Imagine waking up tomorrow to a world that has suddenly fallen silent. You reach for your smartphone, but the screen stays black. You walk out to your car, but the engine won’t start. At the local store, your UPI payment fails, and down the street, hospital monitors go dark. This is not a scene from a dystopian movie but a glimpse of what happens when the supply of a single component dries up.

Silicon chips are the invisible nervous system of modern economies, powering everything from digital payments and telecommunications networks to automobiles, medical devices and critical infrastructure. Yet, as India races towards becoming a digital superpower, it faces a fragile paradox. The brains powering much of the world’s technology may be designed by Indian engineers, but the chips themselves carry foreign passports. Largely, their silicon is birthed in Taiwan, stamped with American patents, and packaged somewhere in Southeast Asia.

In an era where technology has become a strategic asset, disruptions caused by geopolitical tensions, trade restrictions, natural disasters or supply-chain shocks can ripple through entire industries. This leaves India’s digital economy exposed to forces beyond its control.

The Silicon Deficit

The scale of India’s semiconductor dependence becomes clear when measured in dollars. India’s semiconductor consumption in 2025 was estimated at $30-35 billion, with the overwhelming majority of that demand being met through imports. “Majority of it was import dependent and will continue to be so for the next couple of years, till the local semiconductor manufacturing reaches steady-state yields,” says Apaar Bhatnagar, Associate Partner, IM & Auto, KPMG in India.

India’s appetite for chips has expanded rapidly alongside the digitisation of the economy. Between FY17 and FY25, India spent nearly $150 billion importing semiconductor products, with imports growing at a compound annual growth rate of 23%. According to estimates by the Ministry of Commerce and Industry, if current trends persist, the annual semiconductor import bill could swell to nearly $240 billion by 2035.

The challenge is that demand is only beginning to accelerate. “As the demand for semiconductors grows, volumes are expected to be driven by AI data centres (25%), consumer electronics (30%), automotive (20%), industrial automation (15%) and telecom infrastructure and other industrial applications (10%),” says P.S. Subramaniam, Partner in the Strategic Operations practice at Kearney.

The concern is not that India lacks access to semiconductors today but that so much of that access depends on events unfolding far beyond its borders. When the bulk of a critical technology is sourced from overseas, supply security becomes inseparable from geopolitics, a reality that has pushed semiconductors from the realm of commerce into the domain of national strategy.

Recognising that technological sovereignty cannot rest on permanent dependence in today’s world, the central government has committed billions of dollars to build a domestic chip ecosystem spanning chip fabrication, packaging, testing and design under the India Semiconductor Mission.

But given the complexity and global nature of semiconductor supply chains, experts believe imports will remain an integral part of India’s technology ecosystem for years to come. “Given the ongoing efforts, India could realistically produce about 50% of its semiconductor demand locally,” says Subramaniam.

But breaking free from chip imports is not as simple as building a factory and turning on the lights. The paradox of semiconductor self-reliance is that the road to domestic manufacturing is entirely paved with foreign tools.

The Hardware Monopoly

A modern semiconductor fab is, in many ways, a collection of the most complex machines ever built. While India is investing billions of dollars to establish domestic manufacturing, it cannot yet make the equipment required to produce chips.

Photolithography systems come primarily from ASML in the Netherlands. Etch and deposition tools are supplied by American giants such as Lam Research and Applied Materials, while critical track systems are manufactured by Japan’s Tokyo Electron.

India will continue to rely on global supply chains for semiconductor manufacturing equipment in the foreseeable future. Case in point is Tata Electronics, which is building India’s first commercial silicon fab in Dholera, Gujarat. “Tata Electronics is partnering with PSMC in Taiwan. Initially, Tata Electronics will be using PSMC’s global supply chain,” says Raja Manickam, Founder & CEO, iVP Semi.

This dependence reflects the nature of the semiconductor equipment industry, which is not a commodity market. These machines require decades of research and development, deep engineering expertise and billions of dollars to be built. The decision to establish manufacturing facilities is also driven by the presence of a sufficiently large and sustainable customer base.

For instance, Applied Materials currently manufactures across a globally distributed footprint, with major manufacturing units in regions such as the US, Europe and Asia. But expanding manufacturing into new geographies is closely tied to broader ecosystem readiness.

“Semiconductor equipment capability is inherently a long-cycle effort that requires sustained focus, strong partnerships and ecosystem development. Our model reflects this, with R&D, engineering and supplier ecosystems are built close to talent hubs and customer locations. Manufacturing is anchored in regions with mature supply chain ecosystems,” says Avi Avula, President, Applied Materials India.

While Applied Materials’ current focus in India is on product development, engineering and R&D, the company operates India’s only facility capable of processing 300-mm wafers. Its India Validation Center in Bengaluru serves as a hub for equipment design, simulation, testing, engineering and process validation; and an advanced Class 1K cleanroom supports inspection, diagnostics, prototyping and component qualification.

