India opened the next chapter in the semiconductor story by announcing Semicon 2.0. The first tranche of the policy was launched in 2022. But before the first India-made (or assembled) chip is out, the government unveiled the second part in July.
Semicon 2.0 goes beyond chip assembly and packaging. That is the lowest value-addition process in the entire supply chain. But India doesn't want to stop at that. It wants to develop the ecosystem around chips. The policy wants to achieve the cremier layer of the semiconductor pie.
It signals opportunities for companies, suppliers and other players, but also to other countries that India is a serious player. We must welcome this policy. But we need to understand that the hard part has just begun. Let's understand what lies ahead.
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Background
In July, the Union Cabinet approved Semicon 2.0 with an outlay of Rs. 1,27,500 crore. There are six pillars: chip design, machines and materials, fabrication, advanced packaging, research and development (R&D), and talent. India has approved 12 semiconductor manufacturing projects involving more than Rs. 1.64 lakh crore of committed investment. These include a silicon fab, a silicon-carbide fab, an integrated GaN/Micro LED facility and nine packaging units.
Three projects have already begun commercial production. The government mentioned the country accounts for nearly 20% of the global semiconductor chip-design workforce, while 105 startups are developing chips. Under the Design Linked Incentive scheme, 24 projects have been approved, and several Indian-designed chips have reached tape-out and fabrication stages.
The next challenge is what happens around those factories.
Chip assembly and chip design are two separate activities. Moreover, there is a greater difference between Indians designing chips and Indian companies owning the technology. A large semiconductor design workforce can work for global companies and global R&D centres without creating Indian-owned intellectual property, products or companies.
Semicon 2.0 emphasises narrowing that gap.
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Malaysia shows the other possibility
Indian policymakers should study Malaysia's semiconductor journey closely. Malaysia accounts for around 13% of global semiconductor assembly, testing and packaging and has more than five decades of manufacturing experience. Yet despite becoming a major export hub, it struggled to build world-class Malaysian chip companies.
Malaysia is the best example of how a country can achieve economic growth through foreign direct investment (FDI). By combining free-trade zones, tax incentives, infrastructure and low-cost labour, it attracted multinational semiconductor firms. It turned Penang into a major electronics cluster. Workers and firms improved over time and developed strong capabilities.
Then, wages rose, and lower-cost competitors emerged. Its policymakers sought to move into higher-value activities through various institutions and incentives. But it struggled to keep pace with the technology.
Malaysia taught that manufacturing success does not automatically generate technological leadership. Most advanced capabilities remained within foreign firms, while local companies stayed in testing, packaging and other outsourcing activities.
The broader lesson for India is that industrialisation and technological depth are not the same thing. Without strong domestic firms, engineering talent, R&D capabilities and technology transfer, a country may end up assembling without controlling the technology.
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And the rules have changed
There's another complication. For Malaysia, it mattered, but was smaller. However, it has become far more important for India today. Semiconductor manufacturing, trade and technology are no longer just commercial considerations. They are geostrategic. The US restrictions on China's semiconductor sector are reshaping global value chains and access to critical technologies.
The experiences of Korea and Taiwan show why this matters. They moved faster because firms and engineers learned from the American counterparts. Research shows that the tacit knowledge of how to manufacture, troubleshoot and improve mattered more in their development than owning a patent. But when Malaysia tried to move up the value chain, the technology had become more complex and closely guarded.
The incumbent firms had stronger reasons to protect the technology. Today, the need for secrecy has increased manifold. So India cannot assume that foreign investment will automatically bring the technology it needs. India needs global partnerships. But it also needs the ability to absorb whatever knowledge comes through those partnerships and build on it.
That means playing the foreign and trade policy cards carefully, while investing in human capital, research and advanced technology as if there were no tomorrow. We need institutions that can absorb knowledge, spread it, commercialise it, try, fail, learn and try again. And, most importantly, we need patient capital. This is not a five-year project. The window for catching up may still be open. But India needs to build the capability to use it before that window gets narrower.
Final Take
India has largely solved the first problem: attracting semiconductor manufacturing. The harder challenge begins now. The real test is whether India can convert manufacturing presence into technological capability: Indian-owned intellectual property, domestic suppliers and globally competitive firms. For that, we need policies like Semicon 2.0.
But we cannot stop at this industry alone. Industrial R&D is lower in India. Educational institutions need not only capital expenditure, but also new courses, better pedagogy, and stronger university-industry partnerships. Without them, India may build a semiconductor industry tomorrow, but struggle to sustain technological upgrading over the long run.
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