There is constant talk about the need for higher research and development (R&D) spending in India. Industrialist Naushad Forbes has long advocated it. The government exhorts industry to innovate. Corporate leaders promise action. Yet little changes. Why?
I will argue it is because of Indian democracy and the Indian consumer. Let me take a historical detour to explain.
When the British left India, they did so hastily. Exhausted by World War II and pressured by a powerful freedom movement, they departed with minimal transition planning and with little care as to what happened after they had gone. Partition displaced over 14 million people and killed more than a million. Country boundaries were drawn in distant offices without understanding social or geographic realities.
The British left a country drained by 150 years of colonial extraction, with low literacy, weak infrastructure, and deep poverty. Yet it started as an independent nation with universal adult franchise, something even Switzerland did not have.
In the early years, the moral authority of the Independence movement gave leaders clarity and autonomy. Jawaharlal Nehru supported a parliamentary democracy combined with socialist economic principles. He embedded democracy, scientific temper, and non-alignment but also adopted an import-substituting industrialisation (ISI) economic strategy that assigned the commanding heights of the economy to the State. With limited private capital and technical capability, the government built heavy industries and nurtured infant sectors. Institutions such as the IITs were established, and dams and steel plants became symbols of national ambition. Arguably, this strategy was unavoidable.
However, continuing the same economic model post 1964 was economically disastrous. While other developing countries pivoted toward export-led growth, India persisted with ISI and an expansive State that controlled nearly everything but managed little efficiently. Between 1960 and 1990, India grew at the so-called Hindu rate of growth of about 3.5% annually. Infrastructure investment was minimal. Whatever growth occurred was driven by domestic consumption. For three decades under the licence raj, enterprise was constrained by pervasive controls.
Production levels, product lines, capacity expansion — all required government approval. Government controls and protection went hand in hand and insulated industry from competition, allowing poor-quality goods to survive. Capital was scarce and credit was allocated after providing 50% of bank deposits to the Planning Commission for development expenses, 40% of the rest went as priority sector advances to important lobby groups and the rest was allocated by a credit authorisation scheme administered by the Reserve Bank of India to individual companies.
What did take firm root — except for a brief interruption during the Emergency — was robust, contested democracy. Citizens quickly grasped the power of their vote and used it to demand subsidies and entitlements. As a result, “protected” industry bore high freight rates to subsidise passenger fares, high electricity tariffs to subsidise erratic retail supply, and high credit costs to finance priority sector lending. India exported little of consequence, and its manufacturing base had no path to global competitiveness. Consumers had little choice. Imported goods became synonymous with quality. Scarcity defined the economic environment.
In contrast, nearly every country that grew rapidly after World War II shifted toward export-led growth by the 1960s. Japan and Germany were first, followed by South Korea, Taiwan, Singapore, and Hong Kong. Later came Malaysia, Indonesia, Mexico for a brief period, and eventually China and Vietnam. They grew by serving the demanding American consumer.
Competition was ruthless; price and quality were constantly tested. Many entered global markets at the lower end and steadily moved up the value chain. This required building capabilities in innovation, quality control, and research. Their R&D spending reflects this — South Korea spends over 4%, Japan above 3%, Germany around 2.6%, and China above 2% of GDP on R&D. India spends roughly 0.6%.
By 1990, India mirrored the collapse of its superpower ally, the Soviet Union. The crisis enabled sweeping reforms in 1991— dismantling industrial licensing, reducing tariffs, liberalising prices, devaluing the rupee, and opening the economy. The reforms delivered results. From the mid-1990s onward, India averaged roughly 6.5% annual GDP growth.
However, despite tariff reduction, Indian tariffs were high compared to other countries offering its industry continued protection. Indian companies mostly continued to serve the hapless Indian consumer rather than export. As a result, Indian manufacturing still lags in scale, quality, branding, and innovation.
R&D flourishes when survival demands it — when firms must meet the standards of the world’s most competitive markets. It thrives under relentless competition and minimal protection. In India, democracy has delivered political stability and social inclusion — immense achievements. But India’s growth has come on the back of the Indian consumer with Indian industry even today being protected with higher tariffs because of its need to cross-subsidise the Indian voter.
Unsurprisingly, the manufacturing share of GDP has reduced to around 13% from the mid-teens in the mid-2000s. Growth and improved living standards have allowed the Indian consumer to taste global quality, no doubt at a higher price. The FTAs being signed today will allow them more choice at better prices than before and hopefully, improve Indian quality.
The other opportunity for India to move up the R&D ladder is the global capability centres (GCC) ecosystem. The anti-immigration sentiment that has taken hold globally provides an opportunity for India to attract a tiny fraction of qualified Indians back. GCCs, if supported by government policy, could create innovation clusters for the world in targeted areas, delivering to the highest global standards. This year’s budget announcements to create education and research clusters in partnership with industry, to invest in transforming new technologies like AI, quantum and biotech is exactly the right place to start.
As French President Emmanuel Macron said in Mumbai, a country whose people lead Alphabet, Microsoft, IBM, Adobe, and Novartis cannot lag in innovation. India’s challenge is not a lack of talent. It is a lack of sustained competitive pressure. R&D spending will rise not because it is exhorted, but when innovation becomes indispensable for survival in global markets.
Janmejaya Sinha is chairman, BCG India. The views expressed are personal
