India is not usually a source of new, technologically sophisticated products, notwithstanding the stellar performance of our pharma industry during the pandemic. The Economic Survey 2021 discussed the low rate of innovation, noting that only now has India finally found itself in the list of top 50 innovative countries but still ranks 48th among 131 countries in the Global Innovation Index.
Why is this so? The usual explanation is that Indian R&D spend as a share of GDP is low at 0.7%. It is far lower than that of Israel (4.6%), South Korea (4.5%), Japan (3.2%), Germany (3%), US (2.8%), France (2.2%), UK (1.7%), and Canada (1.6%). This, despite a sustained and wide-ranging focus on promoting R&D for many years and the government’s own spend growing steadily. Government-funded research focuses mainly on Agriculture and allied sectors, Space, Atomic Energy, Earth Sciences, etc. The State’s share in the gross national spend is 52%, as against the norm of 20% in peer countries, thus highlighting inadequate focus on R&D by the Indian business sector and academia.
However, the adequacy of the national R&D effort can be examined from another dimension, looking at it in terms of Purchasing Power Parity (PPP). Usually, the bulk of R&D spend comes from recurring needs, largely manpower cost. Notably, the Indian salary structure is lower than in peer countries. UNESCO has been tracking inter-country performance using PPP. Its database indicates that in PPP Dollars, India’s expenditure exceeded that of Russia and UK, and may soon equal France’s. So, the question needs to change from “Are we spending enough on R&D?” to “Why is India not getting value for money in the form of recognisable technological achievements?”
Over 4,000 approved R&D establishments exist in the Indian business sector. Individual companies reveal varying performance. Pharma major Lupin spends 8% of its sales on R&D. Tata Motors and Mahindra spend 5% of their revenue and compare well with global majors like Daimler, Volkswagen and Volvo. However, only 26 Indian companies figure among the top 2,500 global R&D spenders. These are mostly from three sectors – pharmaceuticals, automobiles and software. It is noteworthy that India is seen as globally competitive in these sectors.
A wider array of globally competitive product development would be enabled only if companies in other sectors ramped up their spend on R&D. Total business sector contribution should rise from the existing 42% (private sector 37%; public sector 5%) to near 70%. The question is, how to generate interest in R&D.
The answer does not lie in giving additional tax sops. A variety of government programmes -- Make in India, Start-up India, FAME, etc., apart from a variety of tax incentives, exist to promote both in-house and outsourced research. It is also not the case that the private sector is not responding. Their R&D spend is steadily growing. The problem lies in the structure of our manufacturing sector.
We have historically promoted MSME development, majorly focused on low-tech products. About 90% of our companies are MSMEs, of which 90% are ‘micro and small’. We don’t have many global-size firms. The bandwidth to deploy money in R&D to attain breakthroughs is thus limited. So, if we want a greater variety of breakthrough achievements, we need ‘lateral’ thinking, such as that displayed by some luxury car dealers. It is no longer unusual to read about how 100-plus Mercedes/BMWs are bought by entrepreneurs of Aurangabad, Kolhapur, Surat, Coimbatore, Pune, Ludhiana etc., on a single day to avail discounts on offer for group buys.
In 2018, GoI had partnered with Rocky Mountain Institute (RMI), Colorado, and others to launch the Global Cooling Prize challenge. This resulted in breakthrough innovation in air-conditioning technology. The target -- 80% reduction in climate impact compared to current ACs and specified affordability criteria with boundary conditions for use of water, power, materials and refrigerants -- was initially called unrealistic. However, by 2021, two contenders (Daikin with partner Nikken Sekkei, and Green Electric Appliances, Zuhai, with partner Tsinghua University, China) achieved them. Both use refrigerants that are more climate-friendly than those used currently. As a result, a number of AC manufacturers have committed to bring to market super-efficient ACs by 2025. This breakthrough happened because companies collaborated to win a prize.
This ‘mission mode’ model can be replicated through national prize competitions (involving at least one Indian participant) with attractive honours and prize money for winners. Some pre-defined targets in select growth sectors could be identified and a reasonable time-frame set. This ‘mission mode’ R&D competition(s), sitting on top of existing incentive schemes, may boost innovation, rather than just more tax incentives.