India’s Deeptech Gambit Has Begun, But Nobody Knows The Rules Of The Game

Better late than never — a sentiment blazing across the Indian deeptech ecosystem — and at the centre of the cacophony lies the much-hailed INR 1 Lakh Cr corpus announced by the finance minister in the Union Budget 2024 to fuel research and development in sunrise sectors. 

More than a year and hordes of missed memos later, the fund has finally managed to receive approval from the Union cabinet under the Centre’s Research Development and Innovation (RDI) scheme earlier this month.  

With this, the deeptech ecosystem has breathed a sigh of relief, at least from the looks of it. However, behind closed doors, VCs and startups are famished for clarity.

How will the allocation take place? What guidelines will the Centre introduce? How much funding will be disbursed to sub-sectors and how? The stakeholders are groping in the dark.

Amid the haze of grandstanding, the government also approved a second tranche of INR 10,000 Cr deeptech fund allocation earlier this month. On top of it, the Centre is planning another INR 2,000 Cr initiative for drone tech. 

Together, these announcements, stakeholders say, are a little more than an eyewash and just enough to keep the flame of hope flickering until the target sectors are benefited in real time with real funds in hand. 

While that may take some time to realise, let’s understand how these allocations will tweak the script for India’s deeptech fairy story.

Making Sense Of The INR 1 Lakh Cr RDI Scheme

The major stumbling block for India’s deeptech sector is hardware innovation. Whether it is small electronics parts or something as complex as making a satellite, the Indian manufacturing arena is marred by sky-high capex, tech incompetencies and other production-related risks. 

Besides, deep research for anything novel is time-consuming, and hardly anyone wants to walk that road.

That’s not all, VCs often fight shy of making deeptech bets (think IP-led or R&D-heavy ventures) due to reasons like short fund lifecycles, exit pressures, and limited cheque sizes.

This is exactly where the government’s backing can tip the scales.

Now, as far as the government’s RDI scheme is concerned, the idea is to ease funding constraints for the private sector, including startups. However, the irony of the matter is that nobody knows how exactly the new scheme will augment R&D in deeptech. 

On the other hand, the government’s pitch is that it will encourage research, development and innovation in sectors that are critical for economic security, strategic interests, and self-reliance. It will also provide risk and growth capital in these areas.

Besides, the scheme plans to fund projects at higher technology readiness levels (TRL). 

While there is little clarity beyond this, the common understanding is that the government may end up providing support to companies that have a working prototype of a tech or have demonstrated such capabilities in controlled or real environments. 

So, How Does This Work?

As per industry experts, the allocation of the aforementioned INR 10,000 Cr FoF for deeptech will be part of the broader RDI scheme, which will have a two-tiered funding mechanism under an overarching strategic direction led by the governing board of Anusandhan National Research Foundation (ANRF), an apex body providing high-level strategic direction of scientific research in the country as per recommendations of the National Education Policy.

At the first level (tier I), a special purpose fund (SPF), established within the ANRF, will act as the custodian of funds. 

At the second level (tier II), money from the SPF will be allocated in the form of long-term concessional loans at low or zero interest rates.

As per industry experts, a multi-tier funding mechanism has been chosen because it offers various perks to the government, such as: 

• Involvement of various stakeholders in the investment community
• Allows the use of pension funds and other long-term financial vehicles
• Helps minimise risks associated, particularly in the sunrise sectors

Further, given that deeptech funding also demands deep industry know-how, which bureaucrats at the government often lack, the VC ecosystem may be approached to pitch in.

While the discussions at the government level are still ongoing, experts directly associated with this development believe that the deeptech FoF structure under the broader RDI scheme will work like the existing Fund of Funds for Startups (FFS), which was unveiled in 2016 to allocate capital to VCs via SIDBI. 

However, the broader INR 1 Lakh Cr fund might find different models and institutions for disbursal.

“The idea behind creating two tiers in the funding mechanism might be to encourage participation from different industry stakeholders and do appropriate risk mitigation,” Anshuman Tripathi, former member of the National Security Advisory Board and a defence tech consultant, told Inc42.

