Leveraging research

India needs to push R&D expenditure

The 2024 Interim Budget speech, by Union Finance Minister Nirmala Sitharaman, underscored the government’s focus on fostering entrepreneurship and innovation. Notably, Ms Sitharaman announced the establishment of a Rs 1 trillion corpus to incentivise innovation and research in sunrise sectors. The fund will provide financing and refinancing for long tenures with low or zero interest rates, thereby enabling the private sector to scale up research and innovation. While this is indeed a welcome move, especially for Indian tech startups, which are facing a funding winter, it may not be enough to push investment in research and development (R&D) to the level desired. In terms of both product and process innovation, India lags behind most major economies of the world.

India’s per capita R&D expenditure is one of the lowest in the world. Gross expenditure on R&D as a percentage of gross domestic product (GDP) was at a meagre 0.64 per cent for India in 2020-21, far lower than the world average of 2.71 per cent. For instance, an analysis by the co-chairperson of Forbes Marshall, Naushad Forbes, published in this newspaper, showed that the top two software firms in the country invested only 1.4 per cent and 0.5 per cent of sales in R&D, respectively. In contrast, the corresponding numbers for IT software firms in countries like the US, China, Japan, and Germany ranged between 6.5 per cent and 21 per cent. According to the World Intellectual Property Organization’s global innovation index, India retains its 40th rank in 2023, suggesting its inability to step up in research and innovation. Fitting into the broader picture, low R&D by India Inc has dragged down the overall share of expenditure on research in India’s GDP. Low investment by the private sector leaves most of the heavy lifting for the government, which has other pressing demands on the Budget. It is no surprise that the country cannot boast too many global firms in contemporary times — the ones associated with great products and a premium position in the global markets.

It is thus worth noting that without the private sector stepping up efforts in R&D and improving innovation output, India cannot possibly move up in the global supply chain. An underdeveloped intellectual property rights regime, uncertainty around data protection, and fear of imitation by smaller firms discourage large private-sector firms from increasing their R&D spending. Notwithstanding impediments, a few global companies are developing R&D capacity in India. For instance, GE Healthcare opened its first 5G innovation lab in Bengaluru in 2022. The same year, another health care firm opened its first surgical robotics centre in the Asia-Pacific region in Gurugram. However, while some of these global capability centres will increase overall R&D activity, it is worth noting that research and innovation breakthroughs in most cases would belong to overseas firms. 

Since large corporations in India are not short of cash, the new funds should be expected to help small new-age firms. To encourage higher activity in research, the government must work with the private sector to address their needs and concerns. The establishment of the National Research Foundation will also help in this context. However, as argued by several experts, its operations should be professional. Bureaucratic interference will hamper operations and outcomes. In a world that is increasingly driven by technology, only firms and countries focusing on innovation will prosper.