Why India’s Innovation Story Must Spread Wider
India’s manufacturing R&D is expanding, and with wider participation across sectors, regions, and firms, it can become a true engine of inclusive growth.
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Shailender Kumar Hooda: Institute for Studies in Industrial Development (ISID), India
SDG 8: Decent Work and Economic Growth | SDG 9: Industry, Innovation and Infrastructure
Institutions: Ministry of Commerce and Industry | Ministry of MSME
India’s industrial future will not be written only in assembly lines, but also in laboratories and design studios. As the country seeks to cement its place in global technology and manufacturing, the way research and development (R&D) unfolds inside its factories takes on strategic importance. A close look at national industrial data from the Annual Survey of Industries (ASI) shows where India’s innovation system is expanding, where it remains narrow, and how it can be broadened for the decades ahead.
Encouraging Growth, Waning Intensity
The headline figures suggest progress. Between 2015–16 and 2021–22, the number of units reporting R&D rose from 7,258 to 7,946, and the share of registered R&D units climbed from 60 to 69 percent. Total R&D spending has almost doubled, reflecting the recognition that innovation is central to competitiveness.
Yet when measured by intensity, the picture is less encouraging. R&D intensity – defined as the share of sales reinvested into innovation, like a company’s savings rate for its future - has not kept pace with sales growth, compromising long-term competitiveness of companies. This fall is most pronounced among micro, small, and medium enterprises (MSMEs). Firms with fewer than 20 employees out of the total number of firms saw their R&D participation drop from 13.5 percent to just 5.7 percent, while those with more than 5,000 employees nearly doubled. Unless reversed, this shift risks hollowing out the very base of India’s innovation ecosystem.
Narrow Concentration
R&D is also concentrated in a few sectors. Pharmaceuticals now account for more than half of all manufacturing R&D. This reflects India’s global strength in generics and vaccines, but reliance on one sector creates vulnerability. South Korea avoided such dependence by broadening innovation from electronics and semiconductors into biotech and renewable energy. India now requires a similar push.
Regional concentration adds to the imbalance. Nine industrially advanced states, including Maharashtra, Gujarat and Tamil Nadu, dominate both sales and R&D spending. These hubs benefit from established clusters of skills, infrastructure, and supplier networks. Their success offers useful models, but much of the country remains outside the innovation map. The challenge is not to pull back from established clusters, but to build comparable strengths in regions that remain outside the innovation map.
Institutional and Financial Gaps
India has a long record of policy initiatives aimed at increasing industrial R&D activities: duty-free imports of research equipment, fiscal incentives, and registration schemes for recognised R&D units. These have expanded the number of formally recognised R&D units, but the overall framework remains fragmented. Each scheme carries separate norms and compliance burdens, which can be prohibitive for smaller firms.
The result is that large firms, with diversified product lines and strong compliance systems, capture a disproportionate share of support. Smaller, single-product firms face barriers in accessing incentives, even though MSMEs are central to the economy. They contribute nearly 30 percent of GDP, close to half of exports, and employ above 120 million people – yet their share of recognised or subsidised R&D is far lower.
Registration data illustrate the gap: nearly 79 percent units and 62 percent of R&D expenditure comes from firms outside the Department of Science and Technology (DST) or Department of Bio-Technology (DBT) registration system. This means that a large share of genuine R&D activity takes place outside official registration systems – and has been largely invisible in policy discourse. Strengthening data systems is essential so support reaches the full range of innovators
Financial support in the form of product subsidies has shown a positive association with R&D spending, but mainly among firms with multiple product lines. For others, the effect has been modest. Subsidies alone cannot create a culture of innovation. To broaden participation, financial measures must be complemented by institutional reforms and capacity building.
Linking Production-Linked Incentive (PLI) schemes more directly to R&D efforts – rather than primarily to output or scale – could help turn subsidies into a catalyst for innovation, especially if smaller firms are able to access them.
The Research, Development and Innovation (RDI) Scheme, launched in July 2025 with an outlay of ₹1 lakh crore to spur private investment in sunrise and critical technologies – ranging from clean energy and semiconductors to advanced materials and defence systems – and to promote collaborative innovation across sectors, holds promise. But its success will hinge on effective implementation, including streamlined funding access, clear accountability, and stronger industry participation.
The Human Capital Lever
One of the clearest patterns in the data is that firms with a higher share of professional and managerial staff per worker are significantly more likely to sustain R&D. In simple terms, managers and supervisors are as vital to innovation as capital.
This suggests a clear policy lever. Programmes to build managerial and supervisory capacity, especially for MSMEs and firms in lagging regions could have lasting payoffs. Helping smaller enterprises recruit, train, and retain professional staff adds incrementally to fiscal support. R&D thrives not only when resources are available but when organisations have the people to turn resources into results.
Technology and Learning Capacity
Firms that import technology are also more likely to invest in R&D, highlighting the role of absorptive capacity – the ability to learn from external technologies and adapt them locally. It is the difference between buying a machine and knowing how to improve it.
Large firms and those with foreign equity enjoy structural advantages, thanks to global networks and advanced practices. Smaller firms often lack such channels. Public policy can help by supporting collaborative research consortia, building partnerships between firms and universities, and easing technology transfer arrangements.
Internal resource strength also plays a role. Firms with greater profitability, higher value added, and longer years of operation are more likely to invest in R&D. Stable finances and accumulated industrial experience give firms the confidence to experiment and the capacity to sustain long-term projects. Policies that ease financing constraints or connect younger firms to technical expertise could help broaden R&D participation.
Inclusion as the Next Frontier
One gap is striking: neither official statistics nor industrial policy frameworks provide systematic information on gender or social diversity in R&D participation and leadership. For a country committed to inclusive growth, this absence is telling. Without data, there can be no targeted support. Ensuring pathways for women and underrepresented groups to lead or participate in industrial R&D is not only a matter of fairness – it is economic logic. Diversity widens the talent pool and enriches innovation.
A Positive Way Forward
India’s ambition to become a global manufacturing power depends not only on scale and cost advantages but also on its capacity to innovate. The foundations are already visible: more firms are engaging in R&D, pharmaceuticals have established global standing, and industrial clusters show how innovation ecosystems can flourish.
The next step is to widen this circle: bringing smaller firms, new regions, and underrepresented talent into the fold. Done well, India’s manufacturing R&D can become not just a driver of growth, but a model of inclusive industrial transformation.
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The discussion in this article is based on author’s working paper on the subject. Views are personal.