As India aspires to achieve the transformative vision of becoming a developed nation by 2047, investing in research and development (R&D) emerges as a cornerstone. Deloitte India's latest white paper, "Structural changes to incentivise the Research & Development (R&D) Sector in India," sheds light on this critical requirement and underscores the imperative to fortify the nation's R&D ecosystem. The paper proposes implementing crucial reforms to bridge the gap in R&D expenditure, foster industry-academia collaboration, and streamline regulations to accelerate innovation and investment. With the Union Budget 2024 expected to focus on R&D, enhanced funding is anticipated to boost private sector investment in research and innovation, as well as facilitate more public-private partnerships for collaborative research.
Key takeaways from the white paper include:
Disparity in Research & Development expenditure
India's gross expenditure on R&D (GERD) stands at 0.65 per cent of GDP, which is lower than the global average of 1.79 per cent. Countries such as the US and South Korea spend 2.8 per cent and 4.5 per cent of their GDP on R&D, respectively. In India, the private sector's contribution to GERD is 37 per cent, compared with 68 per cent in the US and 75 per cent in China, indicating a substantial gap in private sector involvement.
Structural recommendations
The shift from a 200 per cent super deduction to a 100 per cent deduction on R&D expenses has reduced the financial impetus for innovators and risk-takers. The current patent box regime, which offers a reduced tax rate of 10 per cent on income from patents developed and registered in India, has seen limited uptake due to its narrow focus.
Policy and regulatory enablement
The establishment of dedicated R&D hubs with benefits akin to those in special economic zones, including tax incentives, duty exemptions, and infrastructure support, can create a conducive environment for research and innovation. The process of streamlining approval processes for R&D projects and reducing bureaucratic barriers will encourage more companies to invest in innovation.
Financial incentives and support
Enhancing the scope and scale of R&D tax incentives, such as the patent box regime, to cover a broader range of intellectual properties, will attract more investment. Introducing loan guarantee programs and increasing interest allocation for R&D-intensive industries will lower the financial risks associated with high-cost innovation projects.
The Deloitte white paper highlights India's potential to establish innovation hubs, such as the GIFT City in Gujarat, which attracts financial services. These innovation zones could attract MNCs to set up R&D centers in India by offering preferential tax rates and other incentives, fostering FDI, and harnessing India's skilled workforce to strengthen the country's R&D ecosystem. This approach aims to build on the success of existing service sectors and drive further innovation and economic growth.
A sustained focus on incentivising R&D is crucial for the government to achieve economic prosperity. With the Union Budget 2024 expected to place significant emphasis on R&D, this white paper can serve as a crucial resource for policymakers, industry leaders, and stakeholders committed to advancing India's innovation ecosystem.
Rohinton Sidhwa, Partner, Deloitte India, remarked, “Our country is on its journey to achieve a developed nation status by 2047, and we have observed a positive trajectory in its GERD, indicating the nation's dedication to fostering research and innovation. With more than 1,38,000 patent filings between 2015 and 2021 and a growing number of Global Capability Centres, India is emerging as a key R&D hub. Through our thought paper, we aim to present a comprehensive roadmap for advancing the R&D sector. Our goal is to provide insightful analysis and strategic recommendations to bridge the investment gap and streamline the existing regulatory framework."
