OPINION | India’s $12 billion deep tech fund is a great start; now we need other structural changes

An approach of matching government-to-private capital ensures that state funding catalyzes, not crowds out, private funds.

Deep-tech’s long-gestation cycle and high-risk R&D deter private capital despite its high strategic value and potential for commercial viability and social good. Given India’s strategic ambitions, the question isn’t whether the government should intervene – but how in a manner that sparks a self-sustaining ecosystem without market distortions.

Learning from global precedents

Indian policymakers have chosen a judicious approach in line with other state-enabled tech hubs like Taiwan, Israel, and South Korea. After broad consultations with stakeholders, in early July the Government approved its Rs1 lakh crore (≈ $12 billion) Research, Development and Innovation Fund-of-Funds (RDI Scheme) meant to kick-start a competitive deep-tech ecosystem. Following through, on October 11 the Government approved the establishment of a government funds custodian SPV within the Anusandhan National Research Foundation.

Successful state interventions share a pattern: governments de-risk early-stage capital to attract private participation and gradually recede as markets mature.

The modern toolkit uses Fund-of-Funds (FoF) and co-investment structures—public capital that seeks to create strategic national capability, accepting capped gains so private investors are incentivized to take risks. This PPP model embeds market discipline through aligned incentives and minimizes red-tape.

Global models of catalytic capital

Taiwan’s semiconductor miracle began in the 1980s when the state filled a capital vacuum, providing 48 percent of TSMC’s seed funding. Over decades, its stake diluted to 6.38 percent, shifting from founder to investor. Today, each public dollar leverages three to four private ones through its National Development Fund.

Israel’s Yozma Program (1993) invested $80 million of government funds in a 60:40 ratio alongside private VCs, granting them call options for exits. Within five years, many government stakes were profitably exited, and by 2000 Israel’s private capital driven VC industry exceeded $3 billion. No surprise in 2024 Yozma 2 was over-subscribed.

South Korea’s model now similarly multiplies public investment threefold, with every ₩1 from government attracting ₩3 from private sources. Public money represents barely 25 percent of total venture capital. Western analogues—Canada’s VCCI and the UK’s Enterprise Capital Fund—also use FoF structures with asymmetric-return incentives to attract investors. Together with the tech ecosystem’s network effects, these programs have contributed numerous unicorns and successful IPOs, and thousands of high-skill jobs worldwide.

India’s RDI scheme: design and intent

Policymakers have woven these lessons into the RDI Scheme’s structure and tailored it to India’s needs:

1) Fund-of-Funds and Co-Investment Model– The Scheme deploys government funds through selected Second Level Fund Managers. An approach of matching government-to-private capital ensures that state funding catalyzes, not crowds out, private funds. The government accepts muted returns, to effectively acquire expertise, networks, and commercial discipline it cannot build.

2) Meritocratic Selection– Only globally credible fund managers participate, chosen through a transparent, and merit-based process.

3) Global Benchmarks and Transparency– Funds’ performance will be measured against international VC benchmarks with periodic disclosures, anchoring accountability.

4) Ecosystem Development Mandate – Investments must anchor high-value activities in India: local IP registration, jobs, principal business and R&D operations. Getting academic research market-ready will also be a focus, linking universities and startups.

The fine balance: open capital, sovereign capability

National interest underpins the design: building domestic capability through international collaboration. The scheme’s strength lies in its openness that will foster the flow of technology to India — no forced Indian ownership or state buy-back rights. Instead, it enhances Atmanirbharta (self-reliance) with global talent and capital.

India’s macro conditions help: a $4-trillion economy in waiting, world-class STEM talent, and stable governance. Just as the India Semiconductor Mission benefited from facilitating private sector participation, this scheme’s well-conceived public-private incentive alignment will lead to attracting talent and capital for innovation.

Early momentum is visible: the newly formed India Deep Tech Alliance—a coalition of leading domestic and international fund managers – has already pledged over $1 billion toward the RDI objectives.

The reform frontier

Though historic and laudable, government capital alone may not suffice in generating long-term gains. Structural reforms must follow over time:

* Intellectual Property—predictable and fast adjudication to secure R&D.

* Single-window clearance for labs and startups to reduce regulatory cholesterol.

* Tax rationalisation to meet international benchmarks in capital gains and options.

* High-skill visa reforms to attract global researchers.

Process simplifications like regulatory sandboxes will help, but long-term deep-tech competitiveness depends on institutions that efficiently protect innovation and reward risk capital.

Measuring success

Ultimately, the success of the RDI scheme will not be judged by short-term IRRs of participating funds but by strategic outcomes like India’s emergence as a leader in semiconductors, AI, and quantum computing.

With disciplined execution, India’s $12 billion bet could replicate the virtuous cycle pioneered by Taiwan, Israel, and Korea—where public capital seeded ecosystems that now power national GDPs and technological sovereignty. The stakes are high, but so is the opportunity: to transform India from a consumer to an innovator of deep-tech products.

(Arun Kumar is Managing Partner, Celesta Capital, former Chairman and CEO of KPMG (India); & Vardaan Ahluwalia is General Counsel, Premji Invest.) 

Views expressed are personal and do not represent the stand of the publication.