The Special Technopolitik Budget Edition
Key Tech Announcements in the Union Budget 2024
Today, Arindam Goswami, Sridhar Krishna, Bharath Reddy, Rijesh Panicker, Avinash Shet, and Satya Sahu share a brief analysis of some key areas of interest presented in the Union Budget 2024-25.
Following the General Elections, the Union Government tabled the Union Budget 2024-25 on Jul 23rd. It replaces the interim Union Budget, tabled in February, which had refrained from proposing major projects in technology sectors before the elections.
While presenting the Budget, the Finance Minister explicitly highlighted the criticality of technologies and digital infrastructure in furthering the economy and improving citizens’ lives. The presentation’s accompanying rhetoric was also helpful in understanding the newly elected government’s focus on utilising technology as a vehicle of economic and social change. For instance, the idea of Digital Public Infrastructure (DPI) as a “ factor of production” alongside land, labour and capital seems to be driving the Union government’s plans to implement it in agriculture within 3 years. It certainly provides some food for thought for us analysts as well, but for now, the HTG team pens down some thoughts on a few key technology areas the Budget 2024 touches upon.
First off, Electronics and Semiconductors. Let’s begin with listing some of the relevant announcements:
As a general measure, Budget 2024 proposes reducing the corporate tax rate on foreign companies to 35% from 40%. This is a clear attempt to double down on increasing India’s attractiveness to foreign manufacturers looking to diversify from China but who may have been wary of India’s unpredictable regulatory environment and the prospect of higher initial setup costs.
The Finance Minister also announced a flat reduction in Basic Customs Duty (BCD) on mobile phones, PCBAs, and chargers by 15%. Indian mobile phone exports have grown by leaps and bounds, but our export competitiveness has had to contend with inverted tariff structures for a long time (where imported components of a good attract higher duties as compared to the good itself). We have previously echoed the need for India to reaffirm its ITA-1 commitments and reduce tariffs on components to be able to compete in the global electronics export market. This reduction is a good first move. A move towards tariff slab rationalisation is also sought to be taken up in the next 6 months, with new tariff lines in respect of products used in semiconductor machines, etc, which will be added to the Customs Tariff Act, 1975.
Similar tariff exemptions were also announced for 25 critical minerals, such as lithium, copper, and other Rare Earth Elements. These should help fledgling industries in sectors such as green energy, defence, space, and telecom.
Venture capital in sectors like semiconductors (with much longer timeframes for a return on investment) may likely see a resurgence, as the Budget also announced the abolition of angel tax for investors.
Skill development in manufacturing and technological sectors was a core focus of the Finance Minister’s speech, with the promise to establish an additional 1000 Industrial Training Institutes. Technically trained labour is an essential part of electronics and semiconductor assembly operations, so a targeted policy effort on this front is welcome.
Figure 1: Comparison of Budget outlays for semiconductor-related programmes. Source: Business Standard
The Interim Budget had announced Rs. 6903 Cr for the semiconductor sector, which remained unchanged in July. This is, however, a big step up from the initial allocation of Rs. 3000 Cr made in Budget 2023-24. Of this amount, a staggering Rs. 4203 Cr has been earmarked for Assembly (ATMP) projects, with Rs. 1500 Cr going towards fabrication facilities. This makes sense, as having a diffused ecosystem of ATMP facilities is a far more cost-effective way for India to gain a measurable foothold in the global semiconductor value chain rather than spending much larger chunks of money on multiple foundries from the outset. Foundries also require the provision of many more variables like water and power; ATMP plants do not have as fastidious a requirement.
A relatively small sum of Rs. 200 Cr has been earmarked for the semiconductor Design-Linked Incentive (DLI) scheme. While an increase in financial outlay is welcome, we identified the core problems with the DLI scheme that still persist, namely, its modest benefit caps and stringent ownership thresholds, which have contributed to its lacklustre uptake. The Union Govt is reportedly looking to relax the latter condition and encourage larger Indian subsidiaries of foreign companies to participate as well. We hope to see more movement on this front.
