Indian Deep Tech and a case for a strategic fund (07 November 2022)
The Prime Minister is making a deliberate effort to increase self-sufficiency in military Technology, semiconductors, and science-based industries. However, there is a market failure in that traditional venture capital will not invest in this asset class, and government money needs to be more sufficient and quick. India will need to establish world-class deep tech skills in specific industries to become a developed country in 25 years.
Regarding deep Technology:
Deep Technology, often known as hard tech, is based on high technical creativity or substantial scientific advancements, as opposed to shallow Technology, which is based on gradual improvement from current tech concepts. Deep tech is frequently radically new and aims to solve challenging and practical challenges.
They create obstacles that may require extensive research and development and a significant capital commitment before effective commercialization. Their major risk is the technical risk, but the market risk is frequently substantially smaller due to the apparent societal value of the solution. Deep tech and complex tech firms tackle fundamental scientific or engineering difficulties that generate valuable intellectual property (IPR) and are difficult to replicate.
Time for an India Strategic Fund:
To address this market inefficiency, we must look forward to establishing an "India Strategic Fund." Specific changes in existing CSR budgets and high net worth (HNI) tax benefits will encourage cash to flow toward strategic Technology.
Certain general-purpose technologies (GPTs) support our way of life, economy, and national security. There are four technical battlegrounds today:
- 5G communications technology.
- Revolutions in biology.
- The Technology of autonomy (e.g., AI).
Each of these is subject to armed warfare, public health crises, and natural calamities. They are dual-use technologies (that may be utilized for both civilian and military applications) with high entry barriers. They are also locations where India remains at the bottom of the food chain. So India's self-reliance in deep Technology is more than simply a "feel good" mantra. It is a matter of life and death.
Funding plays a critical function:
- Government is still the primary funding source for Deep Tech in developed or NATO nations – a cutting-edge, quantum leap in capabilities that creates an intellectual property moat. Billions of dollars in financing are channeled via agencies such as the Defense Advanced Research Projects Agency and the Directorate of Defense Research and Development. Much of it serves as the oxygen that small enterprises require to thrive.
- As a result, start-ups have emerged as a link between IEEE articles or benchtop prototypes in academia and production-hungry huge industry. This bridge remains unbuilt in India due to a lack of financing.
- When it comes to Deep Tech, venture capitalists throughout the world are hesitant. The Indian venture capital ecosystem is unwilling to invest in risky yet groundbreaking concepts. An Indian investor agreeing to support a laser start-up from an IIT Madras laboratory or a battery start-up from IIT Mumbai is still a fantasy. Investors need to comprehend Deep Tech, and investing in basic Technology also does not match the 10-year fund return cycle since it takes considerably longer to mature.
- Deep Technology nearly usually has a dual purpose. Position navigation timing technology, such as GPS, is required for Google Maps and Uber, but it is also critical for fighter aircraft navigation and missile systems.
- While western discourse is shifting toward boosting the military value of commercially accessible Technology, we must remember that strategic Technology cannot be only the responsibility of commercial business.
The way forward: Redirecting CSR and tax incentives:
- While the Indian Government is changing with the establishment of the Indian Semiconductor Mission and the Ministry of Defense's flagship iDEX and TDF programs, relying exclusively on an already stretched source of money is not the answer to galvanizing the ecosystem.
Deep tech financing can be obtained through two channels:
- CSR budgets:
- According to some estimates, the yearly CSR funding is 15,000 crore, with a significant chunk going unutilized.
The Companies Act of 2013 is a significant piece of legislation that established India as the first to require and quantify CSR spending. The inclusion of CSR is the Government's aim to involve companies in inclusive growth, welfare, and national development. Companies in India are currently required to spend at least 2% of their average net earnings produced in the three prior fiscal years in each fiscal year.
- CSR has historically been used in the social sector. However, this expanding corpus should also be exploited to build strategic technologies. The Government should enable this money to flow into key innovation firms in industries like semiconductors, artificial intelligence, space exploration, and information technology.
- HNIs (high net worth individuals):
- HNIs may also be awarded tax breaks for investing in important technological businesses that would otherwise be considered high-risk investments. This would assist in alleviating the pain associated with decreased short-term returns. The investment corpus should be tax deductible and not exceed a specific proportion of annual income.
High net-worth people (HNIs) have an investible surplus that exceeds a specific level set by the Government for tax reasons.
- To avoid financial mismanagement, qualifying criteria must be established. The pool of investable enterprises must be confined to start-ups recognized by the Government of India; start-ups should receive finance or 'approval of necessity' from the Indian military/Ministry of Defense.
In the near future, India will continue to be a net importer of key technologies. While the Prime Minister's vision for an Atmanirbhar Bharat has generated the necessary momentum, it will take a decade or more to materialize. When adequately linked with the Government's programs, CSR funding and the right tax incentives to HNIs might generate a self-fulfilling prophecy in the young Indian Deep Tech ecosystem.