such as assembly, packaging and testing. Once it stabilises and an ecosystem develops, front-end of manufacturing will follow.
9. Integrate with global value chains: India should pursue “China+1” and supply-chain diversification opportunities while avoiding an unrealistic goal of complete self-sufficiency. The objective should be to become a trusted, competitive and resilient node in global semiconductor value chains.

Conclusion: The 21st century will be an era of Digital revolution signifying an increased use of mobile phones and computer devices. This enhanced usage can be met only with a robust availability of semiconductor chips that sustains their functioning. Therefore India needs to focus on the indigenous development of semiconductors in order to realize its digital potential and emerge as a strong power in the present era.