Rs 900 Cr has been set aside to revamp and modernise the state-run Semiconductor Laboratory, Mohali (SCL). Earlier this year, we proposed a potential way for the SCL to help accelerate the homegrown chip design startup ecosystem by acting as a testing and prototyping foundry. Interestingly, the newly proposed Indian Semiconductor Research Center, meant to focus on semiconductor research that can be quickly put into production, did not find a mention in the budget.
The MEITY (responsible for the country’s electronics and semiconductor ecosystems) also received a substantial increase in funding, up from Rs. 14,421 Cr to Rs. 21,936 Cr. This amount also accounts for the largest allocation for a Production-Linked Incentive (PLI) Scheme, with electronics getting Rs. 6200 Cr from the total PLI outlay of Rs. 12,493 Cr. While mobile manufacturing has been drastically bolstered by PLI before, it remains to be seen if large-scale electronics and IT hardware manufacturing will take off similarly. As mentioned earlier, just like with semiconductor ATMP, starting at the assembly stage of the value chain and attracting dominant foreign players and OEMs should be the core focus. The reduction and streamlining of component tariffs and raw materials should greatly help in this regard.
Moving on to Nuclear Energy, Sridhar Krishna writes:
Finance Minister Nirmala Sitharaman made some groundbreaking announcements about moving beyond energy efficiency to controlling emissions as a means towards energy security. She said,
“nuclear energy is expected to form a very significant part of the energy mix for Viksit Bharat. The latest budget allocates Rs. 2,228 crores for nuclear power projects across the country. This is a jump from the budget estimates of Rs. 442 crores in 2023-24 that were further revised to Rs. 1,791 crores the same year.”
The government seeks to partner with the private sector to develop a) Bharat small modular reactors, b) Research and development on small modular reactors, and c) Research and development on newer technologies for nuclear energy.
According to the Nuclear Energy Agency, an intergovernmental agency of the OECD, small modular reactors are gaining popularity among policymakers and industry. The idea of setting up small reactors that generate up to 300 MW of power, modular in construction and with more predictable delivery timelines has come of age. There are technological, economic, and supply chain challenges to overcome, but India may be doing a smart thing by pursuing this direction.
Figure 2: Comparison of a conventional, small modular reactor and microreactor (i.e., vSMR) in terms of size and generated power. Image courtesy of the Office of Nuclear Energy.
What is going to change?
The biggest change is the involvement of the private sector. The original mandate laid down in 1962 in India was not to permit the private sector to invest in this sector. Reliance, Adani, Tata Power, and Vedanta are among those planning to invest alongside the Indian government in nuclear reactors. This should help contribute to India's ambitions of achieving net zero by 2070.
Space is a sector that can often see RoIs only take place many years down the line; a VC fund-like approach makes more sense than allocating funds via something like a PLI. The Finance Minister announced the creation of a Rs. 1000 Cr venture capital fund for space startups. Keep an eye on upcoming Antariksh Matters editions for a detailed breakdown of India’s space economy post the Budget session.
The Budget has allocated Rs. 1148 Cr to the Ministry of Electronics and Information Technology (MEITY) for a wide range of research areas in IT/ Electronics/ Convergence, Communications, and Broadband Technologies. These research areas include AI, quantum, blockchain, high-performance computing, 5G communications, the National Language Technology Mission, and others.
This sets us up for moving into buzzword territory, and Bharath Reddy comments on the Budget’s provisions related to India’s Artificial Intelligence goals:
IndiaAI Mission
The Budget has announced an outlay of 551.75 Cr for the IndiaAI Mission out of the overall Rs 10,738 Cr earmarked for a 5-year period. The Mission announced on 7th March 2024, aims to "democratise and catalyse the AI innovation ecosystem in the country and ensure the global competitiveness of AI startups and researchers of India.”
The Indian Express reports that the IT Ministry is expected to release a tender to procure 300 to 500 graphics processing units (GPUs) to build domestic computing capacity for building and testing artificial intelligence (AI) systems. Skilling and creating Indian datasets are expected to be other areas in the scope of the current outlay.
Rs. 255 Cr has also been allocated for the establishment of 3 Centres of Excellence in AI (which, oddly enough, were announced in Budget 2023-24).
