Framing of India’s Industrial Policy: A Domestic Industry Perspective

20 January 2020, ISID, New Delhi

Innovation in Draft Industrial Policy 2019: A reflection on the strategies and action points

Reji K. Joseph

Associate Professor, ISID

Email: rejikjoseph@isid.edu.in

Innovation in Draft Industrial Policy 2019

• Key objectives• Prepare enterprises for taking advantage of emerging technology advances• Increase technology depth of Indian industry

• Challenges• Low expenditure on R&D in India• Lack of efforts for future industries

• Strengths• Leadership in several sectors – pharma, automobile, IT, etc.• India has world’s third largest start-up ecosystem• Availability of human capital in science and technology• A major destination for offshore corporate R&D

Key Strategies and Action Points

• Increase the share of private sector in R&D expenditure• Strengthening of the incentive system• Simplifying incentive regime• Promotion of CSR with R&D

• Aid technology upgradation of the industry• Ease of innovation: Facilitation of experimental licensing and cross-border

movement of prototypes• Enhancing outcome of public R&D in terms of commercialisation, number of patents

granted and licenses issued • Tweaking of FDI regulations for the promotion of technology transfer• Deepening the R&D activity (offshore R&D) of MNCs in India

• Boosting up start-up ecosystem• Enhancing domestic capital for start-ups

I - Increasing the share of private sector in R&D

• Very low expenditure on R&D in India - 0.7% of GDP

• Share of private sector has been increasing and reached 42% in 2016-17

• Government sector constitutes 54% of total R&D • Nearly half of this is accounted by 3 agencies – DRDO, DoS, DAE

• This implies that a significant amount of public R&D is in highly sensitive areas, which the private sector cannot take direct advantage of

• Any attempt to leverage on public sector R&D to boost technology adoption in the manufacturing sector should also reflect the highly skewed nature of public sector R&D

Share of private sector in R&D has been rising, still much lower as compared to major economies

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Share of Private sector R&D (%)

India’s R&D % GDP has been stagnant at 0.5-1.0% during the last 25 years

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R&D % GDP

India China

I - Increasing the share of private sector in R&D …

• Will more incentives result in more investment in R&D?• The Industrial R&D Promotion Programme, DSIR

• Income tax benefits under Section 35.1. of Income Tax Act 1961 (capital and revenue expenditure on scientific research are exempted).

• Section 35.2AB provides for weighted tax deduction for expenditure on R&D in the manufacturing sector. Introduced 200% weighted tax deduction in 2010. • Reduced to 150% in 2016 with a provision to bring it down to 100% in 2020.

• Exemption from custom duty on goods imported for R&D

Recognition by DSIR for availing the incentive schemes

• Recognition of DSIR of a R&D facility is necessary for availing the incentive schemes. A study at ISID of 298 firms, which received FDI in R&D, finds that:• Only 11% have DSIR recognised in-house R&D units

• None of the firms in the ICT sector (out of 42) has DSIR recognised R&D units.

• The incentive schemes need to become more broad based.• Income tax benefits under Section 35.2AB is strictly confined to scientific research in

manufacturing. Manufacturing is defined as “change in non-living physical object”.

• Draft Industrial Policy acknowledges that servicification of manufacturing is taking place. Similarly, servicification of manufacturing R&D is also taking place. This definition needs to be broadened to address the growing servicification of manufacturing R&D.

II. Technology upgradation

• Literature on FDI and technology catch-up has unambiguously shown that FDI will be of no help, in the absence of a competing indigenous industry. • In the absence of a competing indigenous industry, FDI would transfer obsolete

technologies.

• International laws for the protection of the rights of foreign investors, restrict the ability of host countries to adopt policies that would compel MNCs to transfer technologies.

• India has become a major hub for global offshore corporate R&D. But it is mainly for providing R&D services for their parent firms, taking advantage of lower costs of doing R&D in India.• Not linked to the manufacturing sector.• Lack of linkages with academia, except a few cases in the ICT sector.

• Outward FDI, which could be used as a channel for acquisition of foreign technology, is not touched upon in the draft industrial policy.

Contribution of FDI companies is very low in private sector R&D in India

R&D Expenditure by Non-

Government, Non-Financial

(NGNF) FDI Firms in India (Rs.

Million)

GERD Private

Sector (Rs.

Million.)

Share of R&D by FDI

companies in GERD

by the private sector

(%)

2013-14 9657.0 305148.0 3.2

2014-15 10915.0 325383.9 3.4

2015-16 12696.0 378356.4 3.4

Source: RBI, Finances of Foreign Direct Investment Companies 2015-16, and DST, R&DStatistics 2017-18

Offshore R&D in India contributing to the thriving export of R&D services from India

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Offshore R&D in India: Part of R&D is done in India, but the outcome is owned by firms in foreign countries

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Number of Patents Granted by USPTO in which India is an Inventor Country and the Assignee Country

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Use of OFDI to source technology - Mahindra

III. Boosting the Start-Up Ecosystem

• India’s start-up ecosystem is third largest globally, but far behind.• Number of unicorns: China – 206; US – 203; India – 21.• Major investors in the start-ups are from US, followed by China.

• Major weakness of India’s start-up ecosystem• Lack of investment from Indian investors

• Start-up India website (https://www.startupindia.gov.in/) provides some statistics on India’s start-up ecosystem• More than 67000 start-ups• 63 interested investors

• None of the 63 investors have invested in the 21 unicorns from India• Very few start-ups involved in deep technologies

• Deep technologies have high capacity for IP generation and contribute to new knowledge and science

• Shortage of human capital (STEM) at PhD level and competition for available talent• Deep tech start-ups take longer time for growth and therefore require patient investors

India doesn’t figure among top countries in research on deep technologies

For more details:

• FDI in R&D in India: An Analysis of Recent Trends, ISID Working Paper No. 209 (http://isid.org.in/wp-content/uploads/2019/08/WP209.pdf)

• Revamping the Indian Start-up Ecosystem, Financial Express, 12 December 2019 (https://www.financialexpress.com/opinion/revamping-the-indian-start-up-ecosystem/1791408/)

• Global Innovation Index 2019: Key takeaways for India (https://www.orfonline.org/expert-speak/global-innovation-index-2019-key-takeaways-india-54919/)