Financing of Innovation in India

Professor Sunil Mani

Centre for Development Studies

Prasantha Nagar Road

Ulloor, Trivandrum-695011

Kerala, India

April 25 2007

E-mail: Mani@cds.ac.in

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Outline The background Financial Instruments

• Research grants

• Tax incentives

• Financing techno entrepreneurship through venture capital

Effectiveness of the instruments

– Case of tax incentives Conditions under which financial incentives for innovation

are successful

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The Background Overall research intensity has decreased Quantity and quality problems wrt to human resource in

Science and Technology Increasing privatisation of R&D National innovation system dominated by the sectoral

innovation system of the pharmaceutical industry R&D outsourcing has increased Some technology based sectors like telecommunications

have been becoming an important contributer to the growth process

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Overall research intensity has decreased

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Overall thrust

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Where are the Indian venture capitalists investing in ?

IT and IT-enabled services Software Products (Mainly Enterprise-focused) Wireless/Telecom/Semiconductor Banking PSU Disinvestment Media/Entertainment Bio Technology/Bio Informatics Pharmaceuticals Contract Manufacturing Retail

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The budget proposals

Overall thrust Financing technology Infrastructure for innovation Growing high tech industries Diffusion of new technologies Promoting R&D outsourcing Addressing the human resource issue

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Financing technology tax incentives for R&D: Section 35(2AB) allows a weighted deduction of 150 per cent

for expenditure relating to in-house research and development. I propose to extend the concession for five more years until March 31, 2012.

Venture capital: Venture capital funds are a useful source of risk capital, especially for start-up ventures in the knowledge-intensive sectors. Since such funds enjoy a pass-through status, it is necessary to limit the tax benefit to investments made in truly deserving sectors. Accordingly, I propose to grant pass-through status to venture capital funds only in respect of investments in venture capital undertakings in biotechnology; information technology relating to hardware and software development; nanotechnology; seed research and development; research and development of new chemical entities in the pharmaceutical sector; dairy industry; poultry industry; and production of bio-fuels. In order to promote business tourism, I also propose to allow this benefit to venture capital funds that invest in hotel-cum-convention centres of a certain description and size.

propose to extend the concessional rate of 5 per cent duty available to public funded research institutions to all research institutions registered with the Directorate of Scientific and Industrial Research.

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Infrastructure for innovation

Incubators: Ø      exempt from service tax all services provided by technology business incubators. Similarly, their incubatees whose annual business turnover does not exceed Rs.50 lakhs will be exempt from service tax for the first three years.

 

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Growing high tech industry

Ø      the pharmaceutical and biotechnology sector, the duty on 15 specified machinery is proposed to ve reduced from 7.5 per cent to 5 per cent.

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Diffusion of new technology E-governance: proposal to increase the allocation

for e-governance from Rs.395 crore in 2006-07 to Rs.719 crore in 2007-08. The Central Government supports e-governance action plans at State levels, and I propose to increase the allocation for such support from Rs.300 crore in 2006-07 to Rs.500 crore in 2007-08

Telecommunications industry- new committee to study the levies paid by the industry

Proposal to reduce the duty on drip irrigation systems, agricultural sprinklers and food processing machinery from 7.5 per cent to 5 per cent.

While specified medical equipment attract a concessional duty of 5 per cent, other equipment are taxed at 12.5 per cent. I propose to bring down the general rate of import duty on medical equipment to 7.5 per cent.

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Promoting R&D outsourcing

Clinical trials: tax concessions will be introduced

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Addressing the human resource issue for S&T Grants to two agricultural universities-

Ø      proposal to provide Rs.33 crore for a new scheme of manpower development for the software export industry.

1. Scholarships for science in higher education (Rs 100 crores)

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Complementarity between various financial

schemes for promoting innovation

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Major research grants in India

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Actual operation of the R&D tax incentive in

India

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Response of GERD to GDP ratio to tax incentives

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Distribution of R&D personnel in India according to place of work, 2000

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