Rs 1 trillion innovation fund can unlock India’s investment lag

innovation fund, R&D
The Budget allocation of Rs 1 trillion innovation fund can bridge the gap between R&D leaders as India is struggling with low spending and a weak patents regime.

Innovation fund: The Union Budget has allocated a Rs 1 trillion for innovation and research in emerging fields, recognising the need to boost R&D across various sectors. Finance Minister Nirmala Sitharaman announced in her Budget speech on Thursday that this fund would include provisions for 50-year interest-free loans. Sitharaman also mentioned that the fund will provide long-term financing and refinancing at low or zero interest rates for extended periods. This initiative is particularly beneficial for the private sector which has been hesitant to engage in research and innovation due to funding constraints.

The government intends to strengthen deep-tech technologies for defence and accelerate self-reliance with this scheme. The startup and tech industry has greeted the announcement with optimism, hoping it will significantly boost R&D investments.

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Need for an innovation fund

India’s R&D spending is relatively low, compared with developed nations and even BRICS countries. Brazil, Russia, China, and South Africa allocate approximately 1.2%, 1.1%, over 2%, and 0.8% of their GDP to R&D, respectively. In contrast, developed countries like the United States, Sweden, and Switzerland spend about 2.9%, 3.2%, and 3.4%, respectively, with Israel leading at 4.5% of its GDP on R&D, the highest in the world. 

Despite efforts to increase R&D spending, India’s investment remains significantly low at around 0.7% of GDP, well below the global average of 1.8%. Global R&D expenditure has been on the rise, approaching $2.5 trillion.

Private sector dilemma

A major barrier to increasing R&D spending in India is the private sector’s reluctance to invest and a heavy dependence on government funding. In India, the government accounts for more than half of R&D expenditure, unlike in other countries where the private sector leads. While the corporate sector contributes about two-thirds of gross domestic expenditure on R&D (GERD) in leading economies, its share in India is only 37%. The absence of private enterprise in R&D could hinder the nation’s growth.

In India, the pharmaceutical and transport sectors are the most R&D intensive. However, globally, R&D focuses more on industries such as semiconductors, electronics, and information technology, areas where India lacks a significant presence. India’s low R&D investment also results in fewer patent filings compared to its peers. A recent EAC-PM paper revealed that India filed only 56,771 patents in 2020, just 4% of China’s filings and 9.5% of the US’s.

Understanding the private sector’s hesitation toward R&D investment is key to unlocking India’s full potential. The lack of a strict patent system protecting innovations discourages firms from investing in R&D due to fears of intellectual property misappropriation and replication by competitors. Strengthening intellectual property protection could alleviate this issue.

Challenges in educational institutions

Unlike the US and China, India’s higher education institutions struggle to attract top talent, hindering the development of a strong R&D ecosystem. Presently, less than 1% of approximately 40,000 higher education institutions actively participate in high-quality research. This lack of participation contributes to India’s shortfall in creating high-quality knowledge.

Funding issues also stifle innovation at leading institutions like the IISc, IITs, and IISERs. Experts advocate for increasing public expenditure on R&D activities in higher education institutions to at least 1%, which is still below the global average.

Beyond funding, investing in human capital is paramount. Attracting and retaining top talent in research fields is crucial for building a robust R&D ecosystem. This requires not only competitive salaries and research facilities, but also fostering a stimulating and supportive environment for researchers. Additionally, strengthening science education at the K-12 level can spark interest in STEM fields from a young age, creating a pipeline of future innovators. By nurturing talent and expertise across all levels, India can ensure a sustainable and vibrant R&D landscape.

To further R&D efforts, the government and policymakers must address bureaucratic obstacles, red tape, and brain drain. Enhancing collaboration between academia, industry, and government could significantly advance India’s research and development, potentially leading to marketable innovations.

As India positions itself as a new global powerhouse amid shifting geopolitical landscapes, increasing R&D spending is crucial. For the economy to grow and innovate, R&D investment needs to reach at least 2% of GDP. This is essential for India to achieve its goal of becoming a $5 trillion economy.

The true impact of the Rs 1 trillion fund will be measured not just by the amount disbursed, but by the tangible outcomes it generates. The initiative’s success hinges on fostering a culture of innovation, collaboration, and risk-taking across all stakeholders – government, academia, and industry. By addressing systemic challenges, nurturing talent, and focusing on measurable outcomes, India can leverage this initiative to not only bridge the R&D gap but also establish itself as a global leader in innovation and technological advancement. The journey ahead requires sustained commitment, strategic implementation, and a collective effort to translate ambition into reality.

The government’s latest scheme demonstrates its commitment to making India a global technology leader. While skilling, upskilling, and reskilling the youth remain priorities, the fund is expected to create an industry-ready workforce equipped to navigate market volatility. The initiative also aims to support startups engaged in long-term projects with extended gestation periods. However, the effectiveness of the scheme in making a tangible impact remains to be seen.