Trade imbalance: India needs to urgently enhance its R&D investment

By prioritising this, and cultivating a robust ecosystem for innovation and business growth, India can build the foundation to achieve sustainable economic growth and avoid the middle-income trap

India’s aspiration to achieve self-reliance and reduce dependence on imports in critical sectors such as electronics, electric vehicles, semiconductors, and machine tools continues to encounter significant obstacles. The latest trade figures for July reveal that despite the resistance against Chinese products, China remains dominant in India’s imports, accounting for about 18 per cent of total imports for the month. Further, imports from other emerging economies are also rising. For instance, Vietnam’s share in India’s imports increased 26 per cent in July 2024 compared to the same period last year, which was possibly driven by Chinese firms rerouting exports through other economies. The trade deficit with China stood at $85 billion in 2023-24.

This trend is worrying because it indicates that India is not only struggling to reduce its reliance on China but is also losing its competitive edge to other emerging economies. Among the various factors contributing to this situation, India’s limited investment in research and development (R&D) stands out as a critical issue. With R&D expenditure still hovering below 1 per cent of gross domestic product and having declined marginally over the years, India lags behind countries like the US, China, and South Korea, which have made substantial investment in innovation. This underinvestment in R&D hampers India’s ability to develop indigenous technology, innovate, and compete on a global scale.

In this context, an article in the latest edition of Economic and Political Weekly sheds light on India’s challenges in knowledge localisation. Notably, less than 5 per cent of Indian patent citations refer to other Indian patents, reflecting a low level of local knowledge creation and heavy reliance on foreign sources. By comparison, China and South Korea have local citation rates of 10 and 20 per cent, respectively. India also ranked 42nd out of 55 countries on the 2024 International Intellectual Property Index, with an overall score of 38.64 per cent, unchanged from the previous assessment. In contrast, countries like the US and UK continue to dominate the rankings. While the number of granted patents in India has increased, and the country has improved its ranking from 81st in 2015 to 40th on the 2023 Global Innovation Index, this does not fully reflect the local innovation landscape. Many of these patents are filed by foreign entities.

Research further suggests that the low level of innovation localisation and ownership in India is likely due to the difficulty in scaling up startups into becoming large corporations. Large domestic businesses are crucial for achieving high-income status, as they typically conduct high-end, value-added activities like R&D, thus driving economic growth and job creation. This view is supported by a recent World Bank report, which notes that enterprises in middle-income countries often remain small even after years of operation, unlike in the US, where companies either grow significantly or exit the market. As highlighted in the above-mentioned article, the ratio of big businesses to unicorns in India is just 0.1, compared to 0.9 in the US, 0.4 in China, 0.5 in Germany, 0.25 in Brazil, and 0.6 in South Korea. Thus, to address these challenges, India must urgently enhance its R&D investment and cultivate a robust ecosystem for innovation and business growth. By prioritising these efforts, India can build the foundation to achieve sustainable economic growth and avoid the middle-income trap.