By TV Mohandas Pai and Nisha Holla
The world is amid the Digital Revolution; digital and technology innovations are transforming how we live, work, and connect. Innovation, R&D, and technology development are essential in this era. India missed the Industrial Revolution and is still playing catch-up. However, it is one of the top three digital powers globally, lagging behind only the US and China. India must focus on building deep technology R&D ecosystems and investing in the capacity to become a broad-based technology leader and exporter.
The Top 2 economies have demonstrated the need for continuous investment
The US and China, the top 2 economies in the world, have invested heavily in technology. They have demonstrated the need for continuous investment in R&D and its exponential returns. US government funding organizations like the National Science Foundation (NSF) and Defense Advanced Research Projects Agency (DARPA) are endowed with budgets in the billions of dollars annually to invest in research areas critical to the country’s growth. These areas include materials science, bioinformatics and disease prevention, quantum computing, artificial intelligence and machine learning, and biotechnology, among other frontier areas. These funding organizations have been operational since the 1960s and have overseen the development of critical technologies, such as GPS and imaging, that have become ubiquitous today.
After economic liberalization in 1978, China studied the US’ technology development juggernaut and deployed the same playbook. The country has increased its innovation budget by 10% this year to $51.5Bn. The National Natural Science Foundation of China (NSFC), one of China’s multiple research funding organizations, operated under a $5.2Bn budget in 2022.
Both these countries’ economic leadership comes from their focus on innovation spending and their drive to lead the global cutting-edge of R&D and technology. India must follow suit to scale its economy faster and join the $10 trillion GDP club in the next decade.
Putting India in perspective
It should be no surprise that India’s massive brain drain of research talent to the US, Europe and other mature research ecosystems is due to the lack of substantial and liberal funding in the country. Indians are considered some of the most intelligent people on the planet but are forced to relocate to other nations and develop technology and research to benefit those economies due to India’s inability to provide state-of-the-art laboratories and non-term funding grants. A Top 5 economy cannot afford to lack in such a critical dimension.
There is no shortage of capital in India. Central and state budgets together amount to ₹45 trillion annually. Of this, ₹8 trillion is spent on subsidies alone for the bottom of the pyramid. Undoubtedly, this is important for their survival. Still, the political class cannot ignore the ramifications of spending such a significant amount on just subsidies without any substantial allocation towards securing our future – through technology development, which perpetuates virtuous cycles in giving people opportunities and building a sizeable entrepreneurial class versus keeping people chained to the vicious cycle of relying on subsidies.
India’s technology-powered startup ecosystem is a testament to the will of the Indian entrepreneur. Without substantial help from the political machinery, the Indian startup ecosystem is today the third-largest globally – with 138,000+ startups having created $550Bn in value and 115 unicorns. Encouraging, though this may be, 85% of the inbound capital into this system is foreign; India has hardly created the opportunity to invest in its own growth story while overseas investors are enjoying the bounty. The SIDBI Fund-of-Funds (FoF) has been the lone success story of government intervention and has been instrumental in the development of the ecosystem. However, the government cannot rest with just one successful funding vehicle. For the scale of India’s population (144 crores), economy (nearly $4 trillion, scaling to $10 trillion in a decade), and startup ecosystem growth potential, the country needs tens of FoFs.
The US has demonstrated that deep technology research ecosystems, university laboratory centres, national research laboratories, and startup ecosystems—powered by government funding—all work together to create combinatorial value and economic growth. India must invest in this tried-and-tested playbook.
India’s technology budget
The suggestion of launching a National Research Foundation (NRF) in India has been floated several times. The National Education Policy (NEP) 2020 has rightly emphasized R&D and technology as essential dimensions of the higher education system and has suggested the launch of the NRF as a funding body to invest in research in critical areas like science, technology, social sciences, and mathematics. The Union Finance Minister announced an initial outlay of ₹50,000 crores over five years in the FY20 and FY21 budgets but without any allocations. In FY24, the Union budget allocated ₹2,000 crore for the NRF but then revised it to ₹258.6 crore – a sad testimony to the lack of urgency in this critical area.
It is critical to make a substantial allocation to the NRF in FY25 of ₹10,000 crore on a non-lapsable basis without passing the buck again for another year. It is also necessary to structure the terms and conditions of the NRF grants liberally, like the National Science Foundation in the US, instead of being too rigid, stifling innovation.
Second, a ₹50,000cr FoF to provide capital for technology innovations in the private sector must be planned. This FoF can invest in other funds, up to a maximum of 20% of the fund, which will create ₹2.5 trillion in total investment. The funds must be directed towards frontier technology development in areas like AI, quantum computing, genomics, new materials, and 3D printing. The government can provide incentives, such as taking only 50% of pro-rata profits and distributing the rest to other investors.
Third, the government can encourage corporate R&D by providing a grant of 10% of the amount spent on approved R&D projects. The grant would be tax-free in the hands of the recipient corporation, provided it is spent on the said project.
In the era of the Digital Revolution, innovation, research and technology development are the foremost drivers of socio-economic growth. There is an excellent opportunity to invest in building deep ecosystems with state-of-the-art facilities to attract the world’s best talent to Design in India, Develop in India and enrich the country’s Make-in-India program. GoI must not miss this generational opportunity to set up the nation’s growth engines of the future.
(TV Mohandas Pai is the Chairman, and Nisha Holla is the Research Fellow at 3one4 Capital.)
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