Semicon 2.0 gets it right on the issues that matter

The improvements over Semicon 1.0 reflect the government’s commitment to growing India’s presence in this sector. The largest risk is the administrative load.

On August 31, the ministry of electronics and information technology (MEITy) notified Semicon 2.0, an overhaul of India’s semiconductor incentive architecture. Four things stand out. Chip design, for the first time, is front and centre in the scheme rather than an afterthought, a sensible bet given India’s real comparative advantage in design talent. Second, the India Semiconductor Mission (ISM) now runs design as well as manufacturing. Until now, design was with the Centre for Development of Advanced Computing (C-DAC). Third, research and talent development now get specified fiscal backing. Fourth, upfront capex support across manufacturing categories has been recalibrated into a narrower band, mostly 30-40%, down from Semicon 1.0’s uniform 50%.

ISM now runs the entire value chain, ten categories, equity management, royalty tracking, and investment decisions. [Photo credit: Getty Images]

Semicon 1.0 arrived in 2021 as four separate notifications: a design-linked incentive, a compound-semiconductor and packaging scheme, a display-fab scheme, and a silicon-fab scheme. Semicon 2.0 folds the whole value chain into one instrument with six pillars and 10 categories, spanning design, materials, fabrication, packaging, research and talent.

Semicon 1.0’s design-linked incentive worked through reimbursement. Chip design firms spent money, then claimed back up to half, capped at ₹15 crore. They could also claim a deployment incentive on total sales. It did not match the interests of an industry where gestation periods can be as long as five years. As a result, only 24 of a target of 100 firms received the fiscal support.

Semicon 2.0 replaces this scheme with a hybrid capital stack. There’s seed funding up to ₹15 crore, and beyond that, equity co-investment or royalty financing once a startup has already raised private venture capital. In other words, startups now have grant, equity and royalty options instead of a single reimbursement route, a mix far better suited to an industry where products can take five years to reach the market. The scheme also drops the earlier numeric cap on foreign shareholding, replacing it with a qualitative requirement that the company remain owned and controlled by Indian citizens or Overseas Citizens of India. Indian startups can also bid in consortium mode with global companies, R&D organisations, and academic institutions.

The removal of the foreign-shareholding cap is a welcome move, but the replacement, a control test rather than a percentage test, still retains the uncertainty. An eligible startup can raise as much foreign capital as investors are willing to put in, but only up to the point where citizens or OCIs still control the company. This is a reasonable compromise between attracting capital and avoiding a foreign-controlled recipient of public money, but it stops short of a fuller reform. Ideally, support would go to any India-registered company regardless of ownership, since design capability matters more than who holds the equity.

The equity model raises a second problem that will surface once startups start failing, which most will. Venture investing assumes that most bets fail outright and a few big wins cover the rest. Government finance treats the loss of public money as a presumption of impropriety. Bureaucrats negotiating valuations and write-downs under that scrutiny will be structurally biased toward caution, the opposite of what deep-tech investing needs. One fix is for the State to hold equity with no say in company decisions, leaving private investors to negotiate the actual terms. Whether ISM does something similar will only be clear once guidelines are published.

For defence and critical-infrastructure chips such as telecom, there is a separate category of incentives. C-DAC will select firms via competitive bidding, and the resulting intellectual property be co-owned with C-DAC. Co-owning intellectual property with C-DAC is meant to keep sovereign IP out of foreign hands, and to counter export-control blockades. But global venture capital underwrites its bets on unencumbered IP, and a State co- owner makes it nearly non-fundable by private investors. In practice, this category will likely stay the preserve of defence contractors and State-backed consortia. Since C-DAC runs the bidding and ends up co-owning what it selects, the conflict of interest remains.

Pillar 2 is meant for raw materials and equipment used in a fabrication facility. This is an acknowledgement that the inputs feeding chip manufacturing needed a funding line of their own. It offers 30% capex support plus a production-linked incentive of 2-10% on domestic bill-of-materials sourcing from FY29, funding the ultra-pure supply chain fabs previously lacked.

Pillar 3 carries fab support forward with the quantum trimmed. Future silicon wafer fabs now get 40% upfront capital against the earlier 50%, while compound-semiconductor, photonics and display fabs get a lower 35%.

Pillar 4, packaging, is the more interesting one, receiving a graded support at 35% upfront capital support for advanced 2.5D and 3D packaging against 25% for legacy work. This plays to a comparative advantage too because nine assembly and testing plants are already approved under Semicon 1.0. Moreover, packaging is becoming more research-intensive to squeeze higher performances.

The two pillars that matter most are research and talent. India’s public labs have historically received capital grants for expensive equipment, then no operating budget to run it. Semicon 2.0 funds up to 75% of both. This scheme fixes a structural gap.

Overall, this is a definite improvement over Semicon 1.0 and reflects that the government is firmly committed to growing India’s presence in this sector. The largest risk, though, is the administrative load. ISM now runs the entire value chain, ten categories, equity management, royalty tracking, and investment decisions. Whether it works will depend on a step-jump in the capacity of the ministry and ISM to govern this complex mission.

Pranay Kotasthane is a researcher with the high-tech geopolitics programme at the Takshashila Institution. The views expressed are personal