CSR funds and tax incentives can fuel a nascent Indian deep tech ecosystem, if aligned properly with government programmes.
CSR funds and tax incentives can fuel a nascent Indian deep tech ecosystem, if aligned properly with government programmes.
Prime Minister Narendra Modi is making a concerted effort 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 funding is not nearly enough or not fast enough. To become a developed country in 25 years, India will need to build world-class deep technological capabilities in certain areas.
To address this market inefficiency, here is the case of “India Strategic Fund”. Some innovations in the current Corporate Social Responsibility (CSR) budget and high net worth (HNI) tax breaks will encourage capital inflows into strategic technology.
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Our way of life, economic and national security is based on some General Purpose Technologies (GPT). Today, four technology battlefields exist, i.e. revolutions in semiconductors, 5G, biology and autonomy. Each of these is vulnerable to military conflicts, health emergencies and natural disasters. They are dual-use and have barriers to entry. They are also areas where India is still at the base of the ladder. Self-reliance is not just a slogan of ‘feel good’. It is a survival imperative.
important role of funding
A look at Bengaluru’s emerging start up ecosystem is a revelation. There are 10-minute grocery delivery and new fintech unicorns popping up around 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 won’t unless there is a dedicated pool of funds to tap.
In the United States, Israel and North Atlantic Treaty Organization countries, the government is still the biggest source of funding for deep tech – a cutting-edge, quantum jump in capacity that creates an intellectual property gap. Billions of dollars flow through agencies such as the Defense Advanced Research Projects Agency, the Defense Research and Development Directorate, and the Defense and Security Accelerator, much of which becomes the oxygen on which small businesses survive.
This has allowed start-ups to emerge as a bridge between IEEE publications or bench top prototypes of academia and production-hungry big industry. This bridge remains incomplete in India.
The relevant question is why? Answer: It all boils down to money.
Globally, venture capital is cautious when it comes to deep tech. The Indian venture capital ecosystem is unwilling to even discuss it. An Indian investor to fund a laser start-up from an IIT Madras laboratory or a battery company out of IIT Mumbai is still in the realm of imagination. Not only do investors understand deep tech, but investments in fundamental technology also do not fit into the 10-year fund return cycle as it takes a long time to mature.
Deep technology is almost always dual-use. For example, GPS-like position navigation timing technology is required for Google Maps and Uber, but it is also an extremely important aspect for fighter jet navigation and missile systems.
While Western rhetoric is now shifting toward exaggerating the military utility of commercially available technology, we need to be aware of the fact that strategic technology alone cannot become the burden of commercial industry.
Redirecting CSR and Tax Incentives
While the Indian government is changing with the launch of the Indian Semiconductor Mission and the Defense Ministry’s flagship iDEX and TDF schemes, relying only on an already expanding pool of funding is not the solution to galvanize the ecosystem.
There are two ways of building the movement of patriotic capital.
CSR Budget: According to some estimates, the annual CSR budget is ₹15,000 crore, of which a major chunk goes unutilized. CSR has traditionally been used for the social sector. However, this growing fund should also be used for strategic technology development. Large corporations may be encouraged to use some of this budget to meet the country’s strategic needs. The government should allow these funds to flow into some strategic tech startups.
HNIs may be offered tax incentives for making equity investments in the same critical technology startups that would otherwise be treated as high-risk investments. This will help mitigate the pinch felt with low short-term returns. The investment amount should be tax deductible and should not exceed a certain percentage of the annual income.
It is important to create eligibility criteria to prevent misuse of funds. The pool of investible companies should be limited to start ups recognized by the Government of India; Startups should have a grant or ‘sanction of need’ from the Indian Army/Ministry of Defence.
stay the course
India will continue to be a net importer of critical technology in the near future. While the Prime Minister’s vision for an Atmanirbhar Bharat has created the right momentum, it will take nearly a decade or more for it to flourish. If properly aligned with the programs launched by the government, CSR funds and the right tax incentives to HNIs can predict a near self-fulfillment in the nascent Indian deep tech ecosystem.
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PM talks about his ambition for a developed India; An India which is a superpower. Investing in deep, critical technology is the first step in fueling that ambition in the country.
Vrinda Kapoor and Vinayak Dalmiya work at the intersection of national security and technology