Our analysis shows that spending funding a domestic computing cluster might not be the best use of public funds. There are bound to be complications in managing and allocating access to such a cluster, leading to inefficient use of these resources. Startups that face difficulties in procuring such services could be given grants that they can use as they fit. However, a sovereign domestic computing cluster might be required for applications dealing with sensitive data or having national security implications, but there is no indication that this serves such a purpose. The funds could instead have been allocated towards scaling up regulatory capacity or creating quality Indian datasets that have positive externalities.
Data Protection Board
The Budget has announced an outlay of Rs. 2 Cr for the setting up of the Data Protection Board, of which Rs. 1.96 Cr is for revenue expenditure and 0.04 Cr is for capital expenditure. The Data Protection Board of India will adjudicate on non-compliance with the provisions of the Bill. The Central Government shall appoint the Chairperson and other Members who will carry out functions including, a) monitoring compliance and imposing penalties, b) directing data fiduciaries to take necessary measures in the event of a data breach, and c) hearing grievances made by affected persons.
The data protection board can enforce penalties for non-compliance with the Act, which can extend up to Rs. 250 Cr, as shown below.
Figure 3: The Digital Personal Data Protection Act, 2023
In contrast, Germany's Data Protection Authorities (DPA) had a budget of €104.2 million (around Rs. 850 Cr) in 2022. Germany accounts for 32% of all European DPA budgets.
Let’s transition to discussing, well, Energy Transition policies. Rijesh Panicker lists some major points:
The government has announced a policy for promoting pumped storage facilities for energy storage and smoother integration of the renewable energy mix with the electric grid. The Ministry of New and Renewable Energy has been allocated Rs. 600 Cr towards energy storage and transmission capital assets. In addition, the Ministry of Power has been allocated Rs. 96 Cr as viability gap funding for energy storage systems.
The National Programme on Advanced Chemistry Cell (ACC) Battery Storage also saw an increased allocation of Rs. 250 Cr, up from its previous Rs. 12 Cr.
The National Green Hydrogen Mission also saw its funding jump to Rs. 600 Cr from Rs. 100 Cr, although experts say the increased allocation is unlikely to achieve concrete progress without specific initiatives outlined alongside it.
NTPC and BHEL will build an 800MW Advanced Ultra Super Critical(AUSC) thermal power plant based on indigenously developed technology. This is expected to lead to the development of indigenous capacity for the production of high-grade steel and other metallurgical products, which should have spin-off effects on the economy. Additionally, a Rs. 245 Cr PLI scheme for speciality steel in India was announced, which is complementary to this project.
The government also announced a project to build a taxonomy for climate finance. This will help streamline and standardise the norms for climate finance projects and enhance the availability of global capital for climate adaptation and mitigation.
Arindam Goswami has a couple of notes on the Budget’s Scientific R&D related announcements:
Operationalisation of the Anusandhan National Research Fund (ANRF)
The Budget 2024 also announced the operationalisation of the Anusandhan National Research Fund (ANRF) represents a crucial step towards bolstering basic research and prototype development in India. However, the effectiveness of this initiative is called into question by the composition of the ANRF, which is predominantly filled with bureaucrats and politicians. This top-heavy structure risks rendering the fund moribund, as it lacks the necessary involvement of experienced scientists and industry experts who are essential for stimulating genuine innovation.
Historically, research funds dominated by bureaucratic and political interests have struggled to achieve their intended outcomes due to a lack of flexibility, slow decision-making processes, and an insufficient understanding of the nuanced needs of the research community. For the ANRF to truly fulfil its potential, it must prioritise the inclusion of seasoned researchers, industry leaders, and innovators who can guide the fund's strategic direction and ensure that it responds dynamically to emerging scientific and technological challenges. If we fail to do this, it will merely be old wine in a new bottle and will be just like the Science and Engineering Research Board (SERB) earlier constituted under the SERB Act, 2008 which the ANRF replaces.
