India lags far behind other emerging economies in total spending on R&D. As per the latest estimates, this stood at around 0.6 per cent of GDP, compared to 2.4 per cent and 1.3 per cent for China and Brazil, respectively. Even more concerning, private firms contribute only about a third of this spending.
For India to transform into a global economic powerhouse and sustain high-velocity growth, private R&D investment must move from the margins to the mainstream, scaling exponentially to match the country’s industrial ambitions.
While the government has already signalled its commitment to financing long-term innovation, achieving this shift demands more. The private sector needs an enabling environment and confidence in regulators to take bold risks.
The Research, Development and Innovation Scheme, announced in the 2025-26 Union Budget with an outlay of ₹1 lakh crore, aims to create dedicated financing and equity support mechanisms, including through a targeted deep-tech investment fund. The budget sought to strengthen the research ecosystem and support innovation by continuing support to the National Quantum Mission and the National Supercomputing Mission. It also maintained support for manufacturing-linked incentives and for strategic technologies such as semiconductors.
What ails private R&D
Despite these measures, India’s private sector remains hesitant to invest in R&D. This is understandable, as the domestic market often fails to reward differentiated technologies adequately, and government procurement does not provide an early market for innovations. As a recent Reserve Bank of India study demonstrates, private corporate investment optimism fell in 2024-25.
Globally, major innovation has resulted from a mix of private risk capital and public support, with the private sector often leading large-scale investment in applied research and product development. Meta operates roughly 6,00,000 GPUs at a cost running into billions of dollars. Google is also on a similar trajectory, planning to double compute capacity roughly every six months to keep up with the AI demand.
The tech giant’s deal with Anthropic, reportedly worth tens of billions of dollars, aims to add over one million GPUs worth of compute capacity by 2026. No government could match that without exhausting its entire R&D budget and more. A similar pattern was seen in data centres, where, despite subsidies, significant private investment followed only once demand from enterprises and cloud users validated the market.
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Government intervention still matters
Private investment, especially in nascent sectors, often needs a push start from the government. One such scenario is when cost disadvantages make private entry prohibitively expensive. For the manufacturing sector in India, these cost disadvantages may stem from higher power and logistics costs and a lack of scale, leaving domestic players less competitive than those in China or Vietnam.
India’s burgeoning smartphone ecosystem illustrates the extent of the challenge. The Production-Linked Incentive scheme anchored investment that might otherwise have flowed to cheaper markets, taking revenue and growth with it. While some benefits have since accrued to India, there are concerns that the momentum may stall as the scheme ends and incentives lapse.
Semiconductors are another case in point. Building fabs requires huge capital, specialised infrastructure and long gestation periods. The government has stepped in, committing ₹76,000 crore to the India Semiconductor Mission. Incentives here act as risk partners, making sectors investable, especially where domestic cost disadvantages are significant. This underscores the role of the government in de-risking early investment so the private sector can scale innovation, and the new budget is where that support gets decided.
Just incentives are not enough
Effective incentives are undermined when the general business environment is hampered by inefficiency. Taxation is a prime example of this burden. The budget is the natural venue for simplifying tax treatment, which is central to reducing friction for businesses. For e-commerce companies, the lack of clarity around the application of GST to short-distance and intra-state deliveries has increased risk and complexity. The ambiguity lies in whether local delivery services constitute a transport service or a distinct category, ultimately determining who pays the tax.
The crypto sector faces a similar challenge. Unlike other investments, gains are taxed at 30 per cent regardless of the holding period. Coupled with the 1 per cent TDS that is applied to every transaction above ₹10,000, the result is a high-friction, low-visibility tax regime that keeps investors cautious. As examples across sectors demonstrate, uneven taxation weakens demand, and when demand erodes, investment stalls.
Consider the now-banned online real-money gaming industry. The Promotion and Regulation of Online Gaming Act, 2025, introduced uncertainty, shaking investor confidence in the sector. Here, it is not regulation per se that deters capital, but volatility in the rules of the game. Investors follow demand, without which subsidies cannot build markets.
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The time for R&D investment is now
India will not be able to close its R&D gap unless private-sector investment dramatically increases. Public support is essential, not just directly, but in providing an enabling environment. The upcoming budget can help in three ways.
First, stimulate demand through public procurement and early market support mechanisms. Second, continue robust incentives for industries where cost disadvantages still hinder investment. Third, reduce business friction by implementing clear and uniform tax regulations for digital services. These are essential to unleash private R&D and, consequently, deepen national capability.
The authors are economics researchers at Koan Advisory Group, a technology policy consulting firm. Views are personal.
(Edited by Saptak Datta)