To truly become self-reliant, invest in research and development
India has long had a reputation about its ability to thrive on “jugaad technology” which can be loosely translated as innovative solutions which get around the rules. This needs to become a story of the past now. For India to evolve into a self-reliant economy, the importance of investment in research and development (R&D) is critical in this new decade.
Despite all efforts, the gross domestic expenditure on R&D as a fraction of Gross Domestic Product (GDP) has declined from 0.8% in 2010 to 0.6% in 2018. It has been hovering around this level for more than two decades. This pales in comparison to R&D investment in developed countries such as Japan (3.2%), Germany (3.0%), the United States (2.8%) and developing ones such as South Korea (4.8%) and China (2.2%) in 2018. Most R&D expenditure in India comes from the government and this is unfortunate.
A higher expenditure on R&D usually correlates with high technology exports. India’s share in high technology exports stands at 9.1%, while for China and South Korea, it is 31.4% and 36.3% respectively. To move up the manufacturing value chain and enhance competitiveness, there is a need to increase R&D expenditure in sectors which are import-dependent.
Though hundreds of international companies having set up R&D shops, utilising the talent pool at lower cost, Indian corporates have failed to keep pace.
The heightened need for R&D creates opportunities for financing its expansion. This will not only lead to augmenting exports but also reduce the country’s dependence on R&D-related product imports — something which can make the trade deficit more manageable. In fact, according to the government’s Invest India report, each $1 million invested in R&D in India per year by multinational corporations (MNCs) is likely to generate a demand for around eight to ten researchers.
In this context, the Reserve Bank of India (RBI) and the government may possibly consider setting up a credit facility solely for investments in R&D in industries in which India requires import substitution. The initiative would provide lending at rates lower than the prevailing repo rate, for 10 to 12 years, to finance investments that create technological and production capacity in R&D-intensive sectors.
To further ensure greater access for the R&D sector, the government can consider a sub-category under the priority sector lending (PSL) which will boost access to finance. However, there should be clarity on the list of industries to be covered in order to ensure that benefits are not skewed to select ones only.
India has always been found lacking in terms of academia-industry linkages. This is a bedrock in developed economies. In fact, private-public partnerships aligned with national innovation and industrial strategies such as China’s Industry-Research Strategic Alliances, Canada´s Strategic Network Grants, the Netherlands´ Top Sectors, Germany´s Innovation Alliances, Israel´s Magnet Consortium, and France´s Strategic Industrial Innovation Programme are all worth looking into.
The government should set up a mechanism wherein the grants received by Central Universities and technology and management institutes are linked to their collaboration with the public and private sectors and designed to produce concrete outcomes, not just cooperation agreements on paper.
Economies worldwide have graduated in the production chain from low and middle technology exports and have been focusing on R&D-related high technology exports which bring in greater foreign exchange earnings. In fact, Samsung’s global R&D spending in the first nine months of 2020 hit a record high of $14.3 billion and was equivalent to 9.1% of its sales amid the Covid-19 pandemic. This clearly demonstrates the importance such firms give to R&D.
India needs to show flexibility and offer differential treatment to Indian companies in the form of tax incentives, uninterrupted support, and stringent supervision. The upcoming Budget in 2021 could possibly be just the right moment to support R&D in the backdrop of the government’s Aatmanirbhar Bharat initiative.
Rahul Mazumdar is an economist with EXIM Bank, India
The views expressed are personal