A blueprint to get bang for the buck out of government’s Rs 1 trillion research support scheme

India's expenditure on R&D is a mere 0.64% of GDP, far behind China's 2.1%.

India's launch of the Research Development and Innovation (RDI) Scheme, supported by Rs 1 lakh crore worth of funding, is a step in the right direction to spur innovation. The initiative seeks to give a push to India's innovation ecosystem in key areas such as artificial intelligence, biotechnology, energy security, and other deep-tech sectors. This is certainly a lofty project. But it might be worthwhile to do a deeper analysis that can uncover both tremendous promise and giant challenges that must be carefully negotiated around.

Progress made, gaps remain 

India has made a stellar climb in the Global Innovation Index - rising from 81st place in 2015 to 39th in 2024. Being at the top among all lower-middle-income countries and overtaking other nations such as Vietnam and the Philippines is a matter of great pride. However, this should not result in hiding alarming disparities against innovation leaders.

India's expenditure on research and development (R&D) is a mere 0.64% of GDP, far behind China's 2.1% and well below innovation-led economies where the private sector does more than 70% of aggregate R&D expenditure. Indian private sector contribution is at a meagre 36% - a stark contrast - reflecting an underlying structural imbalance that the RDI Scheme aims to address.

The economics of innovation incentives  

The RDI Scheme strategically intervenes in a highly documented market failure: private companies systematically underinvest in long-horizon, high-risk research because of uncertain payoffs and capital market constraints. Yet, effective innovation goes beyond the provision of capital. Revolutionary breakthroughs are created through repeated refinement, organised trials, and active exchange of ideas instead of singular flashes of brilliance. Another thing to consider would be for the government to provide preferential market access or advanced purchase commitments to R&D projects to provide a sense of certainty.

In any innovation ecosystem, there would be some wastage. The tolerance for wastage will be lower in a democracy like India, versus a country like China. But, it is important to develop this tolerance. What does this tolerance mean at a practical level? It means, on one level, appetite for failure, for consistent ploughing of resources into promising projects irrespective of initial failures. But at another non-financial level, it translates into evaluation mechanisms that can appraise projects based on good-faith efforts, instead of on rigid outcome metrics, if there is no malfeasance.

It would require the accountability mechanisms and institutions like the Comptroller and Auditor General (CAG) of India to have legal and regulatory wherewithal to evaluate such projects based on these new concepts. Otherwise, there is a risk of paralysis setting in at the first failure.

Governance challenges and decentralisation imperative 

India is beset with chronic issues: bureaucratic lethargy, poor academia-industry linkages, and high regional disparities. The scheme's centralised control via the Anusandhan National Research Foundation and Prime Minister's Office poses the danger of strengthening hierarchical control mechanisms that can detract from the adaptability and nimbleness that is needed in innovation. The Empowered Group of Secretaries (EGoS) led by the Cabinet Secretary will approve scheme changes, sectors and types of projects as well as second-level fund managers. It will also be reviewing the performance of the Scheme. There is a risk of bureaucratic lethargy and rigidities creeping into these evaluations, which need to be guarded against.

The US' Defense Advanced Research Projects Agency (DARPA) model is particularly effective at bridging the infamous "valley of death" between visionary research and useful application. Integrating a mission-focused, challenge-based methodology in which program managers articulate a specific technology vision and then work backward to determine what research milestones need to be achieved would concentrate resources on revolutionary, high-risk initiatives with strategic payoffs. Secondly, it would be good to adopt DARPA's failure tolerance. This would avoid hasty project terminations on short-term evaluations. Lastly, integrating lean, agile, empowered program managers with a mandate to make quick approvals and make changes fast would overcome the inertia of bureaucracy.

Innovation works best in decentralised, responsive environments in which clusters at the regional level can tailor strategies to take advantage of local strengths and overcome local challenges. Place-specific innovation policies that grant states and cities with structured financing instruments and regulatory structures could democratise innovation possibilities while avoiding undue concentration in established technology centres such as Bengaluru and Hyderabad.

Learning from global success models 

Initiatives such as the US Small Business Innovation Research programme and EU's Horizon Europe provide financial incentives along with a holistic ecosystem development that includes incubators, technology transfer systems, and public-private partnerships.

The RDI Scheme's focus on advanced Technology Readiness Level projects can unintentionally overlook underpinning basic research that supports radical innovation breakthroughs. South Korea and Israel, whose economic profiles are similar to that of India, keep strategic investments along the entire innovation pipeline - a balanced strategy that India can adopt to avoid innovation pipeline bottlenecks.

Meeting private sector challenges  

Indian firms' absorptive capacity continues to be a major constraint. Several firms are risk averse and short term oriented, partly due to capital market constraints and governance systems. For organisational and cultural shifts required for long-term innovation capability, complementary reforms become necessary: intellectual property enforcement being strengthened, regulatory processes being streamlined, and corporate R&D tax incentives being widened. Promoting corporate venture capital activity and innovation-led mergers and acquisitions can further induce private sector innovation participation.

The RDI Scheme must also incorporate culture-building initiatives - entrepreneurship training programs, mechanisms for recognising innovation, and public celebration of innovators - to supplement financial incentives and establish truly innovation-fostering environments.

Securing accountability and impact  

Strong governance and accountability structures are essential to avoid moral hazard as well as misallocation of resources. The two-tier fund-of-funds structure proposed creates intermediary levels demanding transparent performance measurement. Learning from global best practices, India needs to set up continuous impact measurement mechanisms, adaptive management, and stakeholder feedback routes to drive real innovation and not subsidise incremental innovation.

In conclusion, to succeed, the RDI Scheme requires breaking free from merely funding-driven strategies towards holistic, adaptable, and culturally sensitive approaches.