Indian corporates need to invest in R&D for make-in-India to succeed
India continues to be by far the most preferred destination in the world for Information Technology (IT), Information Technology enabled Services (ITeS), engineering and research & development (R&D) services delivery. In 2018, of the 307 new centres that were set up for such services, India accounted for 23 per cent of them, as per consulting firm Everest Group’s Global Locations Annual Report 2019. Singapore followed at about 8 per cent whereas Ireland, China and Mexico accounted for 5 per cent each.
The primary reason for companies moving their core R&D operations to India is no longer just cost. Many Multi-National Corporations (MNCs) are now increasingly outsourcing their corporate R&D efforts by investing in India’s local start-up ecosystem – to create breakthroughs in innovations that could help the parent companies. Global giants such as Google, Microsoft, SAP, and IBM have come forward with strategies to invest as well as incubate start-ups, or collaborate with small early stage service providers in the form of venture funds, evangelism programs, and partnerships with a focus on solving problems faster for customers. These companies have realized that the start-ups are the quickest way to develop a product and make it ready for the market. India’s start-up ecosystem is third only to the US and the UK. According to industry reports, the number of start-ups in India has gone up from 7,000 in 2008 to 50,000 in 2018.
More than 150 international companies are doing R&D in India. However, while MNC’s are turning to India for setting up their R&D Centres, the Indian corporates have failed to keep pace and step up their R&D activities. Multinationals are investing millions to do R&D in a country where its own R&D spending remains abysmally low at less than 1 per cent of Gross Domestic Product (GDP). The fact that foreign multinationals are setting up global innovation centres to tap India’s low-cost, English-speaking engineers and technicians shows there is no shortage of talent in India. However, in a trend that picked up over the years, India bought its technology or licensed it from other countries. It spent just 0.6 per cent of its GDP on R&D in 2014-2015 while countries like Brazil, Russia, China, and South Africa – spent 1.24 per cent, 1.19 per cent, 2.05 per cent and 0.73 per cent, of their GDP’s on R&D during the same period.
The question then arises as to why does a country with so much research talent produce such little home-grown innovation? A possible answer is that despite a strong engineering talent pool, low costs and a good knowledge of English, India has failed to invest properly in R&D. The spending is so low by global standards that it even holds back India’s economic, technological and strategic ambitions.
It is high time to wake up to the challenge that India faces overhaul regulations, and nudge companies to put money into research and innovation. India’s R&D spending amounts to 0.7 per cent of GDP, a fraction of China’s 2.1 per cent let alone Japan’s 3.1 per cent. India’s figure has been hovering around this level for two decades; the bulk of the meagre spending is accounted for by the government and a few strategic sectors, notably atomic energy, space and defence according to India’s official Economic Survey.
When it comes to corporate R&D, India fares even worse. The contribution of Indian companies, private and public sector taken together, towards R&D is just 44 per cent against a global average of 71 per cent, says a recent study by the National Science and Technology Management Information System (NSTMIS) a division of the Department of Science and Technology (DST). For private sector companies by themselves alone, the share is a meagre 38.1 per cent. Reliance Industries, one of the largest private sector enterprises, spent only 0.5 per cent of its sales revenue on R&D in 2016, according to the Centre for Technology, Innovation and Economic Research (CTIER).
There should be little surprise then, that efforts to lift the manufacturing industry’s share in GDP from around 15 per cent have repeatedly failed. Prime Minister Narendra Modi’s “Make in India” campaign, launched in 2014, has not moved the dial much. Be it agriculture or manufacturing, with products such as refined petroleum, cotton yarn, apparel and leather goods, India’s merchandise exports are a low-margin high-volume activity dominated by undifferentiated products and weak brands. India’s flagship high-tech industries such as pharmaceutical and information technology spend relatively more on R&D than other industries, but the proportions are still low compared to global peers. For instance, with the notable exception of market-leader Lupin, Indian pharmaceutical companies spend 10 per cent of sales revenue on R&D compared with 20 per cent for the US and European companies. No surprise then those Indian pharmaceutical companies is exporting low-margin generics and information technology services companies survive on the low cost of their highly skilled labour. In the long run, this model is not sustainable.
For “Make in India” to compete globally, both the government as well as the corporates need to wake up to the urgency of stepping up the Indian R&D centres. India must target 2 per cent of GDP for R&D spending if it wants to be considered an innovative country. The government can reallocate and manage its resources, but the real challenge is in firing up the corporate sector. One argument is that the R&D benefits/concessions/ incentives given by the Indian government to the industry should benchmark with incentives available for R&D in other BRICS countries as well as the US, Canada, Israel, European Union, the UK, Ireland and Singapore. This would go a long way to making India truly competitive as an R&D destination.
For instance, the Chinese government is steadily increasing its support for R&D and innovation through R&D tax incentives, subsidies, and a more supportive regulatory framework. In the year 2018, the US and China were global leaders in R&D investment, although China’s R&D investment grew at a faster rate. China’s advances in this space are driven by its continually refined innovation tax policies, R&D tax incentives, continuous encouragement and an increasingly stringent supervision. China has continued to improve access to tax incentives and provide new regulatory support for innovation. At the same time, renewed rigour is being applied to ensure that tax incentives are claimed appropriately.
The other side of the argument is that the service-oriented enterprises, whose business model thrives on innovation, do not require incentives to do R&D. For example, withdrawal of weighted deduction benefit in the Income Tax Act for all R&D activities from the next fiscal seems like a step-back but may not have any significant impact on India Inc’s R&D activity. It has been pointed out that corporates now enjoy a reduced effective corporate tax structure, which should more than compensate for the loss at least for the manufacturing sector.
The Indian Government’s recent move to constitute an empowered ‘Technology Group’ to render timely policy advice on the latest technologies is a very positive step. The cabinet, chaired by PM Narendra Modi, will have 12 members with the Principal Scientific Adviser to the government as its chair. The group will map technology and technology products, commercialisation of dual-use technologies developed in national laboratories and government R&D organisations, develop an indigenisation road map for selected key technologies and appropriate R&D programs.
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