India’s DLI-backed chip startups seek procurement push to stay Indian

Founders of semiconductor startups supported under India’s Design Linked Incentive (DLI) scheme have urged the government to back local chip design with procurement support and preferential market access, warning that many firms may struggle to remain Indian-owned without stronger demand for domestically designed chips.

The ₹1,000-crore DLI programme, launched to nurture a domestic fabless ecosystem, has so far backed 24 startups and MSMEs in chip design. Yet founders say there is little to no incentive for electronics manufacturers to actually use Indian-designed chips in products targeted at the domestic market, limiting the commercial runway for these companies even as they build technically competitive products.

‘Indian’ today, foreign-owned tomorrow?
Under current DLI norms, startups that receive support must retain Indian status for three years after their final milestone payout. Founders say this requirement may not be enough to preserve Indian ownership of strategically important intellectual property in the long run, given the capital intensity and long gestation cycles of semiconductor ventures.

Several DLI-backed firms are already attracting interest from overseas investors in Singapore and the US, according to founders. While some have so far avoided foreign capital to preserve domestic ownership, they acknowledge that severe capital constraints in India make external funding increasingly difficult to ignore. “There is no choice but for me to seek funds outside of India,” one founder said, pointing to the scarcity of large, patient domestic investors willing to underwrite high-risk semiconductor bets.

Ultimately, they argue, companies answer to investors and employees. If overseas capital offers better terms, faster scaling or a path to survival, founders concede that Indian ownership could be diluted substantially over time, regardless of national interest arguments.

No structural advantage for Indian chips
Founders say the core problem is not just funding, but the absence of structural demand for Indian chips. Current procurement norms, especially in public projects, focus on “Indian content” at the product level rather than on the origin of semiconductor components. This means electronics makers can satisfy localisation requirements by using Indian enclosures, PCBs or other hardware, while continuing to rely on foreign chips.

In sectors like surveillance and CCTV systems, which one founder described as a “low-hanging fruit” for domestic chip adoption, existing rules restrict the use of Chinese-origin components in certain deployments. However, they do not require or even encourage the use of Indian semiconductors. Device makers can switch to chips

from Taiwan, Singapore or other markets and still qualify under current procurement norms, leaving Indian chip startups with no inherent edge.

Even when Indian chips meet technical and quality benchmarks, founders say there is “no compelling reason” for OEMs to adopt them. Since semiconductors often account for only a small portion of overall project costs, buyers can meet localisation or cost targets through other inputs while continuing to source chips from global incumbents.

Cost disadvantages and NRE burden
Indian chip startups also face structural cost disadvantages versus established global players. Mature overseas competitors have long since amortised their non-recurring engineering (NRE) costs across large volumes, allowing them to price aggressively. By contrast, Indian firms are still absorbing heavy upfront costs for tape-outs, IP licensing and production-readiness.

According to one founder, full-mask NRE and associated IP costs for a chip can range from ₹1 crore to ₹70 crore, depending on complexity, even after accounting for DLI support. This cost overhang makes it hard for Indian companies to match the prices offered by international suppliers on comparable products, especially when customers are highly cost-sensitive.

Existing initiatives such as Standardisation Testing and Quality Certification (STQC) help limit certain imports, but do not directly translate into orders or price advantages for Indian chip designers. Founders argue that without some form of procurement preference or pricing benefit, local startups will continue to lose out in bids where the lowest cost wins.

Call for procurement preference and policy shift
To address these gaps, DLI-backed startups are calling for a more explicit procurement policy that favours domestically designed chips in government projects, particularly in security, surveillance and other mission-critical deployments. They propose targeted preferences or margins of purchase for Indian semiconductor products, while still requiring them to meet stringent quality and reliability standards.

“Every country does that,” one founder said, noting that major semiconductor nations use public procurement, defence and infrastructure projects to seed domestic chip ecosystems. In their view, a clear demand signal from government buyers would provide the “real incentive” for startups to remain headquartered in India and retain majority Indian ownership while they scale.

They also suggest that surveillance networks, public safety systems, and other large-scale electronics deployments could be early testbeds for Indian chips, provided procurement guidelines explicitly value domestic semiconductor content.

Tax and testing hurdles
Beyond market access, founders flagged taxation and regulatory frictions that add to the cost burden. One concern relates to engineering test chips that are fabricated abroad and imported into India purely for validation and R&D. Startups say they currently pay 18% GST on such test lots, even though these chips are not meant for commercial sale and are essential to the design cycle.

They argue that exempting or easing GST on test chips could materially reduce early-stage costs and encourage more design iterations and risk-taking. Similarly, founders note that there is no dedicated procurement framework recognising the strategic role of Indian chip startups, even as broader electronics policies emphasise localisation and trusted supply chains.

Risk of missed opportunity
The founders’ warnings underscore a broader tension in India’s semiconductor push: while design capabilities and early-stage funding are improving, policy instruments on the demand side have yet to fully align with the strategic objective of building and retaining Indian-owned semiconductor IP.

Without stronger domestic market pull, especially via government procurement, founders fear that promising DLI-backed startups may either relocate, become foreign-controlled, or be outcompeted on price by global incumbents whose costs are already amortised. In that scenario, India risks nurturing the early stages of an ecosystem only to see its most valuable assets and IP move abroad as companies chase capital and customers.

CT Bureau