The actual cause of India’s R&D malaise

The root cause is the handicap our policy ecosystem imposes on the ease and cost of doing business

The latest Global Innovation Index placed India 38th. The commentariat will repeat what it says every year: Our R&D expenditure is only ~0.6% of GDP, against China’s ~2.7% and Korea’s ~5%; only 41% of our R&D comes from the private sector, compared to 70-80% in peer economies; and we have no patience with failure.

Instead of trying to solve every problem, all at once, give Indian entrepreneurs large, city-sized, globally competitive clusters free of approval and logistics delays, high electricity costs and input tariffs. (Shutterstock)

All these are true, but are mere symptoms. The root cause is the handicap our policy ecosystem imposes on the ease and cost of doing business. Even if an Indian firm’s R&D gives it a better product, it cannot manufacture the product cheaply and quickly enough to beat global competition. Without the ability to win in world markets, the returns on R&D investment are too low. Thus, private R&D investment in India stays low.

Japan, Taiwan, South Korea and China all built globally competitive manufacturing before becoming R&D powerhouses. Each was first known for cheap, poor-quality products. Korean R&D was 0.26% of GDP in 1965 and 0.77% in 1980, while exports went from 2.6% of GDP in 1960 to 27.7% in 1980. R&D crossed 2% only around 1995. China passed the US in manufacturing output in 2008, when its R&D intensity was just 1.42%. The export take-off led, the R&D take-off followed.

But Indian firms cannot bet on global revenue because tariffs on steel imports, expensive electricity, high cost of borrowing and uncertain logistics will prevent them from winning in world markets, no matter how good their R&D.

In global markets, a firm can only compete on quality and cost, and improving either needs R&D. What about innovating for the domestic market? At home, an Indian manufacturer can get its edge from regulations — tariffs on foreign-made products and domestically focused rules. Indian firms, thus, sit protected from competition, waiting for the world to innovate. And given the local conditions, is it even fair to remove their protections?

That’s why levelling the playing field is the core challenge. An Indian manufacturer with a best-in-class product fights the world with one hand tied behind their back. With AI shortening R&D cycles, speed of execution is what will set countries apart. By the time our firms navigate high input tariffs, burdensome labour laws, poor quality cross-subsidised electricity, approval delays, tax and contract disputes and costly capital, any edge R&D gives them would have disappeared.

The solution is to deregulate until a factory in India sets up and operates at the same speed and cost as one in Vietnam. This sounds impossible, but it is doable. Instead of trying to solve every problem, all at once, give Indian entrepreneurs large, city-sized, globally competitive clusters free of approval and logistics delays, high electricity costs and input tariffs. Without globally competitive manufacturing eco-systems, all the government funding we throw at R&D will not get us the edge we want.

Rahul Ahluwalia is founder-director, Foundation for Economic Development. The views expressed are personal