Deloitte proposes blueprint to boost India’s R&D sector: Suggests structural reforms to propel innovation, economic growth

• Proposes increased R&D funding to elevate India's global R&D status
• Analyses disparity between India's R&D expenditure with developed economies, proposes structural changes to bridge gap
• Recommends refining patent box regime, introducing dedicated national R&D policy and establishing innovation hubs similar to GIFT City for fostering FDI
• Highlights India's potential with more than 1,38,000 patent filings between 2015 and 2021
• Harness potential of Global Capability Centres (GCCs) established in India by various MNCs, provide impetus to increase such centres, scale and activity coverage

National, 29 May 2024: As India aspires to achieve the transformative vision of Viksit Bharat 2047, the significance of robust investments in 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. It proposes implementing crucial reforms to bridge the gap in R&D expenditure, foster industry-academia collaboration and streamline regulations to accelerate innovation and investment. Union Budget 2024 is expected to focus on R&D, with enhanced funding to boost private sector investment in research and innovation and in the government’s plans to facilitate more public-private partnerships for collaborative research.

Key insights

• Disparity in Research & Development expenditure

1. India's gross expenditure on R&D (GERD) stands at 0.65% of GDP, which is lower than the global average of 1.79%. Countries such as the US and South Korea spend 2.8% and 4.5% of their GDP on R&D, respectively.
2. In India, the private sector's contribution to GERD is 37%, compared with 68% in the US and 75% in China. These numbers indicate a substantial gap in private sector involvement.

• Structural recommendations

1. The shift from a 200% super deduction to a 100% deduction on R&D expenses has reduced the financial impetus for innovators and risk takers.
2. The current patent box regime, which offers a reduced tax rate of 10% on income from patents developed and registered in India, has seen limited uptake due to its narrow focus.

• Policy and regulatory enablement

1. 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.
2. 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

1. 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.
2. Introducing loan guarantee programmes and increasing interest allocation for R&D-intensive industries, will lower financial risks associated with high-cost innovation projects.

Innovation hubs and incentives

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 centres in India by offering preferential tax rates and other incentives. This initiative would foster FDI and harness 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.

The government has taken various initiatives to encourage research and innovation, resonated by the surge in India’s GERD, from INR 60,196.75 crore in 2010–11 to INR 1,27,380.96 crore in 2020–21. Despite this positive momentum, India’s R&D spending appears to be on the lower side compared with the developed economies. While most developed countries allocate more than 1.5% of their GDP towards R&D, India's expenditure stands at just 0.66%.

Expanding the Patent Box regime
Introduction of India's patent box regime reflects the government's proactive thrust to the country’s home-grown businesses and local R&D. The Deloitte paper suggests expanding the regime’s eligibility criteria and scope to bolster effectiveness. The suggestions include extending benefits to non-residents based on substantial IP development, broadening the "patentee" definition and including designs, copyrights and models as eligible IPs to boost participation and innovation. In addition, streamlining the SHR process of implementing and introducing a matrix for determining industry-specific safe harbour margins, is crucial, given the diversity in operational dynamics across sectors. This would ensure that the margins reflect the varying degrees of value addition, risk and investment associated with different industries and move beyond the one-size-fits-all approach.A sustained focus on incentivising R&D is crucial for the government to achieve economic prosperity. With the Union Budget 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.