Recent Department of Science and Technology (DST) reports on R&D Statistics and Science & Technology Indicators show India’s Gross Expenditure on R&D (GERD) rising from 0.71 per cent of GDP in 2013-14 to 0.84 per cent in 2023-24, with 0.9 per cent projected for 2025-26. This may look like the start of a transformation of India’s innovation ecosystem, but India had attained 0.84 per cent as far back as 2008-09.

What do these data suggest for policymaking, given India’s ambition to become a developed country in the next two decades? Two observations stand out. First, the share of Business Enterprises R&D (BERD), covering private and public sector enterprises, in GERD rose from 43.6 per cent in 2014-15 to 49.3 per cent in 2023-24. Second, multinational companies (MNCs), both Indian and foreign, account for a large and rising share of BERD, from 68.8 per cent in 2021-22 to 71.3 per cent in 2023-24.

Business accounting for half of GERD may appear impressive, but there is a long distance to cover: in Korea and China this sector accounts for more than 70 per cent. Without raising this share, a GERD-GDP ratio of 2 per cent is out of reach. The question is how fast this goal should be reached, and how.

Indian policymakers have periodically announced the 2 per cent goal since the mid-1980s. Why 2 per cent? Most OECD countries raised their GERD-GDP ratio from below 1 per cent to 2 per cent in about a decade, which some scholars call the ‘technology take-off’ of an economy. Once it happens, the momentum continues and the ratio keeps rising.

South Korea raised its ratio from 0.8 per cent in 1981 to about 2 per cent in the early 1990s. China, which moved from lower-middle to upper-middle income between 2000 and 2010, raised it from 0.9 per cent in 2000 to 2 per cent in 2013.

The challenge for India, then, is to go from 0.84 per cent to 2 per cent in about a decade, i.e., by 2036.

Driven by large firms

India’s BERD is driven by large firms and is highly concentrated. Of the 41 industry groups covered by the DST reports, two — transportation and pharmaceuticals — account for 54 per cent of BERD. Within these, two transport firms, Tata Motors and Mahindra & Mahindra, and a handful of pharmaceutical firms account for much of the R&D.

How intensively do these firms invest in R&D? They figure among the world’s top 2000 corporate R&D investors in the EU Industrial R&D Investment Scoreboard; in its 2025 edition, 10 of the 17 Indian firms are from these two sectors.

Yet among the eight Indian pharmaceutical and biotechnology firms, the highest R&D intensity (R&D to sales) was 8 per cent, against an average of 22.4 per cent for the top five firms globally. Although large firms drive India’s BERD, they lag far behind global leaders in R&D intensity. Relying on large firms alone to reach 2 per cent in about a decade is therefore not desirable.

Smaller firms are often far more R&D-intensive, and they must be brought on board if BERD is to grow faster and on a broader base. The S&T Indicators report shows that in scientific instruments, private firms with an average turnover of about ?45 crore had an R&D intensity of 23.2 per cent in 2023-24.

In comparison, private firms in transport, with an average turnover of ?8,130 crore, had an intensity of 3.39 per cent, and those in pharmaceuticals (?1,006 crore) 5.22 per cent.

What is to be done?

First, get the fiscal incentives right. When India raised the weighted deduction for in-house R&D to 200 per cent in 2010-11, R&D spending and patenting rose sharply among DSIR-registered firms, and international evidence shows that smaller firms respond most strongly to such incentives. Yet the deduction was cut to 150 per cent in 2017-18 and to 100 per cent in 2020-21. It should be restored and tilted towards smaller firms, as in Korea, where the R&D tax credit ranges from 12-25 per cent for SMEs to 1-15 per cent for large enterprises. Second, identify strategic sectors on grounds of economic and national security and job creation, and adopt mission-oriented policies for them, as Korea did in 1982 and China in 2006. The quantum, semiconductor and AI missions are a start, and the ?1 lakh crore RDI scheme can be their financing arm.

Raising the GERD-GDP ratio to 2 per cent by 2036 requires BERD to rise from 0.42 per cent to about 1.4 per cent of GDP, growing roughly twice as fast as nominal GDP. A handful of large firms alone cannot carry that burden and a broad-based growth in BERD is essential.

The writer is Associate Professor at Institute for Studies in Industrial Development, New Delhi

Published on November 2, 2026