India's semiconductor drive has largely been led by New Delhi, which selects projects for large central incentives while state governments add their own packages of land, infrastructure and financial support. Tamil Nadu is now giving semiconductor investors another route.
The southern Indian state has introduced a scheme that can support eligible semiconductor projects even if they do not receive funding under the central government's Semicon 2.0 programme, giving chipmakers and suppliers greater scope to seek incentives directly from a state government.
For overseas semiconductor companies considering India, the change could affect site-selection decisions and give individual states greater influence over which parts of the chip supply chain develop within their borders.
It also raises the prospect of stronger competition among Indian states for projects in materials, equipment, testing, packaging and specialty semiconductors.
Under Tamil Nadu's previous semiconductor policy, the manufacturing incentive disbursement was tied to approval and financial assistance from the central government. The new Semiconductor Ecosystem Scheme creates a separate track for eligible projects that either have not applied for Semicon 2.0 support or applied but were not selected.
Those projects can receive fixed capital subsidies ranging from 15 to 25% of eligible fixed assets, depending on the category, as well as turnover-linked subsidies of up to 2% annually for five years.
New Delhi will remain the dominant source of semiconductor funding. Semicon 2.0, approved in July, has an outlay of INR1.275 trillion (approx. US$14 billion) and covers six areas including chip design, equipment and materials, fabs, advanced packaging, research and talent development.
But Danish Faruqui, CEO of Fab Economics, a US-based advisory focused on greenfield semiconductor and AI projects, said state-only support could work better for semiconductor niches with lower investment barriers than large silicon fabs.
Fab Economics modelling points to areas including gallium nitride and silicon carbide manufacturing, glass substrates, legacy assembly and packaging, and Micro LED production as potential candidates.
Suppliers could benefit
The bigger opportunity may lie in the supporting supply chain.
Faruqui, also co-chair of the Global Semiconductor Policy Council (GSPC), said projects involving specialty chemicals, ultra-high-purity gases, testing and characterization, substrates and semiconductor-equipment components require less capital than major wafer fabs but can help create a more durable manufacturing cluster.
Tamil Nadu's scheme explicitly covers semiconductor-grade raw materials, testing and characterization facilities, semiconductor-equipment R&D, and equipment and component manufacturing, assembly and refurbishment.
That is significant for a state that already has a large electronics manufacturing base. Tamil Nadu has been India's leading electronics exporter in recent years and has sought to move further upstream from electronics assembly into components and semiconductor-related activities.
Faruqui argues that India could benefit if its states specialize rather than each attempting to recreate the entire semiconductor value chain.
Gujarat has already attracted Tata Electronics' Dholera wafer fab and multiple semiconductor packaging projects, while Faruqui sees Tamil Nadu as better positioned to expand in packaging, equipment and specialty materials. In his model, Karnataka and Telangana would build further on their chip-design and R&D bases.
"No single state has the capital, natural resources, or varied talent required to house a full-stack semiconductor ecosystem entirely within its borders," Faruqui said.
For international suppliers, such specialization could eventually create several distinct entry points into India rather than a semiconductor industry concentrated in one region.
Risk of subsidy shopping
Greater state autonomy also carries risks. Faruqui warned that companies could play regional governments against each other to secure larger grants, cheaper land, lower power costs and other concessions, creating what he called "subsidy shopping."
States could then spend heavily on projects that fail to reach meaningful production or attract a lasting supplier ecosystem, he said.
Faruqui said incentives should therefore be tied to measurable performance, with clawback provisions where companies fail to meet agreed operating, investment or employment commitments.
The issue will become more important if other Indian states adopt similar routes outside central project selection.
For foreign semiconductor companies, that could mean more locations competing for their investment. For India, the test will be whether the competition produces specialized regional clusters or simply pushes subsidy costs higher.
Faruqui said success over the next three to five years should be judged less by the value of investment memorandums announced and more by whether projects reach production, generate revenue and attract additional suppliers.
Tamil Nadu's scheme therefore represents more than another incentive package. It is an early test of whether giving Indian states greater freedom to choose and support semiconductor projects can deepen the national supply chain without triggering a race for subsidies.
Article edited by Jack Wu
