Indian information technology (IT) companies may still survive the jolt from the steep hike in H-1B visa fees, but there is no denying that it’s time for some deep introspection. For all its success as a software services exporter, Indian IT has little innovation to its credit. The lack of a world-class product or technology is often attributed to the absence of a Silicon Valley like ecosystem. That may be partly true but the real reason is that companies have not tried hard enough because there was easy money to be made by doing simpler work. With artificial intelligence (AI) pretty much taking over, software firms will need to reinvent themselves. Indeed, so will companies in other sectors as they realise that depending on imports of rare earth magnets or high-end electronics technology can be risky. So far, however, Indian companies have shown very little interest in research and development (R&D). Pharma manufacturers have played the generics game, waiting for blockbuster drugs to go off patent and have depended on China for active pharmaceutical ingredients. Top-tier Indian IT services firms spend only 0.4-1.3% of revenue on R&D, a ratio that has barely moved since FY19. This is unsustainable.
Low R&D spending hampers competitiveness
India’s R&D spending has historically hovered around 0.7% of GDP, leaving very meagre resources for any meaningful scientific or innovative breakthroughs. In contrast, China’s R&D investment reached 2.68% of GDP in 2024 and there are signs that this will only increase. Indeed, it is little consolation that India has improved its ranking in the frontier technologies readiness index from 48th in 2022 to 36th in 2024 out of a total of 170 economies. Frontier technologies are advancing rapidly, with the opportunity estimated to grow six-fold to $16.4 trillion by 2033. The fact is that today China and the US dominate knowledge generation in frontier technologies, with around one-third of peer-reviewed articles and two-thirds of patents. The AI-related divide between developed and developing countries is already huge and could widen. One hopes the hike in H-1B visa fees, which will force AI start-ups that were hiring teams in the US to rethink their growth strategies, will only prove to be a temporary setback.
Sectoral analysis and way forward
But it’s not just technology. India Inc’s spends on R&D have been negligible. A study says for a sample of 912 companies, spends were up at `66,733 crore in FY23. This was an increase of 17% over the previous year but amounted to just 0.44% of their turnover. Sadly, of the 842 private sector companies in this universe, only 472 actually spent on R&D; the rest did not. In fact, the vast majority have little inclination towards R&D as seen from the fact that the top 10 companies accounted for nearly 60% of the total spend.
Not surprisingly, among the sectors, the pharma pack is committing the most. Companies including Alembic Pharma, Dr. Reddy’s Labs, and Lupin are among the bigger spenders having committed more than 10% of their sales to R&D in FY23. In other spaces, firms like Tata Motors, Hindustan Aeronautics, Biocon, and Bharat Electronics too have allocated fairly meaningful amounts to R&D. Excluding them, however, private sector investment in R&D has been abysmally low. This is unfortunate because India has talent in its large pool of scientists and engineers. Without a concerted effort at innovation, Indian firms will be forever dependent on global players for technology and unable to compete globally.