In a move as significant as the historic India-US nuclear agreement of 2008, the United States military has partnered with India to establish the world’s first multi-material fabrication unit dedicated to national security. This cutting-edge semiconductor facility will produce high-tech chips for military hardware in both countries, as well as for critical telecommunications networks. The collaboration marks a groundbreaking agreement, as it is the first time the US military has entered into a technology partnership of this magnitude with India.

The announcement was made on the sidelines of the recently concluded Quad Summit—a strategic forum consisting of the US, India, Australia, and Japan. This partnership is part of India’s broader goal to create a robust domestic chip-manufacturing ecosystem, as outlined by Prime Minister Narendra Modi in his recent Independence Day address. “Our dream is that every device in the world will have an Indian-made chip,” he said, highlighting the government’s vision.

With semiconductors powering everything from smartphones to cars, weapons systems, and artificial intelligence, India is positioning itself to play a key role in the global chip supply chain. This initiative is seen as a crucial step to ensure the country does not miss out on the ongoing silicon revolution, avoiding past mistakes when it bypassed industrial manufacturing and jumped from an agriculture-led to a service-led economy.

The Indian government has repeatedly stressed the importance of staying ahead in technological advancements, having taken early strides in 5G, 6G, and now with semiconductors and quantum computing. To bolster its semiconductor manufacturing capabilities, the government has rolled out several initiatives, including offering 50 per cent financial support for chip production and launching a Critical Mineral Mission to secure vital resources.

The government is also setting up a Semiconductor Research Centre in collaboration with leading IITs and implementing a workforce development plan aimed at training 85,000 technicians and engineers. The newly launched Anusandhan National Research Foundation, with a dedicated Rs 1 trillion fund announced in the recent budget, is expected to energise India’s research ecosystem and foster innovation in cutting-edge semiconductor technology. States like Gujarat, Karnataka, Tamil Nadu, Odisha, Assam, and Uttar Pradesh have also introduced their own semiconductor policies, with more states expected to follow, reflecting a nationwide push to become a global leader in the semiconductor industry.

Critics, however, highlight several challenges in the government’s push to develop silicon manufacturing in India. Establishing a semiconductor fabrication plant requires vast capital investment, often amounting to tens of billions of dollars, along with cutting-edge technology. India currently lacks the advanced infrastructure, skilled labour, and intricate ecosystem needed to support such a high-tech, complex supply chain.

While estimates suggest that India has 20 per cent of the world’s semiconductor design engineers, a recent KPMG study noted that India will require 1.2 million skilled workers in the semiconductor sector by 2032. Former RBI Governor Raghuram Rajan has consistently pointed out that the government’s subsidies are capital subsidies provided upfront rather than being tied to production, as seen in production-linked incentives (PLIs) in other sectors. He cautioned that if the government’s timeline for chip production is to be taken seriously, these subsidies must be disbursed soon. Rajan also emphasised that India is likely to produce only 28 nm chips, while modern smartphones rely on 3 nm chips, the cutting-edge standard. To compete globally, India would need to subsidise multiple generations of chip factories, with costs rising as more advanced manufacturing technologies become necessary.

In a free-market economy, the Heckscher-Ohlin model suggests that countries should specialise in areas where they have a comparative advantage, implying that India should leave chip production to Taiwan, the US, and China. However, given shifting global dynamics and ever-changing geopolitical challenges, India cannot afford to miss the critical silicon revolution.

Let us look at what China, one of the biggest consumers of chips, is doing today. As Chris Miller writes in Chip War: The Fight for the World’s Most Critical Technology, China’s original “Malacca Dilemma”—its concern about heavy dependence on the Strait of Malacca, a narrow waterway between Malaysia and Indonesia, for energy imports—has shifted. Around 80 per cent of China’s oil imports pass through this strait, making it a strategic chokepoint. Any disruption, whether from geopolitical tensions, piracy, or military blockades, could critically affect China’s energy security. However, this is no longer China’s main concern today. Now, it faces a “blockade measured in bytes rather than barrels”, as Miller notes.

Fearing that its dominance in global tech infrastructure would be undermined, the US barred China-based Huawei from purchasing advanced computer chips made with US technology. This has alarmed China, which now spends more on importing chips than on oil. In response, China is investing heavily in developing its own semiconductor technology.

While India need not emulate the scale at which China is developing its chip manufacturing capabilities, the government’s priorities, given the critical role of semiconductors today, are not misplaced. Currently, 75 per cent of the industry’s global capacity is concentrated in East Asia. Localising production, coupled with an interconnected labour force, will foster “learning by doing”, thereby driving down production costs over time. Apart from ensuring the domestic supply of a critical component, focussing on semiconductor manufacturing could significantly boost India’s productivity.

A recent IMF report suggests that, with global productivity growth faltering, investing in advanced semiconductor technologies could be the key to unlocking new levels of efficiency and economic dynamism, revitalising productivity, and optimising resource allocation across the economy. India can leverage its strong semiconductor manufacturing ecosystem to drive digital transformation in green energy, healthcare, education, and governance.

As India takes baby steps in this field, there is a need for greater investments, public-private partnerships, and strong collaboration between industry and academia. The current spending of 0.7 per cent of GDP on research and development is low to build a thriving research- and capital-intensive industry. Experts have long argued for increasing India’s R&D spend to 3 per cent of GDP. While there is still a long way to go, India’s efforts in the semiconductor industry could position it as a key player in the global market when the chips are down.

Puneet Kumar Arora is an Assistant Professor of Economics at the Delhi Technological University, India. Jaydeep Mukherjee is a Professor of Economics at Shiv Nadar University, Chennai. Views expressed in the above piece are personal and solely those of the authors. They do not necessarily reflect Firstpost’s views.