Semicon 2.0 Bets India's Chip Future on Materials and Equipment

ISM 2.0 Targets India's Most Critical Supply Chain Gap

India's Semiconductor Mission 2.0, approved by the Union Cabinet on July 15, 2026, with a ₹1,27,500 crore outlay, makes a strategic pivot that sets it apart from ISM 1.0's primary focus on wafer fabrication, compound semiconductor plants and OSAT facilities. ISM 2.0 introduces a dedicated pillar for semiconductor equipment, specialty materials and process chemicals, addressing what many industry analysts consider the most fundamental and overlooked gap in India's semiconductor ambitions: the complete absence of domestic supply chain capability for the inputs that make semiconductor manufacturing possible.

The Equipment and Materials Gap

India currently imports 100 percent of its semiconductor manufacturing equipment and a large majority of its specialty materials, including photoresists, process gases such as silane, arsine and phosphine, chemical mechanical planarization slurries, etchants, wafer cleaning chemicals, and the ultra-pure water systems required for fab operations. These inputs are predominantly sourced from a small number of global suppliers in the US, Japan, Germany and South Korea. For India's operational plants and plants under construction, this total import dependency means that every unit of chip packaging and wafer fabrication produced in the country carries an underlying supply chain risk that cannot be mitigated by domestic industrial policy alone unless upstream supply chain localisation is also pursued.

What ISM 2.0 Introduces

The ISM 2.0 equipment and materials pillar introduces financial incentives for companies that manufacture semiconductor equipment components, sub-assemblies or complete tools in India, with a particular focus on wafer handling systems, etch and deposition sub-components, metrology instrument modules, and test equipment hardware. For materials, ISM 2.0 provides capital support for domestic production of specialty gases, photochemicals, slurry formulations, and packaging substrate materials, with eligibility criteria designed to attract international materials companies to establish India manufacturing operations rather than relying exclusively on exports.

Why This Is the Harder Problem

Building semiconductor equipment and specialty materials businesses is arguably harder than building fabs and OSAT plants, because the technology barriers are higher and the customer qualification process is longer. A semiconductor fab must run extensive qualification tests before switching to a new supplier for any process chemical or equipment type, creating very long sales cycles for new entrants. ISM 2.0's approach is to combine capital incentives with structured pilot customer programmes connecting new Indian materials and equipment suppliers with the operational Indian fabs at Sanand and the planned Dholera facility, giving new entrants a qualified domestic customer as a reference for international expansion.

International Collaboration Angle

Several international semiconductor equipment and materials companies have already indicated interest in the ISM 2.0 equipment pillar as a mechanism to establish India manufacturing operations for components of their global supply chains. Japan's specialty chemical sector, Germany's equipment sub-component manufacturers and South Korea's wafer materials suppliers have been mentioned in initial ISM 2.0 outreach discussions as potential early participants, reflecting the broader dynamic of semiconductor supply chain diversification driving investment into new manufacturing geographies.

The Long-Term Vision

ISM 2.0's materials and equipment focus reflects a long-term vision of India developing a self-sustaining semiconductor ecosystem where the supply chain inputs for chip manufacturing are produced domestically alongside the chips themselves. While full supply chain independence is likely decades away, establishing even partial domestic capability in high-value materials and equipment sub-systems reduces import dependency, builds indigenous engineering expertise in precision manufacturing, and creates the supply chain depth that will make India a credible long-term semiconductor manufacturing location for the next generation of fab and OSAT investments beyond the current ISM cycle.