Indian deep tech and a case for a strategic fund

Indian deep tech and a case for a strategic fund

Prime Minister Narendra Modi is making a concerted push for self-reliance in military technology, semiconductors and science-based businesses. However, there is a market failure where typical venture capital will not invest in this asset class, and government money is not nearly enough or is not fast enough. In order to become a developed country in 25 years, India will need to build world-class deep tech capabilities in certain sectors.

To solve this market inefficiency, here is a case for an India Strategic Fund. Certain innovations in the existing corporate social responsibility (CSR) budgets and high net worth (HNI) tax breaks will incentivise capital flowing into strategic tech.

Our way of life, economic and national security are underpinned to certain general purpose technologies (GPTs). Today, four technology battlegrounds exist, i.e. semiconductors, 5G, revolutions in biology and autonomy. Each of these is vulnerable to military conflict, health emergencies and natural disasters. They are dual use and have steep entry barriers. They are also areas where India is still at the base of the ladder. Self reliance is not just a ‘feel good’ slogan. It is a survival imperative.

Crucial role of funding

A look at the booming start up ecosystem of Bengaluru is revelatory. There are 10-minute grocery delivery and new fintech unicorns popping up in every corner. But where is India’s answer to ARM, NVIDIA, or Hawkeye 360? The answer is plain and simple. It does not exist. And it will not till such time as there is a dedicated pool of funds to tap into.

In the United States, Israel and North Atlantic Treaty Organization countries, government is still the largest source of funds for Deep Tech — a cutting-edge, quantum jump in capability that creates an intellectual property moat. Billions of dollars of funding flow in through agencies such as the Defense Advanced Research Projects Agency, the Directorate of Defense Research and Development and the Defence and Security Accelerator, much of which becomes the oxygen that small businesses survive on.

This has allowed start ups to emerge as a bridge between the IEEE publications or bench top prototypes of academia and production-hungry large industry. In India, this bridge remains unbuilt.

The relevant question is why? The answer: it all boils down to money.

Globally, venture capital is cautious when it comes to Deep Tech. The Indian venture capital ecosystem is not even willing to discuss it. An Indian investor agreeing to fund a laser start up from an IIT Madras laboratory or a battery company out of IIT Mumbai still exists in the realm of the imagination. Not only do investors not understand Deep Tech but also investing in fundamental technology does not fit the 10-year fund return cycle because it takes much longer to mature.

Deep Technology is almost always dual use. For example, position navigation timing technology such as GPS is needed for Google Maps and Uber but is also an extremely important aspect for fighter jet navigation and missile systems.

While the western rhetoric is now beginning to shift towards increasing the military utility of commercially available technology, we need to be cognisant of the fact that strategic technology cannot become the burden of commercial industry alone.

Redirecting CSR and tax incentives

While the Government of India is changing with the launch of the Indian Semiconductor Mission and the Ministry of Defence’s flagship iDEX and TDF schemes, depending solely on an already stretched pool of funding is not the solution to galvanise the ecosystem.

There are two avenues to build a movement of patriotic capital.

CSR budgets: by some estimates, the annual CSR budget is ₹15,000 crore, of which a substantial portion goes unutilised. CSR has traditionally been utilised for the social sector. However, this growing corpus should also be used for the development of strategic technology. Large corporations can be incentivised to use some of this budget to serve the strategic needs of the nation. The Government should allow these funds to flow into certain strategic tech startups.

HNIs can also be offered tax incentives to make equity investment in the same critical technology startups which would otherwise be frowned upon as high-risk investments. This would help mitigate the pinch felt with lower short-term returns. The corpus of investment should be tax deductible and no more than a certain percentage of annual income.

To prevent a misuse of funds, it is important to create qualifying criteria. The pool of investable companies must be limited to Government of India-recognised start ups; startups should have funding or ‘acceptance of necessity’ granted from the Indian military/Ministry of Defence.

Staying the course

India will remain a net importer of critical technology in the foreseeable future. While the Prime Minister’s vision for an Atmanirbhar Bharat has created the right momentum, it will take close to a decade or more to fructify. If correctly aligned with the programmes launched by the Government, CSR funds and the right tax incentives to HNIs can create an almost self-fulfilling prophecy in the nascent Indian Deep Tech ecosystem.

The Prime Minister talks about his ambition for a developed India; an India that is a superpower. Investing in deep, critical technology is the first step for the country to awaken to that ambition.