Already at snail's pace, India Inc's R&D spending slowing down further

Low single-digit growth for the biggest of Indian companies

Companies’ research and development (R&D) spends grew at their slowest pace in at least a decade in the past year, coming in at 3.5 per cent for 2017-18 (FY18), lower than 5.8 per cent seen last year, the lowest since FY09.

Business Standard looked at 105 companies from the S&P BSE 500 universe with data since at least FY08. The list has India's most valuable petrochemical company, a manufacturer of capital goods and pharmaceutical firm; among others. The numbers are declared as part of companies' annual reports, some of which came in only recently.

The total R&D spends are 62 basis points as a percentage of net sales. It has fallen for two years in a row.

This in line with what the government had pointed out. The 2017-18 Economic Survey, released in January, put it at 'about 0.6' of Gross Domestic Product (GDP). The financial year ends in March.

The current levels of spending are lower than emerging market peers.  The World Bank has figures till 2015. While Russia spends 1.13 per cent of its GDP on R&D, China spends 2.07 per cent and South Korea 4.23 per cent.

The survey had also noted that it is the government which seems to be spending the most on research.

"In most countries, the private sector carries out the bulk of research and development even if the government must play an import funding role. However, in India, the government is not just the primary source of R&D funding but also its the primary user of these funds," the survey stated.

According to the survey, the central government spends the most, while states have a negligible role. Universities also focus more on teaching than research, it added.

Deepak Jasani, head of research at HDFC Securities, said that research and development spends will take some time to pick up in India because of multiple roadblocks. Younger innovators have limited capital to bring their new products to market. On the other hand, large companies are hamstrung by India’s manufacturing ecosystem. It takes a long time for a company to convert an R&D product to a large-scale manufactured product in a cost-effective way and bring it to market. This lag results in a loss of competitive advantage compared to other countries. 

“Availability of funds, lack of effective go-to-market strategies and uncompetitive cost of production is holding back people,” Jasani added.

Global experts say that returns to R&D can be as high as 40 per cent or more, though just spending money may not be enough.

“…complementary efforts in improving the quality of human capital, strengthening research institutions, ordering the national innovation system, and raising the sophistication of the private sector are necessary complements to increased spending on R&D,” said a World Bank policy research working paper from authors Edwin Goni and William F. Maloney entitled ‘Why Don’t Poor Countries Do R&D?’.

Meanwhile, even one of the largest spenders on R&D has shown signs of slowing down. The pharmaceutical industry used to spend nine per cent of operating income in 2016-17 but fell to 8.8 per cent in 2017-18.  The first half of 2018-19 saw a further decline to 7.9 per cent, according to figures from rating agency ICRA.

Year	R&D spends as a % of net sales	Growth in spends over previous year (in %)
FY09	0.51	19.6
FY10	0.52	5.9
FY11	0.50	17.4
FY12	0.50	26.8
FY13	0.52	17.0
FY14	0.54	15.8
FY15	0.59	11.3
FY16	0.74	13.1
FY17	0.68	5.8
FY18	0.62	3.5
Source:Capitaline
Note: Based on 105 companies from the S&P BSE 500 with continous data since FY08

 

Chart: Research on the backburner