Why India Inc Must Step Up to Make India a Product Nation

On the stage was chief executive of computing infrastructure behemoth Nvidia, Jensen Huang. Seated across him was chairman of Reliance Industries, Mukesh Ambani. The occasion was the Nvidia AI Summit in Mumbai in late October, 2024.

The two were discussing innovation in India. Bringing up India’s aspirations towards technological sovereignty, its ready infrastructure and talent pool, Ambani told Huang, “India is fast becoming an innovation hub for the world...and not just the manufacturing hub.”

That an innovation hub needs a robust ecosystem that actively involves the private sector was a fact Ambani readily acknowledged. But while there is consensus on the merits of owning intellectual property rights and unlocking value, India Inc is yet to back up its words with action.

Numbers Dampener

The 2023–24 Economic Survey states that India’s research and development (R&D) as a percentage of gross domestic product stood at 0.64%. Within this, the private sector’s contribution was just 36.4% compared to 77% and 75% in China and the United States, respectively.

The private sector understands the need to step up R&D. Amit Chadha, managing director and chief executive at the multinational L&T Technology Services, says India must become a product nation to attain tech sovereignty. “You can’t simply focus on manufacturing without R&D and you don’t want to be a ‘build-to-print’ nation. Look at the engineers graduating from India and the ability of big industrial houses to invest in infrastructure, talent and proof of concepts ahead of time. This is critical,” Chadha says.

Investing in R&D does not yield immediate results; instead, it needs patient capital that business groups with steady cash flows are most suited to fund but hesitant to do so.

Issues Within

An analysis of the expenses of companies on R&D reveals disappointing trends. At the end of the financial year 2024, average R&D expenditure as a percentage of net turnover of Nifty50 companies stood at 0.79%.

Reliance, India’s most valuable company, spent just 0.4% of its consolidated revenue on R&D expenditure in financial year 2024. The R&D expenditure of Tata Consultancy Services was 0.17% of its consolidated revenue in the same financial year. For Larsen and Toubro, R&D expenditure made up a meagre 0.07% of consolidated revenue.

Observers believe the reason for this lacklustre performance is how top companies view competition. Janak Nabar, chief executive of the Centre for Technology, Innovation and Economic Research, says the business mindset of several Indian companies is largely domestic, which does not create enough incentives to invest in R&D.

“Exports as share of revenue is low for several manufacturing firms. This does vary across sectors, but we need many more companies to become globally competitive. When you compete globally, competitive intensity increases, which in turn forces you to spend on innovation to stay ahead,” he says.

India Inc’s balance sheet indicates a dwindling share of exports in sales over the last decade. Data for non-financial companies from the Centre for Monitoring Indian Economy’s indicates that exports as a percentage of sales declined from 17.28% in 2013-14 to 1.76% in 2023-24.

The example of Chinese technology conglomerate Huawei shows how increasing R&D spending can lead to better competitiveness globally. Its annual report says the company spent over 10% of sales revenue on research. It continues to take on Samsung and Apple in domestic and global markets. In the first quarter of 2024, it surpassed Samsung in the global foldable smartphone market.

And despite the US intensifying sanctions against the company, Huawei has managed to grow. Owing to the growing competitiveness of its firms, high-tech exports from China account for close to 26% of the country’s manufactured exports.

Compare this with India: data from the online platform Trading Economics shows that high-tech exports as a percentage of manufactured exports from India was approximately 15% in 2023.

Will Corporates Budge?

While the Economic Survey states that the government wants the private sector to step up, Munira Loliwala, vice-president of strategy and growth at employment-services firm TeamLease, says innovation hinges on an adequate ecosystem.

“Globally, we have seen how governments stepped in to aid research to boost innovation in the economy. Even in India, the government is trying to boost spending on R&D. But it’s about an overall research ecosystem which needs to be created for companies to justify their costs of investing,” she says.

When it comes to research produced in the country, India lags behind. A report by the human resource development ministry shows that only 15.8% papers by Indian researchers feature in top 10 journals globally. The number is 27.6% for China, 33.4% for Germany and 36.2% for the US. Given the need for patient capital for research, government subsidies can help offset the impact on companies’ balance sheets. Analysing China’s spending in green technologies, the Kiel Institute for the World Economy found that the country’s subsidies ranged three to nine times of countries such as Germany and the US.

The Indian government is cognisant of this fact. In the budget for 2024–25, Finance Minister Nirmala Sitharaman announced Rs 1 lakh crore to aid private sector research and innovation. But given the current state of private sector spending, the government would hope that large corporates also take on a share of funding for innovation.

Will the top names of India Inc answer the call?