India’s Economic Security Begins In Its States

In February 2024, the Union Cabinet approved India’s first commercial semiconductor fabrication plant to be developed at Dholera in Gujarat. Its success depends on reliable power, ultra-pure water, suitable land, skilled technicians and effective coordination among local agencies. By May 2026, twelve semiconductor projects involving proposed investments of approximately ₹1.64 lakh crore had been approved under the India Semiconductor Mission. In July, the Cabinet approved Semicon 2.0 with a budgetary outlay of ₹1,27,500 crore. Every project must ultimately take shape in a particular district of a particular state. Where strategic production happens is not merely a matter of administrative detail but also an economic-security decision.

India’s economic-security debate operates largely at two levels. The Centre identifies strategic dependencies and finances incentives. Firms decide where to invest. Between them stands the state government, whose capabilities help determine whether investment becomes a functioning industrial ecosystem. Land and water are principally state responsibilities. Electricity is concurrent, but distribution is largely managed by state utilities and regulated by state commissions. A subsidy, by itself, cannot energise a substation or clear a disputed land title.

Three propositions follow. First, economic security is implemented geographically. National policy succeeds only where productive and institutional capabilities exist. Second, industrial strength is not resilience. Concentration generates efficiency but can also amplify exposure to local shocks. Third, India’s federal diversity can become a strategic asset. This is the principle of capability federalism.

Capability federalism means developing specialised productive capabilities across states while ensuring that strategically critical functions have credible alternatives through qualified suppliers, production locations and resilient infrastructure networks. Gujarat and Maharashtra illustrate the argument. They possess different industrial capabilities, although neither their strengths nor their differences establish national resilience.

Gujarat has emerged as the anchor of India’s semiconductor programme. Six of the twelve approved projects are located there, including the Tata–PSMC fabrication plant at Dholera and Micron’s assembly and testing facility at Sanand, which began operations in February 2026. The six projects represent approximately ₹1.28 lakh crore in proposed investment, nearly four-fifths of the national total. This is a concentration of investment commitments, not completed production capacity.

Gujarat combines industrial infrastructure, ports, chemical industries and substantial incentives. Its semiconductor policy provides capital assistance equivalent to 40% of eligible central assistance. The enduring test is whether these incentives create competitive supplier networks, skills and infrastructure.

Maharashtra brings a different depth. According to the Annual Survey of Industries 2024–25, it contributes 15.92% of India’s registered manufacturing gross value added, against Gujarat’s 14.10%. Maharashtra accounts for 13.08% of factory employment but 17.64% of factory emoluments, indicating higher average remuneration. Maharashtra's Pune, Chakan, Nashik and Chhatrapati Sambhajinagar clusters have extensive engineering and supplier networks. Jawaharlal Nehru Port Authority in Raigad handled 8.17 million twenty-foot equivalent units (TEU) in 2025–26. The issue is not about which state is more successful. It is whether their different capabilities can contribute to a national production system that is both competitive and resilient.

Industrial clustering is often a sound policy choice. Since Alfred Marshall, economists have explained why firms gain from proximity through shared suppliers, specialised workers and the exchange of knowledge. A semiconductor fab cannot be recreated simply by allocating land elsewhere. Dispersing such facilities for regional symmetry could destroy the efficiencies that make them viable.

Yet concentration creates shared infrastructure vulnerabilities. On 12 October 2020, a cascading transmission failure blacked out Mumbai and surrounding areas, disrupting suburban rail services and forcing hospitals onto backup power. The episode demonstrated how failure at a critical infrastructure node can propagate across an advanced metropolitan economy.

Factories face similar dependencies. Geographically separated plants may rely on the same specialised equipment, chemicals, suppliers or logistics networks. The relevant distinction is between productive capacity, what a place can manufacture under normal conditions, and strategic resilience, what the wider economy can continue producing when a critical node fails. The obvious objection is cost. India is still developing its first commercial fab and cannot justify duplicating such investments merely for redundancy.

But some vulnerabilities can be addressed more economically. In semiconductor packaging, specialty gases, battery materials and mineral processing, alternative capacity may be developed at substantially lower cost than duplicating a fabrication plant. The objective is not maximum dispersion. It is the lowest-cost credible protection against strategically consequential disruption.

Japan demonstrates both industrial concentration and shared dependencies. Aichi and neighbouring Shizuoka have sophisticated manufacturing ecosystems through decades of investment in suppliers, skills and industrial institutions. In 2023, Aichi accounted for approximately 14.5 per cent of Japan's manufactured shipments, the highest among its prefectures. The 2011 earthquake halted Renesas’s Naka semiconductor plant in Ibaraki. Renesas then supplied roughly 40 per cent of the global automotive microcontroller market, making the disruption particularly consequential for international carmakers. In March 2022, a systems disruption at Toyota supplier Kojima Industries forced Toyota to suspend all 28 production lines at its 14 domestic plants for a day.

The incidents reveal different vulnerabilities: one involving physical disruption, the other a critical supplier dependency. Geographic dispersion alone cannot resolve either. Japan’s experience suggests that resilience requires understanding where critical functions are concentrated, how production networks are connected and how quickly disrupted capacity can be restored.

The India–Japan State–Prefecture Partnership Initiative launched in 2025 offers an opportunity to connect Indian states with Japanese industrial regions through technology, supplier development and skills. Such partnerships could deepen India’s productive capabilities while creating additional options for Japanese firms.

Capability federalism needs three instruments. First, industrial incentives must be linked to local infrastructure performance. Semicon 2.0’s implementation framework should evaluate power reliability, industrial water, logistics and administrative execution alongside project economics. Central support should be disbursed against verified infrastructure milestones. State utilities and infrastructure agencies should enter enforceable service-level agreements covering supply reliability, restoration times and independent backup arrangements.

Second, a National Strategic Production Resilience Assessment should be established, beginning with semiconductor packaging, battery materials, critical-mineral processing and essential pharmaceutical inputs. Firms receiving substantial public support should confidentially disclose material supply-chain dependencies and provide scenario-based estimates of two metrics developed by David Simchi-Levi and colleagues at MIT. Time-to-recover is how long disrupted capacity takes to resume production. Time-to-survive is how long downstream production can continue at an acceptable level without that capacity. Where recovery exceeds survival, policymakers should assess the strategic consequences and compare the costs of inventories, alternative suppliers, faster restoration and qualified capacity elsewhere.

Third, state incentives should be aligned with national resilience rather than subsidy competition. Semicon 2.0 should require transparent assessment of combined central and state support and discourage incentives that merely shift investment between locations. Instead of automatically rewarding higher capital subsidies, the Centre could offer targeted co-financing for critical suppliers establishing economically viable alternative capacity in locations with independent infrastructure and supply-chain risks. Alternative capacity should receive support only where measurable national resilience benefits justify its additional cost.

India does not need every state to manufacture everything. It needs a network of capable places which are specialised enough to compete, connected enough to complement one another and sufficiently adaptable to prevent local disruption from becoming national vulnerability. The plant may be announced in Delhi, but its resilience must be built in the states.

(This article is authored by Ashish Kumar Singh, IAS (Retd.), Distinguished Fellow, Observer Research Foundation (ORF). Views expressed are personal.)