Can Union Budget 2025 Push India Inc to Increase Spend on Innovation?

Indian Finance Minister Nirmala Sitharaman, in the Interim Budget for 2024-25 on February 1, 2024, announced the setting up of a financing pool of Rs 1 lakh crore to scale up private industrial research and innovation. The corpus was expected to provide long-term financing or refinancing with long tenors and low or nil interest rates.

Sitharaman is all set to present the Budget for the fiscal year 2025-26 (FY26) on February 1, even as the funding scheme for private research and development (R&D) is yet to be operationalised.

As the country's economy is facing lagging growth marred by sluggish private investment, can pushing India Inc to spend more on R&D could be the key to spurring growth?

According to International Monetary Fund (IMF) Executive Director Krishnamurthy Subramanian, innovation and improving productivity by the private sector will be key drivers to achieve the target of a $55 trillion economy by 2047.

"In advanced economies, if $100 is spent on R&D, two-thirds is spent by the private sector and one-third by the government. In India, it's exactly the opposite. If we have to catch up on productivity, we have to reverse this ratio," Subramanian said while delivering the third Suresh Neotia Memorial lecture in Kolkata.

Also Read: Why India Inc Must Step Up to Make India a Product Nation

State of India Inc's R&D

The 2023-24 Economic Survey states that India's research and development (R&D) as a percentage of gross domestic product stands at 0.64%.

A Ministry of Corporate Affairs-backed study published in June 2024 paints an even grimmer picture. While the report notes that India's Gross Expenditure on Research and Development (GERD) has risen significantly from Rs 60,196 crore in 2010-11 to over Rs 127 thousand crore in 2020-21, it is primarily driven by government spending.

The study says over 54% of R&D spending in India is done by central or state governments, and Higher Education Institutions contribute to about 8.8% of spending. Meanwhile, the private sector industry contributes only 36.4% of India's total R&D spending.

The report notes, "In leading economies such as China, Japan, Korea, and the U.S, a significant portion (over 70%) of R&D funding comes from private industries, driven by market forces and profit motives, with substantial research activities conducted in HEIs."

The study examined India's top 1000 listed companies and found that only 911 of them disclosed data related to their research and innovation. Of these 911 companies, 839 were private firms. About half of these private corporations (415) didn't spend any money on R&D in FY23. And the firms that did allocate money for research spent just a fraction of their turnover. As per the study, in FY23, these 911 companies spent Rs 66,687 crore on R&D, during the same period their combined turnover was a staggering Rs 152.73 trillion.

The study also found that major multinational corporations (MNCs) with headquarters or parent companies located outside India invest significantly more in R&D across the globe compared to their subsidiaries in India.

For Nify 50, R&D expenditure accounted for just 0.79% of net turnover in fiscal 2024

How Budget 2025 Can help?

According to accounting giant Deloitte, offering tax deductions and exemptions for R&D expenses can be one step the Modi government can take to help push private spending in the area.

"The current patent box regime, which offers a reduced tax rate of 10% on income from patents developed and registered in India, has seen limited uptake due to its narrow focus," Deloitte said in a report last year.

It further noted that the establishment of dedicated R&D hubs, like special economic zones, which offer tax incentives, duty exemptions, and infrastructure support, can create a conducive environment for research and innovation.