#146 Budget Analysis: AI, R&D, and Innovation
In this edition of Technopolitik, Bharath Reddy and Sridhar Krishna analyse the implications of the Union Budget 2026-27 on AI, R&D, and innovation. This is part 1 of the Budget Analysis.
Read part 2 of the analysis on Semiconductors, Cloud Services, and Rare Earth Minerals here.
This newsletter is curated by Anwesha Sen.
Budget speeches over the last two decades on education, skilling and jobs
The 2026 budget speech marks a significant shift towards the services sector as a core driver of Viksit Bharat. The government has a clearly stated ambition of achieving 10% global share in services by 2047 and moves beyond the goal of providing general education to the population to creating specialised professionals for the world.
Between 2004-2010, the budget had a focus largely on access to primary education through initiatives such as “Sarva Siksha Abhiyan” and the Mid-day meal scheme. Job creation at that time was more around providing some employment for unemployed and unskilled rural youth through the National Rural Employment Guarantee Scheme (NREGS). The 2014-2016 speeches shifted focus from rural employment to “Make in India” and manufacturing as the engines of employment growth. Simultaneously, the emphasis was also on “Digital India” and improving broadband connectivity.
The more recent budgets focused on digital infrastructure, digital skilling, and offered wage subsidies to first time employers and proposed internships in top 500 companies. The current shift towards the services sector is a clear acknowledgment of the transformative changes happening in the “nature of work” across the globe.
This year’s speech looks at AI as more than just a tool but rather as a fundamental shift in the labour market. A high-powered standing committee is being set up to assess the impact of AI on jobs and the new skills required to be successful in this market. The Finance Minister also indicates the intention to mandate the teaching of AI in schools and not just about upskilling existing professionals.
The development of niche high-value professionals is a new and welcome shift in focus. Instead of only leveraging our labour cost advantage, the government today is upping its ambitions and intending to establish institutions for allied health professionals, upgrading the National Council for Hotel Management to a National Institute of Hospitality and on Artificial Intelligence. Going forward, the government wants to look for gaps to unlock employment potential in specific sub sectors, including standard setting and accreditation.
India AI Mission
India’s approach towards government expenditure on AI seems to focus on use cases that have a benefit for the common person – healthcare, agriculture and education. The indigenous models funded under the mission are also intended to serve as multilingual or multimodal (text, speech, etc.) interfaces between citizens and services. The cutting edge of reasoning and thinking tasks still resides in frontier models from US or Chinese labs. The Indian approach seems to focus on the diffusion of AI to transform everyday experiences for the common person. All of the 11 mentions of AI in the budget speech are references to such use cases across governance, agriculture, accessibility, education and skilling.
The revised expenditure estimates for the India AI mission have come down from the budgeted ₹2,000 crores to 800 crores for 25-26. The budget for 26-27 is also similar at ₹1,000 crores. This seems lower than the 10,300 crores that were allocated under the mission over a five-year period.
Here is a split of the total budget allocation across the different pillars of the IndiaAI mission that was shared in response to a Lok Sabha question that was shared in Dec ‘24.
Over 85% of the over ₹1,100 crores subsidy disbursed under the compute pillar of the IndiaAI mission has been directed towards the development of indigenous generative AI models. Projects like Sarvam, BharatGen, Zenteq, SoketAI, Gnani.ai, Gan.ai, and Avataar AI are recipients of these subsidies. Much of the expenditure under the AI mission so far seems to be towards the compute subsidies which also constitute over 40% of the total budget allocated for the mission. This likely serves two purposes: create demand for domestic data centres and subsidise priority sector use cases (currently dominated by indigenous models). In addition, the tax breaks on data centres also announced under the current budget will likely have a much broader impact on creating demand for domestic data centres. The other pillars of the AI mission seem to not be getting much attention in terms of funding.
The investments under the research, development and innovation fund and the national research foundation also include some expenditure towards AI. They also address a more foundational problem of strengthening the research and innovation ecosystem in academia and industry which is essential for long term resilience.
Research, Development and Innovation (RDI) Fund
The scheme aims to strengthen India’s capabilities in strategic technologies and promote technological self-reliance. It focuses on technologies that are at advanced stages of development (technology readiness levels 4 and above). It will also facilitate setting up a Deep-Tech Fund of Funds. The scheme aims to catalyse private sector investment in R&D with a total outlay of ₹1 lakh crore over six years. The budget amount for FY26-27 is ₹20,000.
This fund will operate through a two-tier funding structure. A Special Purpose Fund (SPF) will be created under the Anusandhan National Research Foundation (ANRF). Long-term loans at concessional rates will be provided from SPF to multiple second-level fund managers. These managers will then provide long-term loans to private companies at zero or low-interest rates. In case of startups, fund managers may also finance in the form of equity investments.
The scheme will focus on mission-critical areas that are vital for national development and global competitiveness, including:
Energy security and transition, and climate action;
‘Deep technologies’including quantum computing, robotics and space;
Artificial intelligence and its applications to Indian problems including in agriculture, health, and education
Biotechnology, biomanufacturing, synthetic biology, pharma, and medical devices;
Digital economy including digital agriculture
National Research Foundation (NRF)
This aims to address the pressing need for a professional and comprehensive research framework that directs human and material resources towards carrying out well coordinated research across disciplines and across all types of institutions. The overarching goal of the NRF will be to seed, grow and promote research and development and foster a culture of research and innovation throughout Indian universities, colleges, and research institutions. NRF will act as an apex body to provide high-level strategic direction of scientific research in the country as per recommendations of the National Education Policy.
In contrast to the RDI, it focuses on non repayable grants as the mode of disbursing the funds. The total corpus of investment is ₹50,000 crores over five years with the union government contributing 14,000 crores and the remainder sourced from donations, investments, and contributions by public sector enterprises, private sector entities, philanthropist organisations, foundations, international bodies, and corporate social responsibility funds.
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And before you go-
Check out Grammar of War, a newsletter by Adya Madhavan, that looks at advanced military technologies!