Economic Survey 2020-21: Vol 1 Ch 8: Innovation- Trending Up But Needs Thrust, Especially from the Private Sector

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India entered the top 50 innovating countries for the first time in 2020 since the inception
of the Global Innovation Index in 2007, by improving its rank from 81 in 2015 to 48
in 2020. India ranks first in Central and South Asia, and third amongst lower-middle-income group economies(after Vietnam and Ukraine). To herald this significant achievement while setting out the path for further progress, the Survey examines India’s innovation performance on various dimensions.

Before delving deep into understanding India's innovation performance let us discuss briefly Global Innovation Index.

Global Innovation Index(GII)

GII is co-published by Cornell University, INSEAD, and the World Intellectual Property Organization (WIPO), a specialized agency of the United Nations. It seeks to assist economies in
evaluating their innovation performance by analyzing across various dimensions.

GII  has two sub-indices: the Innovation Input Sub-Index and the Innovation Output Sub-Index, and seven pillars, each consisting of three sub-pillars, further divided into a total of 80 indicators.

Across these 7 pillars, it assesses the country's performance with respect to innovation performances.

India's performance on innovation

The above figure depicts the performance of India across the 7 pillars of the WIPO's GII.

India as an innovation hub:

  • From the above figure, it is clear that India performs extraordinary w.r.t Market sophistication and Knowledge and technology output. India’s performance in innovation outputs is driven by its competencies.
  • India’s first rank in the Information and Communications Technology (ICT) services exports as a percent of total trade show its leadership in the global ICT services industry.
  • It is ranked 21st for citable documents as well as cultural and creative services exports.
  • Other leading innovation inputs for India include the government’s online service (rank nine), graduates in science and engineering (rank 12), ease of protecting minority investors (rank 13), e-participation (rank 15).
  • India ranks ninth in terms of productivity growth (growth rate of GDP PPP per worker).
  • India is a positive outlier on most pillars and sub-pillars of the GII w.r.t. its level of development when compared with the top 10 world's economies.
  • The total number of trademark applications filed in India has risen steeply since 1999 mainly on account of an increase in trademark applications filed by residents.
  • India is a highly attractive R&D destination on account of the opportunities offered for outsourcing, highly skilled labor force, low-cost labor, and R&D activities.
  • India has had a generous R&D tax incentive framework. Taxation Laws (Amendment) Act 2019 amended the Income Tax Act 1961 and Finance (No. 2) Act 2019, allowing domestic companies the option to pay income tax @22 percent. These companies were also not required to pay Minimum Alternate Tax.

Challenges w.r.t Indian innovation performance:

  • India seems to be underperforming in innovation w.r.t. the size of its GDP(i.e negative outlier in terms of its GDP).
  •  India ranks second lowest, after Brazil, on the overall GII when compared with the top 10 economies. Countries such as China and the UK rank much higher than expected for their level of development.
  •  It performed below expectation for its level of development in the primary & secondary education sub-pillar (rank 107), which is mainly attributed to India’s poor performance in the pupil-teacher ratio in secondary education (rank 118).
  • India performed below expectation for its income level in the ecological sustainability sub-pillar (rank 98), which can be mainly attributed to the parameter environmental performance (rank 124).
  • Low performance in the parameter females employed with advanced degrees (rank 101), followed by the parameter knowledge-intensive employment (rank 90).
  • India’s GERD(Gross domestic expenditure on R&D) is much lower than that of the top ten economies. India’s business sector contributes a much smaller percent to total GERD(i.e 37%) unlike large economies like the UK, Japan, and China(with an average of 68%).
  •  India performs below expectation for its level of development in terms of R&D personnel and researchers, making it an area warranting attention.
  • The total number of patents filed in India has risen steeply since 1999, mainly on account of the increase in patent applications filed by non-residents(not by residents).
  • Funding constraints: India, when compared with top economies, perform much below expectation for their level of equity market development and availability of debt finance in the form of domestic credit to the private sector by banks (per cent of GDP).
Measures needed
  • Gross expenditure on R&D needs to boost from 0.7% of GDP currently, to at least 2% of GDP(the average level of GERD in other top ten economies).
  • India’s business sector needs to rise to the occasion and significantly ramp up its gross expenditure on R&D from 37% of GERD currently, to close to 68%.
  • Total R&D personnel and researchers also need to be scaled up from 30% and 34% respectively to the average level in other top ten economies (58% and 53% respectively).
  • India to become an innovation leader, its residents’ share in total patent applications filed in the country must rise from the current level of 36%. India can look into the Chinese model in this regard.
  • The government should make a strategy to improve % of Females employed with advanced degrees and to improve on FDI net inflows as % of GDP and % of Knowledge-intensive

It may be seen that India is able to effectively translate investments in innovation inputs to produce a higher level of innovation outputs. This implies that India stands to gain more from its investments into innovation than many other countries. The govt schemes like the Startup India campaign of the Government of India recognizes entrepreneurship as an increasingly important strategy to fuel productivity growth and wealth creation in India. Along with that focus on primary education and creating a favorable environment at home for research helps India to attain global innovation power status aiding the demography at home and then to become 3rd largest economy in the world w.r.t GDP calculations.

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