The growth of R&D in India

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To give a boost to innovation and continuously launch new services and products, multinational companies spend billions on research and development (R&D), which also helps in enhancing the quality of their existing products. After all, it’s the huge investments in R&D that lead to the next generation of technology. India offers talent and low costs, as a result of which many of these companies have (or are planning to) set up an R&D centre in India. The local industry, however, can do better on this front.

By Nijhum Rudra and Deepshikha Shukla

With its vast market, India is the land of unlimited opportunities for businesses. This, coupled with a proactive government, cost efficiencies, technical competencies, and a low-cost workforce for companies setting up their R&D centres here, is boosting investments and employment opportunities. Government incentives and initiatives such as Make in India, Start-up India, NPE 2019, FAME, etc, along with other enabling policies are helping global firms to set up their R&D centres in India.

Smart new-gen technologies such as the Industrial Internet of Things (IIoT), predictive analytics and smart automation are changing the way organisations work. This change is expected to influence a wide array of functions such as R&D, manufacturing and business support. To become an exporter of technology rather than a buyer, India needs good investment and infrastructure strategies that offer sustainable conditions for R&D centres. The segments that have shown interest in setting up their R&D centres in India, the factors responsible for the growth in this domain, and the role the government plays will be discussed in this market survey.

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Foreign companies setting up R&D centres in India
Emerging businesses from various sectors such as information technology (IT), automobiles, pharmaceuticals, telecommunications, etc, have observed huge opportunities in India and are expanding their manufacturing units and R&D centres here. Many companies have started their captive technology centres in the country to step up R&D in areas like the Internet of Things (IoT), artificial intelligence (AI), and data analytics. The India development team of a company like Vyn, a UK based video technology AI firm, is now aiming to ally with renowned educational centres like the IITs to carry out its digital transformation services and research initiatives.

Chinese smartphone makers OnePlus and Oppo have announced plans to open their first R&D facilities in India. Foxconn, a Taiwanese multinational electronics contract manufacturing giant, has also decided to set up its R&D centre for advanced industrial AI at Hyderabad. In the automobiles sector, giants like Volkswagen have opened a new R&D facility in Pune, and Nissan Motors has signed a Memorandum of Understanding (MoU) with the Kerala state government to set up its first global centre for digital operations in Thiruvananthapuram.

A joint initiative called the India-Sweden Collaborative Industrial R&D Programme has been financed by the Indian Department of Science & Technology (DST) and Sweden’s Innovation Agency – Vinnova. The countries will together address the problems related to smart cities through clean technologies and digitalisation/IoT.

The SoftBank-backed robotics process automation company, Automation Anywhere, has announced its plans to invest US$ 100 million in India over the next three to five years to expand its capacities in India. The company also plans to open four new offices in India to support unprecedented customer and partner growth. Sources at Automation Anywhere have said that the company will set up more R&D centres in India, and focus on training and upskilling more engineers in automation, apart from creating a partner ecosystem to boost the adoption of robotics process automation.

India’s talented scientists and engineers have helped dozens of MNCs in establishing their R&D centres here. For example, Xiaomi, Apple and LG have also begun their R&D operations in India, generating more employment locally. To help these companies further, the government has instituted measures like instant approval for 5G based R&D activities and field trials.

Benefits of a massive startup ecosystem
The creation of innovative products not only adds new revenue streams but also increases brand visibility. This opens up avenues for collaboration and public-private partnerships. The government of India’s initiatives such as Make in India and Start-up India are aimed at promoting an inclusive, vibrant and sustainable ecosystem for R&D and innovation. The government has also initiated a variety of research programmes in different verticals associated with electronics to support the overall growth of the sector.

Apart from moving R&D to India, many global companies are also outsourcing their corporate R&D by investing more in startups. The breakthrough innovations made by these startups help their parent companies. IBM, SAP, Microsoft and Google are investing in Indian startups or partnering with premature service providers through venture funds and evangelism programmes, with a focus on solving problems for their customers faster.

Overall, MNCs have understood that forming partnerships with startups in India could reduce both the time and risks involved in R&D, while exploring greater opportunities to create and innovate.

India has become a key contributor in the global R&D sector, and demand for competitive technology will only increase the investments from big companies. Technology transitions such as the rollout of 5G/LTE networks and IoT will also accelerate the adoption of electronic products. This will further augment investments in production, distribution and R&D in the forthcoming years.