Private Sector-Driven Research and Innovation at Commercial Scale
In tandem with the operationalisation of the ANRF, the budget has also introduced a Rs. 1 lakh crore financing pool aimed at driving private sector-led research and innovation at a commercial scale. This initiative is a significant move towards harnessing the capabilities of the private sector to advance India's research and innovation landscape.
However, the success of this initiative will depend heavily on the execution and governance of the financing pool. Ensuring that the allocation of funds is transparent, merit-based, and devoid of bureaucratic red tape will be critical. The government must create a conducive environment that encourages private enterprises to take calculated risks and invest in groundbreaking research and development projects. Additionally, fostering strong public-private partnerships will be essential in bridging the gap between basic research and its commercial application, thus driving economic growth and technological progress.
HTG’s take: Lessons from DARPA: A Lean and Agile Model
It is instructive to examine the Defense Advanced Research Projects Agency (DARPA) in the United States to consider how to operationalise these initiatives effectively. DARPA is renowned for its lean structure and agile approach to problem-solving, which have enabled it to drive significant technological innovations. DARPA operates with a minimal bureaucratic footprint, maintaining a small, highly skilled workforce that can make rapid decisions and pivot quickly in response to new information and challenges.
DARPA’s success is also attributed to its model of hiring term-limited program managers who are given substantial autonomy to pursue high-risk, high-reward projects. These managers are empowered to make funding decisions swiftly without the encumbrances of extensive bureaucratic oversight. DARPA assembles top-tier experts from both industry and academia to collaborate on projects with a relatively short duration. These teams are organised and led by term-limited technical managers who are highly accomplished in their fields and exhibit exceptional leadership abilities.
Unlike open-ended research programs, DARPA’s projects are characterised by their intensity, clear focus, and fixed time frames, which attract the highest-calibre talent. The challenging nature of the work fosters extraordinary levels of collaboration, bringing together exceptional individuals to address significant problems. Additionally, DARPA operates with autonomy in project selection and management. This approach ensures that DARPA remains at the cutting edge of innovation, able to fund and support projects that might be deemed too risky or unconventional by more traditional research bodies.
By contrast, the ANRF’s bureaucratic structure is likely to stifle innovation, delay critical decision-making processes, and discourage bold, unconventional research.
Finally, Sridhar Krishna ends this roundup by briefly discussing the implications of the Budget removing the Equalisation Levy:
In 2016, a 6% tax was levied on digital advertising sold by nonresidents to Indian customers. In April 2020, the Indian government greatly expanded the scope and introduced a 2% levy on gross consideration of all e-commerce transactions from e-commerce companies not based in India. These were applicable to specified transactions, including online sales of goods and services. It was called an equalisation levy.
Who did it impact?
This equalisation levy impacted a wide range of online transactions, including online entertainment and media, retail sales of goods and services, fund transfer services, payment service providers, subscriptions to e-media, online tests, air ticket booking, hotel booking, video conferencing, cloud services, and online advertising.
This tax does not qualify as an income tax and, therefore, does not qualify for credit under the dual taxation agreements. The United States complicated matters by introducing in 2022 what is called an “attribution requirement” to prove whether such taxes are eligible for deduction under their tax regime. This equalisation levy by India and similar taxes by a few European countries came under the scanner.
What was the objective?
The idea behind the equalisation levy was that while e-commerce companies based in India contributed to taxes in India, those without offices in India enjoyed access to the Indian market but did not contribute to taxes. This levy was introduced to ensure a more level playing field.
What were the objections?
This greatly increased the cost and compliance requirements of foreign companies and added friction to digital commerce. There were also questions about the violation of established international principles and about the rights of India to tax such transactions. Questions arose whether this was an alternate form of income tax. With the US tax authorities not allowing for deduction against this levy, there were claims of double taxation.
What are the potential consequences of the change?
Effective 1 August 2024, the 2% “equalisation levy” is being scrapped in response to these complaints. The 6% levy on digital advertisements will continue, but the controversial 2% levy on all sorts of e-commerce transactions has been removed. This will remove the irritants to international relations, especially with the United States, and provide relief to foreign companies struggling with the increased cost and the compliance burden. Contributes to making India a better place to do business in. A positive step overall.
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