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1% inspiration, 99% perspiration: Budget should incentivise turning jugaad into innovation

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Prime Minister Narendra Modi recently called startups the backbone of a new India. The country has 90 unicorns and is the third largest unicorn hub, behind the US (487) and China (301), said a report by Orios Ventures. Despite the success of the startup ecosystem in the country, the numbers around investments on innovation and R&D are still dismal.

While India’s rank in the Global Innovation Index improved to 48 last year from 81 in 2015, the Economic Survey 2021 showed that India’s expenditure on R&D and innovation was very low compared with other countries. India’s gross expenditure on R&D is 0.65% of its GDP, significantly lower than the top 10 economies that spend 1.5-3% of GDP on research and innovation.

Pradeep Multani, President, PHD Chamber of Commerce and Industry, says there is a dire need to invest in innovation and R&D in India. “At this juncture, we suggest encouraging and incentivising research & development in the private sector, along with making it simpler and encouraging. For Make in India to become a global reality, we must target 2% of GDP for R&D spending. The government can reallocate and manage its resources. However, the real challenge is in firing up the private sector. R&D spend by the public sector is 70% as compared with 30% by the private sector. This needs to be reversed,” says the head of the PHD Chamber of Commerce.

Budget Boost

Multani suggests that some attention be paid in the upcoming budget to this area. He recommends incentivising R&D by providing subsidies and/or fiscal stimulus to the private sector. The subsidy can be in the form of direct support through provision of research grants or indirectly through R&D tax subsidies.

The budget should have provisions to attract FDI in R&D as we usually get prototypes and semi-developed tech samples from abroad. “Such R&D activities are not treated as export of services and, instead, taxed under GST at 18%, as the place of supply by virtue of section 13(3)(a) of IGST is the location where the services have been performed — i.e., India in this case. This is making R&D activity uncompetitive and many companies are shying away from making any further investment in India,” he explains.

Multani says the IGST law should be amended to notify that the place of supply of R&D services provided to foreign service recipients should be the place of effective use and enjoyment of service — i.e., location of the service recipient.

In April 2010, the country introduced a weighted tax deduction of 200% on company expenditure on in-house research and development. However, the model failed to create any traction in innovation culture across industries. “This 200% tax incentive in February 2016 was reduced to 150% of research expenditure from 2017 onwards and to 100% from 2020 onwards. The deduction is available for scientific research on in-house R&D expenditures as approved by the DGIT(E) and DSIR, including capital expenditures (other than land and buildings) by companies engaged in manufacturing and the production of articles and things. Scope of the benefit can include expenses incurred outside research facilities, such as patent filings and product registrations. This could incentivise the industry to spend more on R&D,” he says.

In another suggestion, software advocacy group NASSCOM proposes a scheme under which industry consortiums (of large companies, startups, MSMEs and academic institutions) are encouraged to invest in R&D and help create “innovation superclusters”. “Unlike traditional clusters or parks, these are geographically agnostic and based on a technology theme. These need to be actively built and nurtured by industry and government partnerships over the medium to long term,” says Ashish Aggarwal, Vice-President and Head, Public Policy, NASSCOM.

Under this, for every rupee that a consortium invests, the government should provide a matching grant. He cites the examples of countries like Canada, Germany, Israel and France that have used similar approaches very successfully. Canada’s Innovation Supercluster Initiative, adopted in 2017, has attracted $1.79 billion as co-investment from the industry and has also generated more than 850 IP rights.

New areas

Over the years, the country has spent a considerable amount in optimising crucial sectors such as pharma, construction, automobile but now it needs to look at more technology-driven sectors. “So, looking into the trends we should continue to encourage tech innovation in AI, AR, VR, blockchain, Web3.0 and other deep tech SaaS products,” says Amit Kumar, CEO and co-founder at MSMEx. “However, India is a massive economy of basic needs so we should also encourage innovation and R&D on mobility, agri, D2C and healthcare as we have seen during the pandemic that our medical infrastructure is way behind our needs.”

NASSCOM’s Aggarwal says the focus should be on certain emerging sectors that are important for India. The government should lay out a broad focus and let the consortiums come up with useful project proposals and R&D questions. “Some examples could include mobility, climate & energy, digital healthcare, advanced manufacturing, communication technology and satellite-based environmental analytics,” he adds.

Jugaad is not innovation

With MSMEs playing a crucial role in driving the country’s economy, their role in driving innovation and R&D cannot be ignored. Multani says India’s vision of achieving a $5-trillion economy can be fulfilled by bringing in a culture of innovations in products and processes, and by adopting innovative technologies in the MSME sector. Technology upgrades in manufacturing, and innovations and digitisation in processes can prove to be a game changer for MSMEs.

One of the things pointed out in the economic survey was that “mere reliance on jugaad innovation risks missing the crucial opportunity to innovate our way into the future”.

Elaborating on this, MSMEx’s Kumar says there is not much awareness and understanding of what innovation actually is. “Our MSMEs consider every jugaad as innovation. Our MSMEs are creative, but every creativity is not innovation. Creativity or jugaad needs to be refined for standardisation, scale and commercialisation to treat that as innovation,” he explains.

The second barrier is the ecosystem for innovation, including culture and resources. The Indian style of doing business is not conducive to encourage and cultivate this. “Jugaad style is always cheap and fast. In the race for a short-term approach, MSMEs do not invest in the long-term approach. Hence, they do not have patience to convert jugaad into innovation,” he says. MSME founders do not encourage innovation because they seek guaranteed success and so it never fits into their strategy.

(The one-stop destination for MSME, ET RISE provides news, views and analysis around GST, Exports, Funding, Policy and small business management.)

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