Why companies should invest in R&D in India:
The expert views
“The opportunities in the Indian market are immense. These, coupled with strong investments and a supportive policy environment, make India an ideal investment destination for R&D. While the verticals of advanced analytics and AI are expected to continue to take the lead, the electronics R&D sector will only be strengthened with the advent of newer technologies of the fourth industrial revolution. India is raising its game to become a research and design powerhouse. With the research arms of global companies and specialised providers expanding, the electronics sector is expected to grow at a CAGR of ~24 per cent to US$ 400 billion by 2020 as compared to US$ 69 billion in 2012”.
—Rohit Madhok, VP, engineering, GlobalLogic

“The research and development sector in India has undergone a tremendous shift owing to growing market demands, higher investments and policy support from the government. The growing IT sector, development in infrastructure and the availability of the latest technology for manufacturing purposes as well as skilled labour, makes India the perfect venue for new R&D initiatives”.
—Ravi Raj, director, sales and support, NetRack

“With the intellectual capital available in the country and competitive talent costs, the research ecosystem in India offers a significant opportunity for global companies to establish their R&D centres in India, which can ultimately drive domestic manufacturing”.
—Prakash Mallya, VP and MD, sales and marketing group, Intel India

“India is a highly cost-effective R&D destination, and also has a high-quality, young workforce, as evidenced by major international companies investing in R&D or design facilities in India. Despite a 9 per cent increase in operating costs of R&D centres in India, they are still 25 per cent cheaper than in China. If capitalised well, this can lead to 10-15 per cent growth in R&D in the country in the next couple of years.”
—Nitin Kunkolienker, president, MAIT
(Manufacturers’ Association of Information Technology)


The Indian government’s role and initiatives

In India, investments in R&D have been mainly driven by the Central government, with the private sector and state governments found to be lagging in this area. This is in contrast to the advanced countries, where the private sector is the dominant and driving force behind R&D spending.

Government research is being driven by central public sector enterprises (CPSEs), primarily in the power and petroleum sectors. Ratan Watal, member secretary to the Prime Minister’s Economic Advisory Council (PMEAC), says that the growth in R&D expenditure should be commensurate with the growth in GDP.

The government is encouraging investments in R&D in various ways. This includes a tax-friendly Special Economic Zone policy for the next 20 years; incentives for R&D investments in technology, talent development and reskilling; encouraging funding for technology startups; easing the taxation regime for the digital economy; and promoting ease of doing business.

The tax benefits offered by the Centre include incentives on capital expenditures incurred by companies carrying out scientific research. Some of these incentives (Source: india-briefing.com) are given below:

  • A concessional tax rate of 10 per cent (plus applicable surcharge and tax) on income earned from royalty on patents developed and registered in India.
  • A deduction of 150 per cent for manufacturing companies on in-house R&D expenditure for calculating tax (till March 2020, after which it will be phased down to 100 per cent). This includes expenditure on scientific research related to the production of articles and products, on the filing of patent applications and on obtaining approvals from regulatory authorities.
  • Custom duty exemption to the in-house unit of industries for the consumables and equipment needed for R&D.
  • A concession in GST for research institutions.

India’s R&D expenditure ecosystem
The PMEAC has released a report titled ‘R&D Expenditure Ecosystem’, which states that the growth in R&D expenditure should be commensurate with the economy’s growth and should reach at least 2 per cent of the gross domestic product (GDP) by 2022. Over the past years, it has remained constant at around 0.6 per cent to 0.7 per cent of GDP, which is well below the figures in countries such as the United States (2.8 per cent), China (2.1 per cent), Israel (4.3 per cent) and Korea (4.2 per cent).

The report suggests that a minimum percentage of the turnover of the medium and large enterprises registered in India should be invested in R&D. This will stimulate the private sector’s investment in R&D from the current 0.35 per cent of GDP. The report also pitches for creating 30 dedicated R&D Exports Hubs in the national interest.

Figure 2: Factors responsible for R&D growth in India

As per a NASSCOM report, India’s engineering and R&D market has grown to US$ 30 billion in the financial year 2019 and is estimated to touch US$ 42 billion by 2022. As per the Indian Science and R&D Industry Report (Source: ibef.org), it is speculated that the medical technology sector in India will reach US$ 9.6 billion by the end of 2022 and US$ 7.8 billion by 2020 from US$ 5.7 billion back in 2017.

The Central government, realising the importance of R&D, has allocated huge funds for this sector in the Union Budget of 2019-20. The Ministry of Science and Technology has been given US$ 841 million, while a sum of US$ 369.15 million has been allocated for the Department of Biotechnology, and US$ 700.38 million for the Council for Scientific and Industrial Research.

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