India's research riddle

It has the highest public sector budget for research in the world as a share of GDP, but the private sector lags way behind

India has landed on the moon on a shoestring budget, becoming only the fourth country in the world to do so. India’s successful moonshot was a remarkable achievement, especially considering that much of its space programme has been developed indigenously. One key reason for this is that within India’s limited spending on research and development (R&D), priority has been given to its space endeavours. While we applaud our space programme, our broader underspend in R&D needs to be addressed.

India’s R&D spending peaked at around 0.8 per cent of gross domestic product (GDP) in 2008, and has declined since then to 0.65 per cent of GDP. In comparison, China spends around 2.1 per cent of its GDP on R&D and the US around 2.8 per cent of its GDP. Germany and Japan spend over 3 per cent of GDP on R&D and Israel an amazing 5 per cent of its GDP. The world average is around 2.2 per cent of GDP. While it’s true that a developing country spends less on R&D as it can bring in new technologies from richer countries to catch up, even to do that, some level of R&D is needed. When India underwent a Green Revolution, it was able to bring in high-yielding seed varieties developed elsewhere because it had its own R&D infrastructure to adapt these to Indian conditions. In pharma, India was successful because it had sufficient R&D capabilities to reverse-engineer pharmaceuticals and produce generics. 

A very large share of India’s R&D, therefore, goes to health (18 per cent), agriculture (13 per cent), space (9 per cent) and defence (17 per cent), with less than 10 per cent going to industrial production and technology and to transport and telecommunications each. This is not surprising when you consider that the bulk (almost 60 per cent) of it is in the public sector, whereas in most advanced economies, the public sector accounts for less than 10 per cent of R&D spend. In fact, India’s public sector R&D spend at 0.36 per cent of GDP is the highest in the world, more than Russia’s 0.34 per cent, US’s 0.28 per cent, France’s 0.27 per cent, Japan’s 0.25 per cent, and Israel’s 0.07 per cent of their respective GDPs. India’s huge underspend comes not from its public but from its private sector, where R&D budget needs to be much higher. 

Why does India’s private sector spend so little on R&D? We know that the private sector return to R&D is lower than social returns because it’s not easy to protect knowledge. It can be easily stolen or lost when it’s embedded in people who do the research and its development. China has allegedly been a master at stealing technology, but many others have pirated technology to catch-up during their industrialisation, including the US some 150 years ago. Nicholas Bloom at Stanford University has looked at factors that explain why private firms underinvest in R&D because they cannot capture all the benefits. He argues that reducing the cost of R&D by 10 per cent increases R&D spend by 10 per cent. This can be done by a variety of tax and other incentives, but how these are designed makes a difference. He also argues that freer trade sparks innovation by increasing competition.

India is moving in the opposite direction. India had corporate tax incentives for R&D for many years, but these were eliminated when the corporate tax was reduced in 2018. One argument made was that previous tax incentives did not lead to a significant increase in R&D, but that may have been because they were not properly designed. Our trade policy, which was moving towards freer trade, was reversed in 2018 and is now making India less competitive, which will reduce innovation, not increase it. Patent protection, contract enforcement, and the rule of law are the other main factors that would ensure higher returns to private investment in R&D. 

Dr Bloom has also shown that drawing in skilled migration matters. In India’s case that would mean reversing skilled emigration, as we lose a large part of our top science and engineering students due to lack of well-paying jobs at home. He argues that more spending on STEM (science, technology, engineering and mathematics) makes a difference, as well as making R&D grants to universities rather than spending it on a few government institutions. In India, a handful of institutions get the bulk of the government’s spending budget, with very little going to universities. These are the Defence Research and Development Organisation (32 per cent), Department of Space (19 per cent), Indian Council of Agricultural Research (11 per cent), Department of Atomic Energy (11 per cent), Council of Scientific & Industrial Research (10 per cent) and Department of Science and Technology and Biotechnology (10 per cent). How to ensure that these institutions, in turn, use more university capacity — the IITs and the engineering schools — to conduct this research should be the path others have followed and India must try and emulate. India’s production of peer reviewed research papers and patents has increased over time, but we don’t know their quality and, in any case, remain well behind the US and China.

Clearly, the way forward is to create well-designed incentives for private sector R&D spending and draw in our large and growing universities and institutes into the R&D ecosystem instead of having a few islands of R&D with very little spillovers. Also, rather than taxing private companies’ 2 per cent of net profits to do more CSR (where the default now has become the opaque PM Cares Fund) it would help to focus the energy of our private sector on more R&D. One positive news is that India is improving on the Global Innovation Index, where it was 81st placed in 2015-16 and has improved to 46th place in 2021 but could be even higher if our R&D went up.  

Finally, Dr Bloom argues that “moon shots” have huge benefits as much of the basic research involved eventually produces many new marketable technologies. So, let’s keep the funding for our space programme in place, but bring in more universities and private companies into its orbit.

The writer is distinguished visiting scholar, Institute for International Economic Policy, George Washington University, and co-author of Unshackling India, Harper-Collins India 2021, which was declared the best new book in economics for 2022 by the Financial Times