Rise In R&D Will Help Manufacturing Share Go Up To 18 pc By 2035
The R&D expenditure as a percentage of GDP has largely remained in the range of 0.7 to 0.9 per cent over the years. While absolute spending on R&D has increased, in percentage terms it has broadly remained stagnant
Chennai: If India’s gross research and development expenditure moves up from 0.64 per cent of GDP to at least 2 per cent, closer to the R&D spends of its Asian peers, the manufacturing sector’s share in GDP can rise to 18 per cent by 2035 from the current 13 per cent levels, according to Krunal Modi, Director, CareEdge Ratings.
In an interaction with Financial Chronicle, Modi spoke about India’s low R&D spending, the need for stronger industry-academia collaboration, critical sectors requiring investment, and how innovation-led manufacturing can help India become globally competitive.
India’s R&D spending is currently around 0.64 per cent of GDP. Has it always been this low?
The R&D expenditure as a percentage of GDP has largely remained in the range of 0.7 to 0.9 per cent over the years. While absolute spending on R&D has increased, in percentage terms it has broadly remained stagnant.
Has this low spending affected India’s manufacturing sector?
If you look at the share of manufacturing in GDP, it has come down from around 16 per cent to 13 per cent despite government efforts such as Make in India, PLI schemes and infrastructure spending over the last decade. Low spending on R&D in critical sectors has certainly impacted manufacturing growth.
At one point, India’s manufacturing share was close to 17-18 per cent. What changed?
Over the last 15-20 years, the services sector has grown much faster than manufacturing. Financial services, in particular, expanded sharply due to digitisation and financial inclusion. Since services grew at a faster pace, manufacturing’s share in GDP declined.
How does India compare with countries like China, South Korea, Japan, Vietnam and Bangladesh in terms of R&D spending and manufacturing share?
China spends around 2.5 per cent of GDP on R&D, while South Korea spends around 4.5-5 per cent and Japan around 3 per cent. India spends only around 0.7-0.8 per cent.
China’s manufacturing share in GDP is around 25 per cent, while South Korea and Japan are above 20 per cent. Even Bangladesh and Vietnam have higher manufacturing shares than India due to strong export-led growth, despite comparatively lower R&D intensity.
What about developed economies such as the U.S. and Germany?
The U.S. spends around 2.5 per cent of GDP on R&D, while Germany spends over 2 per cent. Across major economies, industrialisation has always been backed by sustained investment in research and development.
Why is India lagging behind in R&D investments?
India’s R&D ecosystem is still largely driven by government spending, while private sector participation remains low at around 30 per cent of total expenditure. Globally, this ratio is usually reversed, with private companies contributing nearly 70 per cent.
Indian businesses typically prefer investments with predictable returns, whereas R&D investments involve uncertainty and long gestation periods.
India has seen strong FDI and private equity inflows over the years. Why has this not translated into stronger R&D-led manufacturing?
Most investments in sectors such as automobiles, electronics and solar manufacturing have focused on assembly operations. The core technology continues to be imported from overseas. India has largely built assembly-led manufacturing capabilities rather than innovation-led manufacturing.
NITI Aayog has suggested increasing R&D expenditure to 2 per cent of GDP. How can India achieve this?
India needs a stronger ecosystem linking academia, industry and government. There should be dedicated institutions and policies for nationally critical sectors, along with specialised courses and better research infrastructure to retain talent.
Brain drain remains a major challenge because compensation abroad is significantly higher. Countries such as China have successfully brought back talent by offering globally competitive opportunities and incentives.
Which sectors should India prioritise for R&D investment?
Biotechnology is emerging as a major area because of the rise in lifestyle diseases. Other important sectors include solar manufacturing, EV batteries, hydrogen cells, precision engineering, electronic components and rare earth materials.
India has mainly focused on assembling solar modules but still depends heavily on imports for critical components such as polysilicon wafers and other backward integration inputs.
What kind of incentives can encourage private sector participation in R&D?
Earlier, companies received enhanced tax deductions of 150-200 per cent on R&D expenditure under the Income Tax Act. Similar incentives can be reintroduced.
The larger issue is access to risk capital. Financial institutions are generally reluctant to fund long-gestation R&D projects. Dedicated government-backed funds or risk capital mechanisms may be needed to support such investments.
Why are banks reluctant to finance R&D activities?
R&D projects can take three to five years or longer to generate returns. Banks are usually more comfortable funding working capital requirements rather than long-term, high-risk investments.
NITI Aayog has also proposed an ‘ease of doing R&D’ framework. How will this help?
A structured framework can help identify inefficiencies and delays within the research ecosystem. Dedicated nodal agencies can streamline approvals, patents and compliance processes.
This would improve accountability and create a more competitive environment among universities and research labs, encouraging greater private sector participation.
India already has PLI schemes for manufacturing. How can stronger R&D support improve manufacturing further?
Current PLI schemes mainly incentivise production rather than innovation. India still remains heavily dependent on assembly-led manufacturing with limited value addition.
To increase manufacturing’s share in GDP from 13 per cent to 18-20 per cent, India must move towards innovation-led manufacturing, which requires significantly higher investment in R&D.
If India raises R&D spending to 2 per cent of GDP, how much can manufacturing grow?
Most peer economies spending between 2.5 and 3 per cent of GDP on R&D have manufacturing shares ranging from 18 per cent to 25 per cent. India would need to spend around 2 per cent on R&D to move manufacturing’s share closer to 20 per cent of GDP.
How long could this transition take?
India should aim to raise manufacturing’s share in GDP to around 17-18 per cent by 2035 through sustained investments in innovation and research and development.
