Fear of missing out

In 2017, India lost the R&D center crown to China as Beijing attracted nine captives while India was seen attracting eight captives. The number of captives for R&D do not vary significantly, but the amount of investment has a staggering difference. Out of the nine firms in China, three of them have committed to investing $930 million, while in India, three of the eight firms have a disclosed investment of $443 million only. India is losing out on major R&D investment opportunities in the world because of its failure to attract R&D captives. In this article, I will focus on the current R&D scenario in India.

Recent reports show that the R&D investments in India have trebled in the last decade from Rs 24,117 crore to Rs 85,236 crore. These figures may look reassuring but when we look at the different sectors making contributions to the R&D sector, the results are surprising. In India the growth in R&D has come majorly from increased research taken up by the government and not by private sector. 45.1% of the growth in the R&D sector in India was contributed by the central government, 7.4% by the state government, 5.5% by the public sector, the private sector only contributed to the growth by 38.1% and institutions of private education only contributed towards 5.5% of the growth. The role of the government in R&D in India is the maximum compared to other developing countries. Also, around 81% of the government’s expenditure on R&D comes from defense. Hence, the country is spending too much on R&D in defense and not in other sectors like education and health care.

The reduced spending by the private sector on R&D also reflects on the number of patents filed by Indians (only 45,057 in 2016) compared to China which filed 1.34 million patents (around 42% of the patents filed worldwide). Another interesting point to notice is that while companies like Facebook, Alphabet, Apple and Amazon are rewarded in global markets, Indian markets are still dominated by ONGC, Reliance Industries and Indian Oil. The importance of R&D cannot be stressed enough, a recent study conducted by Begun Erdil Sahin estimates that for an increase in 1% on R&D spending, the economic output could grow the economy by 0.61%. Hence, India with a small R&D expenditure by the private sector suffers in terms of the large growth which can be achieved by investing in the R&D sector.

The R&D investments pouring into India from the US have also taken a hit because of the recent BEAT (The base and erosion anti-abuse tax) which is levied on companies that work on offshore subsidiaries. This tax is a protection measure to save local corporate jobs. This comes with an increase in BEAT tax from 5% in 2018 to 10% in 2019. Also, the corporate tax in the US will be reduced from 35% to 21% to encourage US companies to invest locally. Indian R&D will take a hit because of this as India houses many multinational captives and employs around 8,00,000 people. Google, Microsoft, and other companies also engage in R&D in India. Hence, because of increasing costs due to the BEAT tax, the R&D industry in India has taken a blow.

Compared to India, the R&D scenario in China is booming. China is a hot-spot for private sector R&D investments. Out of the 1600 multinational captives, China houses over 1300 of them. Companies are choosing China not only because of the cheap labour and production costs, but also because they want to tailor to products to Chinese tastes. They aim to tap into the large potential of the growing Chinese market. China also offers various tax and trademark incentives to companies taking up R&D in their country. This makes China more competitive in the R&D scenario and China is seen taking advantage of the the impact of R&D on growth figures.

To compete with other countries and to attain growth faster, India must focus on increasing R&D investments by the private sector and balance the investments by the government. India is majorly missing out on the R&D game worldwide and is missing out on large growth figures.

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Vidhi is an Economics and Finance major and is in her third year at Ashoka. She is interested in Macro-economics and believes that good economic policies can change the face of the nation and improve the quality of life of millions. She is also a trekking enthusiast and absolutely loves to travel. Mountains are the love of her life. Simplicity in people baffles her.

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