Beyond the Machines

Building a semiconductor fab is only the beginning. Operating one requires an uninterrupted flow of ultra-pure materials, specialty chemicals and industrial gases that form the backbone of chip manufacturing.

“Etching and deposition gases such as helium, ammonia and fluorine compounds are sourced from Qatar, Algeria, Australia, China and the United States. Specialty gases such as neon, xenon and krypton, critical for semiconductor production, are largely derived as by-products of steelmaking and sourced from China, Ukraine and Russia. Bulk gases such as nitrogen, oxygen, argon and hydrogen are supplied through a global network of industrial gas producers,” says Danish Faruqui, CEO of Fab Economics.

The dependence extends beyond gases. Semiconductor manufacturing also requires wafers, substrates, specialty chemicals, photoresists and packaging materials, many of which are sourced from Taiwan, Japan, Europe, South Korea and the US. Even companies establishing operations in India continue to source critical inputs from overseas.

“To be straightforward, the local ecosystem for semiconductor-grade materials is simply not there yet. Sourcing semiconductor-grade materials locally is indeed one of the most nuanced challenges we face today,” says Ashok Mehta, Founder and Director of Suchi Semicon. The company, setting up an outsourced semiconductor assembly and test (OSAT) facility in Surat, imports equipment from Malaysia, Singapore and Japan.

Where India Can Win First

For all the discussion around self-reliance, industry experts argue that the more practical question is not whether India can localise everything, but where it can realistically create value first.

Backend activities such as packaging, testing, modules and subsystem integration offer the most immediate opportunities because they require significantly lower ecosystem maturity than leading-edge semiconductor fabrication, says Manickam.

India also has opportunities to develop domestic capabilities in semiconductor-grade chemicals, materials and components through joint ventures, technology partnerships and strategic acquisitions.

One example is leadframes, a critical packaging material used extensively in legacy semiconductor packages. Leadframes are essentially copper structures coated with nickel-palladium plating and widely used across the OSAT facilities approved under the government's semiconductor programme. “Currently, 100% of leadframes are imported from China and Japan,” says Manickam. “This could easily be made in India, although the cost may be slightly higher initially due to lower volumes.”

Achieving Chip Sovereignty

Despite the scale of India’s import dependence today, industry experts believe it can be reduced substantially over the next decade as domestic manufacturing capacity and supplier ecosystems mature.

According to estimates by Fab Economics, import dependence could decline from more than 85% of fab project costs and around 50% of wafer manufacturing costs today to roughly 68% and 30%, respectively, by 2030. By 2035, those figures could fall further to 55% and 18%, bringing India closer to the supply-chain depth seen in established semiconductor hubs.

Getting there, however, will require far more than a handful of fabrication plants.

“Following ISM 1.0, India requires two additional incentive packages—ISM 2.0 and ISM 3.0—by 2030, aggregating to nearly $40 billion in subsidies across the Centre and states. This has to be followed by another two ISM 4.0 and 5.0 with incremental subsidy across the Centre and states of $20 billion each,” adds Faruqui.

According to Faruqui, the next phase of the semiconductor mission should focus on developing domestic materials, bare wafers and batch equipment manufacturing. Subsequent phases must expand into advanced packaging, glass and panel substrates, panel-level packaging technologies and eventually semiconductor manufacturing equipment itself.

In essence, India is not building a factory. It is attempting to build an entire industrial ecosystem, layer by layer. Yet, creating domestic suppliers is only half the battle. “The consumers of these inputs, namely fabs and OSATs, will have stringent quality and reliability pre-requisites and globally accepted testing processes while using any of the core ecosystem components to ensure that their output (processed wafer or final packaged component, etc.) qualifies the stringent end-customer requirement,” says Bhatnagar of KPMG.

Redefining Self-Reliance

For all the focus on reducing import dependence, industry experts argue that India’s semiconductor ambitions should not be measured by complete self-sufficiency.

According to NITI Aayog’s latest roadmap, India should aim to meet 15-25% of domestic semiconductor demand through local production by 2030, taking it up to 35-50% by 2035. Equally important is increasing value retention within the country, from 35-40% of the value of every chip consumed in India by 2030 to as much as 55-70% by 2035. Those targets are not unattainable but extremely ambitious.

According to McKinsey, roughly 60% of semiconductor materials and chemicals used by the US ecosystem continue to depend on foreign sources. “The goal is not to make everything in India, but to reduce and diversify risk for companies in India. It is about ensuring that no single supplier, customer or country can disrupt our capabilities," said Prithvideep Singh, General Manager at CDIL Semiconductors.

India may never manufacture every machine but the real prize would be to secure capability, capacity and influence to ensure that its digital future is determined as much in India as it is anywhere else.