The Indian economy has been resilient amidst a challenging global macroeconomic scenario of inflation, recession and supply chain disruptions, with GDP projected to grow 6.5-7% in FY24. This year’s Budget therefore ought to lay the framework to deliver on this potential. 

Budget Should Focus on Research & Innovation

For India to deliver on its aspiration of becoming a $10-trillion economy by 2035, we will need to pursue value-added growth. Research and innovation are fundamental for creating intellectual capital, thereby driving the kind of scientific and technological advancement that will help improve the lives of ordinary Indians and create a lasting global impact.

Prime Minister Narendra Modi, in his recent address at the 108th Indian Science Congress, has articulated the strategic role of Science & Technology in shaping the country’s future. In this context, I expect Budget 2023 to have a strong focus on science, technology and innovation..

The government has been incrementally funding basic and translational research up until now. This, coupled with a burgeoning start-up ecosystem, is leading to the indigenous development of new technologies that are proving to be disruptive. It is a matter of pride that India has, for the first time, broken into the rank of Top 40 countries in the 132-nation Global Innovation Index (GII) for 2022.

India needs to build on these advances by putting in place a comprehensive research and innovation strategy. To join the big league of innovative nations, will need to make exponential investments in R&D.

Having identified key thrust areas for research and innovation, we as a nation will now have to back them with the right kind of fiscal incentives, policy support, financing mechanisms, human capital and best-in-class infrastructure.

Budgetary allocation for R&D needs to increase

India’s gross expenditure on R&D (GERD) as a percentage of GDP has remained stagnant at around 0.7% for about a decade, lower than Brazil (1.16%), South Africa (0.83%) and others.

India will need to raise GERD to the long-promised level of 2% of GDP if it wants to consolidate on the gains made so far in Science & Technology.

India will need to raise GERD to the long-promised level of 2% of GDP if it wants to consolidate on the gains made so far in Science & Technology.

Restore Tax Subsidy for R&D

The 200% weighted tax deduction under Section 35 (2AB) on in-house R&D expenditure was available till March 31, 2020. The dilution of this fiscal incentive has coincided with the sharp reduction in R&D spending by Indian pharma companies, resulting in value decreasing as a percentage of revenue from 8% in 2018 to 6.6% in 2021.

In this context, it is important that the government restores the 200% weighted tax deduction on R&D expenses, covering all expenditures pertaining to a product’s ‘lab to market’ journey, including patenting costs.

Introduce Research-Linked Incentives

There is an urgent need to introduce Research Linked Incentives (RLIs), modelled on the lines of the existing Product Linked Incentives (PLIs) scheme. This will give a strong   stimulus  to R&D investments by the Indian pharma industry, as well as encourage the industry to build the much-needed linkages with academia to co-innovate.

RLIs for ‘moonshot’ sectors such as genomic medicines, biologic drugs both novel and biosimilars, complex generics, orphan drugs, precision medicines, vaccines, and next generation antibiotics can lead to building of capacity and world class capabilities across the pharma value chain.

Widen ambit of CSR spending to fund innovative research 

The Science, Technology, and Innovation Policy (STIP) 2020 is aimed at doubling the private sector contribution to GERD in five years. In keeping with this goal, corporates are allowed to use Corporate Social Responsibility (CSR) funds as contributions to public-funded incubators, research organisations and universities engaged in research in science, technology, engineering and medicine.

The government now has a unique opportunity to increase the ambit of CSR expenditure towards innovative R&D activities in the private sector as well. Private sector research investment can be targeted towards innovative programs that have high inherent risk. For consistency and ease of implementation, the government could mandate that the funds earmarked as risk capital for innovative research should not exceed 25% of a company’s annual CSR budget. Moreover, CSR funds should be solely reserved for funding IP-led and proprietary research aimed at addressing unmet needs. 

Towards Global Leadership in Research & Innovation

India has assumed presidency of the G20, or Group of Twenty, an intergovernmental forum of the world’s 20 major developed and developing economies. As the current G20 president, India now has an opportunity to establish its credentials as a global innovation leader.. Budget 2023 can provide a huge fillip to create the kind of research and innovation ecosystem that will propel India to achieve global leadership.

The article first appeared in Business World on January 23, 2023.

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