The government has hit the nail on the head with its decision to create a research and development (R&D)/innovation corpus of a reasonable size in the public sector, and let the private sector leverage it. The industry has promptly welcomed the `1 lakh-crore Anusandhan National Research Foundation, and especially lauded its two-tiered structure involving second-level fund managers. In a capital-scarce country, where allocations of even the available funds are heavily skewed, and often help entrench market concentrations, R&D has never got a head start. Though the country was aptly placed for making rapid strides in labour-intensive manufacturing for long years, actual accomplishment has been suboptimal. Policies that safeguarded profitability of upstream players at the cost of the downstream value chain, low labour productivity, and logistical constraints prevented the country from winning its spurs.
India is now betting big on capital- and tech-intensive manufacturing and seeks to catapult itself to high-end services, while still extending some support to production processes where labour content could remain high for a longer period. It has set tall targets to become a major global player in sunrise domains, besides eyeing the digital economy. A lot of emphasis is laid on indigenous defence production too. Yet, established private players, except a few, would still seek short-term profitability and market dominance, rather than put risk capital in risk-borne innovation ventures.
Even now, just 0.6-0.7% of the country’s gross domestic product (GDP) is spent on R&D, as against China’s 2.4% and Israel’s 5.4%, both comparable being in the emerging-market-economies’ club. Also, India has had only moderate success in using foreign direct investment as a means to acquire technology, where China and many others have enviable track records. A recent Niti Aayog paper noted how China’s R&D spending of nearly $500 billion in 2024 “dwarfed” India’s sub-$100 billion. The gap, according to other estimates, is even bigger, but the Niti report correctly highlighted that India’s approach to innovation and research also remained “diffused”, and yielded few commercial outcomes.
This is one reason why the manufacturing sector has ceded share in the GDP in recent years, despite the policy intent to raise it to 25%. The country has a measly share of 2.8% in global manufacturing now, compared with China’s 29%. In a recent interview with FE, finance minister Nirmala Sitharaman observed that while labour-intensive units are being given policy support, the choice is no longer a simple one, between labour and capital. The boundary lines are becoming thin as traditionally labour-intensive sectors are getting automated at a fast pace. The minister also highlighted how “old silos” are expanding horizontally, and the labour markets have turned highly fluid in the process. Given that the country’s labour market indicators aren’t keeping pace with the per capita GDP, the feasibility of sustainable rapid expansion of the economy will require a more dispersed income profile. The Fund of Funds scheme for start-ups has helped bolster India’s entrepreneurial ecosystem. Like infrastructure and start-up funding, R&D and innovation too require specialised, patient funds. The success of the new R&D corpus in the government sector will hinge on objective and efficient allocation of the funds to the truly deserving units, and enhanced academia-industry ties. It must be ensured that the corpus encourages the corporate sector to pitch in with much higher funds. The beneficiary pool must be broad-based, rather than being restricted to the creamy layer of Corporate India.