Investing in the stars: Strategic support for spacetech startups

In the Budget, Finance Minister Nirmala Sitharaman announced the establishment of a venture capital fund of about $125 million to promote advancements in the space economy. This initiative is set to provide significant support to spacetech startups, enabling them to secure direct funding from the government.

Additionally, as part of the broader initiative, the government exempted customs duty on the import of certain critical minerals essential to the space sector. This move is driven by projections foreseeing a fivefold growth in the Indian space economy over the next decade.

Historical context and policy shift

The government regulates the Indian space economy through the Indian Space Research Organisation (ISRO). However, the introduction of the Indian Space Policy in 2023 marked a pivotal shift by allowing private entities to participate in space sector activities.

The policy empowers ISRO to enter into various public-private partnerships through its commercial arm, NewSpace India Limited (NSIL).

As a result, Indian space assets—including launch vehicles and spacecraft—are now accessible to private entities for various business applications, leading to increased government collaboration with private and foreign organisations in its space initiatives.

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Market value

As of 2024, the global space economy is valued at $630 billion, projected to reach $1.8 trillion by 2040. In contrast, the Indian space economy is valued at $8.4 billion, growing at a CAGR of 4%.

This growth trajectory is promising, with expectations of reaching $44 billion by 2033. Further, a management consulting firm Arthur D. Little report forecasts that the Indian space economy could reach a valuation of $100 billion by 2040.

The rise of spacetech startups

One of the key drivers of this exponential growth in the Indian space economy is the rapid rise of spacetech startups. According to the Department for Promotion of Industry and Internal Trade (DPIIT), India has 189 registered spacetech startups as of 2023, with investments in these startups increasing to $124.7 million. This surge in investment is a testament to the growing interest and confidence in India's space sector.

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Budget proposals and policy reforms

The Budget proposals also include abolishing the angel tax, a major hindrance to startup fundraising. The removal aims to promote foreign investment, particularly in Indian spacetech startups and is expected to create a more conducive environment for attracting funding, stimulating innovation, and supporting the growth of startups in the sector.

Additionally, in April 2024, the government took a significant step to attract foreign investments in the Indian space economy by permitting up to 100% investment through the automatic route in select space sector activities.

The new foreign direct investment (FDI) policy, along with the abolition of the angel tax, is poised to drive substantial foreign investments, fostering innovation and advancement within the sector.

Conclusion

The government's vision for the Indian space economy is promising and forward-looking. The proposed growth plan—including the establishment of the venture capital fund, the encouragement of public-private collaborations, exemptions for certain critical minerals used in the space sector, and the abolition of the angel tax—are all steps in the right direction to unlock India’s potential in the space economy.

With the right policies and investments in place, India is well on its way to achieving its vision of 'Viksit Bharat' and positioning itself as a global leader in the space industry.

Pranay Bhatia is a Partner and Leader – Corporate Tax (West), Tax and Regulatory Services at BDO India.