Introduction: The Current State of R&D in India
India’s research and development (R&D) expenditure, currently at just 0.6–0.7% of GDP, starkly trails global innovation leaders such as South Korea (over 4%), Israel (over 5%), and even China (2.5%). This persistent underinvestment has become a structural drag on India’s manufacturing sector, whose share of GDP has slipped from 16% in 2015 to 13% in 2024, despite annual growth rates of around 5%. According to a recent The Economic Times report, this decline is not merely cyclical but reflects deep-rooted challenges in scaling value-added production. The report calls for a bold increase in R&D spending to 2% of GDP by 2035—a threshold that, if achieved, could fundamentally reposition India’s manufacturing and innovation ecosystems.
Why R&D Matters for Manufacturing
Manufacturing is not just a source of employment and exports; it is a bellwether of a nation’s technological dynamism. India’s manufacturing sector, while broad, remains concentrated in traditional industries with incremental innovation, as seen in the dominance of sectors like automobiles, pharmaceuticals, chemicals, and metals. This sectoral concentration has limited the spillover effects of R&D, with the broader industrial base remaining under-invested and under-innovative. In contrast, countries such as Vietnam and Bangladesh have expanded their manufacturing GDP share in recent years by leveraging targeted R&D investments and integrating into global value chains—a feat India has struggled to replicate (The Economic Times).
For India, the strategic imperative is clear: without a step-change in R&D intensity, manufacturing will remain trapped in a cycle of low value addition and global follower status. Enhanced R&D can catalyze the development of advanced manufacturing technologies, digital supply chains, and process automation—capabilities that are increasingly prerequisites for global competitiveness. The IT sector’s trajectory offers a blueprint: India’s IT-BPM industry, which now contributes 7.4% of GDP and generated $253.9 billion in revenue in FY24, was built on sustained investment in technology and skills (Wikipedia — Information technology in India).
The Strategic Importance of a 2% R&D Target
Setting a 2% R&D-to-GDP target by 2035 is more than a symbolic gesture; it is an explicit signal of intent to transition from incremental to innovation-led manufacturing. This ambition aligns India with the practices of Asian peers who have used R&D as a lever for industrial transformation. However, the path to 2% will require a recalibration of policy, capital allocation, and institutional collaboration.
Government policy must move beyond sporadic incentives to a systemic approach—combining tax breaks, direct grants, and regulatory simplification. The current landscape is skewed: public sector spending dominates, while private sector R&D remains a fraction of the total, in sharp contrast to economies where private enterprise leads innovation (The Economic Times). Bridging this gap will require not only incentives but also the creation of robust research-to-commercialization pipelines, especially through deeper academia-industry partnerships. India’s low global patent share (just 4%) and weak researcher density are symptoms of this disconnect.
Challenges and Risks
The ambition is formidable—and so are the obstacles. First, the fiscal commitment required to triple R&D spending over a decade will test public finances, especially given competing priorities in infrastructure, health, and education. Second, the risk of inefficient allocation looms large if R&D investments are not tightly focused on high-impact sectors and breakthrough technologies. India’s history of incremental rather than disruptive innovation suggests that without a sharper prioritization, increased spending could yield diminishing returns.
Talent is another critical bottleneck. The shortage of skilled STEM professionals is already constraining innovation capacity, necessitating urgent reforms in higher education and vocational training. Furthermore, bureaucratic inertia and regulatory complexity remain persistent barriers. Unless India streamlines its innovation governance—reducing red tape, accelerating approvals, and protecting intellectual property—increased funding alone will not deliver transformative results (The Economic Times).
The Role of the Private Sector
Private sector engagement is not just desirable—it is indispensable. In advanced economies, private enterprises account for the majority of R&D investment, driving both basic research and commercialization. In India, however, R&D among listed companies is heavily concentrated in a handful of sectors, and broader industrial participation remains weak. To unlock private capital, India must de-risk R&D through public-private partnerships (PPPs), co-investment models, and the creation of innovation clusters and technology parks. These clusters, modeled after successful IT parks, can foster collaboration between startups, established firms, and research institutions, accelerating the translation of ideas into market-ready products (Wikipedia — Information technology in India).
Policy should also address the risk-reward calculus for private investors, offering not just tax incentives but also mechanisms for IP protection and easier access to global markets. Without a vibrant private R&D ecosystem, India risks remaining a consumer rather than a creator of advanced manufacturing technologies.
Potential Economic Impact
If India achieves the 2% R&D target, the economic ramifications could be transformative. Higher R&D intensity is correlated with productivity gains, the emergence of high-value manufacturing niches, and the creation of quality jobs. This would not only enhance India’s export competitiveness but also attract foreign direct investment (FDI), as global investors increasingly seek innovation-driven supply chain partners (The Economic Times). A robust R&D ecosystem could also facilitate technology transfers and deeper integration into global value chains, positioning India as a credible alternative to China in select manufacturing domains.
There is a non-obvious implication here: as India’s manufacturing becomes more innovation-intensive, the composition of its workforce, export basket, and even trade partners is likely to shift. The move toward research-driven manufacturing could reduce dependence on low-cost labor arbitrage and instead anchor India’s competitiveness in intellectual capital and advanced engineering.
Conclusion: The Path Forward
The call to raise R&D spending to 2% of GDP by 2035 is not just a fiscal target—it is a strategic pivot. For India, this is a rare window to break out of the middle-income trap and redefine its role in the global manufacturing order. Success will hinge on coordinated action across government, industry, and academia, as well as the willingness to tackle entrenched barriers in talent, capital, and governance.
As India recalibrates its industrial policy and workforce strategies, the second-order effects could be profound: a shift in global supply chains, new patterns of FDI, and the emergence of India as a hub for sustainable, innovation-led manufacturing. The next decade will determine whether India can convert this ambition into reality—or remain a follower in the global race for industrial leadership.