He added that deeptech funding requires extra due diligence towards viability and RoI. This is where VCs come into the picture.  

Sangeeta Gupta, senior vice president and chief strategy officer at Nasscom, believes that creating a multi-tier structure will also allow the government to remain flexible in terms of taking investment decisions.

“While we are waiting for more clarity, what the Centre likely wants is not to limit itself to one form of funding — either equity or zero commission loans. It would infuse capital based on the requirement, whether in areas that are mature or that need to create strong grounds for maturity,” Gupta said.

Why The Focus On R&D Now?

With the changing global paradigm, India has intensified its focus on R&D. Remember when OpenAI gave ChatGPT to this world? 

It was probably the first time that Indian entrepreneurs realised how many miles were yet to be travelled as they struggled with organising datasets and reducing processing time while trying to keep up with the constantly evolving world of machine learning.

Then happened OpenAI CEO Sam Altman’s visit to India, which further inspired us to introspect, as he raised questions on the country’s prowess to develop such a tech. 

Months later, China challenged the AI behemoth by building an open-source reasoning model, DeepSeek R1, for less than $6 Mn.  

This was the last straw that drove the Centre to rethink India’s AI proposition, and for the first time a Union minister publicly called out the startup ecosystem for lagging behind in deeptech R&D and innovation.

Then, intensified tensions between India and Pakistan became yet another eye-opener. As the countries were engaged in counter strikes, Pakistan’s indigenous drone capabilities came to the fore.

The US-China trade war has further triggered rare earth material concerns, affecting global supply chains.

Result? India is now doubling down on innovation in drones, space, semiconductors, sovereign AI, and materials science.

And, this momentum isn’t limited to defence. Rising global uncertainty is encouraging private investors to fund high-risk, high-reward deeptech projects.

In fact, investor interest in advanced hardware and tech is rising. Among 80 institutional investors surveyed by Inc42, 33% are open to funding early-stage startups in this space — second only to AI, which had 57% interest.

 

“Fund allocation from the government gives comfort to VCs to allocate funds across stages of a company with more ease and take a bit more non-consensus approach, backing startups or ideas that others are unsure about. With guidelines provided by the government under the FoF on return attributes and the kind of companies to invest in, we can be more flexible to back companies with a longer gestation period,” said Venkat Vallabhaneni, founder and MD of Inflexor Ventures.

Therefore, the RDI scheme and the deeptech FoF are going to act as catalysts for the sector both directly and indirectly in the coming years.

But, Something’s Missing?

A major missing piece in the equation is talent. Yes, deeptech needs funding, and some deeptech companies will emerge stronger with this support from the government. 

“But, we need to do a lot more. We also need to ask what’s next,” said Tripathi, who has been associated with decision-making around deeptech policies at the Centre for years. 

One of the major aspects of it, he believes, is access to talent, its retention, and building a proper framework for hiring talent from other countries that are deeptech superpowers. 

“This would considerably shrink the innovation and tech-building timelines,” he added.

As per Tripathi and a few other deeptech founders Inc42 spoke to, human capital or talent has remained a challenge for India to retain which, even today, leads it to losing many innovative ideas to other countries.

“We are seeing AI talent migrate to other countries. Whereas, if you look at countries like China, they are actually attracting back all the talent that may have migrated over the years. The RDI fund can play a critical role here, enabling even more participation from academia and more R&D to happen,” Nasscom’s Gupta said.

She wants the government to double down its focus on R&D in sectors such as robotics, defence, cybersecurity, climate tech, energy, and material sciences. Biotech is the other area where the deeptech ecosystem is extremely bullish on.

“I think ANRF must take the approach of identifying the sectors that are critical for India and drive investment in those areas, rather than adopting a first-come, first-served approach,” Gupta added.

Indeed, much needs to be done if India desires to stand among the deeptech superpowers. While there is a willingness to reach for the impossible, execution should be our only ally. And, any kind of ambiguity in the vision to put India on the deeptech global stage cannot be anything short of treacherous. 

While the INR 1 Lakh Cr deeptech bet has the potential to spark a century of innovation, the real question is — will it?

[Edited by Shishir Parasher]